In this article, I’ll review the capital requirements for an international bank in Puerto Rico. Sometimes referred to as offshore bank licenses or an International Financial Entity, these banking structures have unique capital requirements for their domestic counterparts.
The capital requirements for an offshore bank licensed in Puerto Rico can be misleading. Because the minimum capital requirement is low compared to other quality jurisdictions, it can appear that Puerto Rico is a “low cost” jurisdiction from which to operate a bank. This is not the case and I will explain why in this article.
There are three basic capital requirements for an international bank licensed in Puerto Rico:
1. A Certificate of Deposit,
2. Corporate Capital, and
3. Operating Capital.
The first capital requirement for an International Finacial Entity licensed in Puerto Rico is a Certificate of Deposit for $300,000 held at a local bank. This CD is (basically) a bond or insurance policy for the bank. Should the IFE go out of business, regulators will take the CD to pay creditors.
This $300,000 CD is not part of the bank’s Tier 1 capital. It’s separate and distinct from the share capital and operating capital of the bank. If the CD is closed, the license becomes invalid.
The next component of the capital requirements for an international bank licensed in Puerto Rico is the IFE’s Tier 1 or corporate capital. Tier 1 capital is money deposited into the IFE’s corporate bank account in exchange for shares. In other words, Tier 1 capital for an offshore bank in Puerto Rico is paid-in share capital.
● Additional Tier 1 capital is typically updated preference shares and convertibles.
● Tier 2 is the bank’s supplementary capital, such as subordinated debt, revaluation reserves, and general loan-loss reserves.
The minimum paid-in capital per the International Financial Entity law in Puerto Rico, referred to as Act 273, is $250,000. That is to say, the minimum capital you can have ready to deposit into a corporate operating account in Puerto Rico in exchange for shares is $250,000.
Note that the process of forming an International Financial Entity in Puerto Rico is broken down into two phases, the Permit to Organize and the Permit to Operate. The Permit to Organize allows you to form your banking entity and begin setting up your business. The Permit to Operate allows you to open your doors to your customers.
To receive your Permit to Organize, you must have at least $250,000 ready to be deposited into your operating account in Puerto Rico. These funds are then used to build out the business, pay employees, purchase core software, etc.
The amount you will need to have in your corporate account to receive your Permit to Operate depends on your business model and is negotiated with regulators. Total Tier 1 capital is defined in the business plan filed with your application.
In most cases, clients will need a plan to reach $2.5 million in corporate capital by year 2 and $5 million by year 3 or 4. By “plan,” I mean they must demonstrate the ability to make quarterly deposits to reach these amounts and follow through with these deposits over time.
These capital deposits for an offshore bank license from Puerto Rico are part of your agreement with regulators. They are written into your Permit to Organize and your Permit to Operate. If you fail to make the contributions, your license can be revoked.
I should point out that the maximum authorized capital for an International Financial Entity in Puerto Rico is $5 million. This amount is defined in Act 273 and is the maximum corporate capital regulators can require.
● Above I wrote that minimum paid-in capital was $250,000. Here I’m referring to the maximum authorized capital.
The next consideration when reviewing the capital requirements for an international bank in Puerto Rico is operating capital. Operating capital for an offshore bank can be a very simple topic or a VERY complex matter depending on your business model.
Puerto Rico follows US Federal Reserve standards when it comes to capital ratios and operating capital for an offshore bank. However, these statutes are not codified in Puerto Rico, thus it is possible to negotiate with regulators.
You’ll also find that Federal rules are a combination of Federal Reserve guidance, statutes, and Basel II and III standards.
The most commonly cited statute is 12 CFR § 167.6 – Risk-based capital credit risk-weight categories. This section gives guidance on risk weightings between zero and 100%.
Also, the most commonly referenced Federal Guidance is Section 2.1 of the FDIC manual. This 17-page document gives a nice summary of capital for banks and how it relates to Tier 1, Tier 2 and the Basel accords.
When reading these documents, keep in mind that the Fed does not directly regulate banks in Puerto Rico. The Fed oversees the local regulator, and it’s the local regulator that interprets Fed standards for the Territory. Also, FDIC insurance is not required nor is it available for offshore banks and International Financial Entities licensed in Puerto Rico.
To oversimplify a complex matter, if your offshore bank will provide only deposit-taking and wire transfer facilities, your Tier 1 capital might be your only required capital (not considering counterparty risk-weighted capital held at correspondent banks).
If you will make loans or have collection risks, you’ll need to spend a significant amount of time on your operating capital budget. Also, these matters must be fully analyzed in your business plan.