Process to Apply for a US Banking License

This article looks at the process to start a bank in the United States under a state charter rather than a national or Federal charter. It considers a bank owned by shareholders without the need for a Bank Holding Company. 

This information is based on my experience and published guidance from North Carolina and South Carolina. Other states may have different requirements and capital requirements, especially California and New York (for example). 

Process to Apply for a State Banking Charter in the United States

To apply for a bank license, you will generally need to follow these steps:

1. Develop a comprehensive business plan: Your business plan should include details about the proposed bank’s management, capital structure, market analysis, products and services, and financial projections.
2. Organize a board of directors: Assemble a board with experience in banking, finance, and business management.
3. Raise capital: You will need to demonstrate that your bank has sufficient capital to meet regulatory requirements and operate effectively.
4. Incorporate the bank: File articles of incorporation with the Secretary of State.
5. Apply for a state banking charter: Submit an application to the State Board of Financial Institutions, which typically includes detailed information about the bank’s proposed management, directors, capital structure, and business plan. You may also need to provide fingerprints and background checks for certain individuals involved in the bank’s operations.
6. Apply for FDIC deposit insurance: Submit an application for federal deposit insurance to the FDIC. This process will also involve a review of your bank’s business plan, management, and financial condition.
7. Obtain other required regulatory approvals: You may need to secure additional approvals from other federal and state regulatory agencies, such as the Federal Reserve or the Consumer Financial Protection Bureau (CFPB), depending on the nature of your proposed banking activities.
8. Meet capital adequacy requirements: Ensure that your bank meets both federal and state regulatory requirements for capital adequacy.
9. Complete a pre-opening examination: The relevant State Board of Financial Institutions and the FDIC will conduct a pre-opening examination to assess your bank’s readiness for operation.
10. Obtain a final approval and open for business: If your bank successfully meets all requirements and passes the pre-opening examination, you will receive final approval to open for business.

These steps are a general outline of the process, and the specific requirements may vary depending on your situation. 

Startup Capital Requirements

Per North Carolina and South Carolina General Statutes, specifically Sections 53C-3 in North Carolina, a bank must have an authorized capital satisfactory to the regulator and qualify as a member bank of the FDIC. In addition, the new bank must have an operational expense fund from which to pay organizational expenses, in an amount determined by the Commissioner to be sufficient for the safe and sound operation of the proposed bank while the charter application is pending (Section 53C-3-4-a-4)

Minimum capital is usually considered to be $10 million plus $1 million in startup expenses prior to receiving the banking license. Therefore, the minimum startup capital, not including the costs and fees described below under “Our Services,” will be $11,000,000 from its shareholders to capitalize on this project. Of this, $10,000,000 will come in as Tier 1 capital (paid-in capital), and $1,000,000 will be deposited into an operating account to cover startup and operational expenses while the license application is pending.

In order to ensure that the bank will remain a well-capitalized institution as defined in 12 C.F.R. §324.403(b)(1), you must also commit to increase capital as required by the regulator and to maintain your standing as a member of the FDIC.

Again, the above uses South Carolina and North Carolina as our guides. Most states have adopted similar requirements.  Larger states like California and New York often have much higher initial capital requirements. 

For example, The minimum capital needs of new banks in the New York Metropolitan area range upward from $50 million, net of pre-opening expenses. New banks in upstate New York typically require less initial capital. Also, de novo banks must remain at or above the well-capitalized level for the first seven years; the bank should maintain a ratio of Tier I capital to total assets of not less than 8% for the first seven years (see below).

Typical Capital Ratios

State-chartered banks are subject to both state and federal regulations. The relevant Office of the Commissioner of Banks (COB) oversees state-level requirements, while federal regulators such as the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) enforce federal requirements.

Capital adequacy is generally assessed using several key ratios, which include:

1. Common Equity Tier 1 (CET1) Capital Ratio: This ratio measures a bank’s core capital, including common stock and retained earnings, relative to its risk-weighted assets. Under the Basel III framework, which has been adopted by U.S. regulators, the minimum CET1 capital ratio requirement is 4.5%.
2. Tier 1 Capital Ratio: This ratio includes CET1 capital and additional Tier 1 capital, such as non-cumulative preferred stock. The minimum Tier 1 capital ratio requirement under Basel III is 6%.
3. Total Capital Ratio: This ratio includes Tier 1 capital and Tier 2 capital, which consists of instruments such as subordinated debt and hybrid capital instruments. The minimum total capital ratio requirement under Basel III is 8%.
4. Leverage Ratio: This is a non-risk-based capital ratio that compares a bank’s Tier 1 capital to its average total consolidated assets. The minimum leverage ratio requirement under Basel III is 4%.

In addition to these minimum capital requirements, banks are also required to maintain a capital conservation buffer of 2.5% above the minimum capital ratios. This buffer is designed to ensure that banks have an additional layer of capital to absorb losses during periods of financial stress.

Please note that these requirements are general guidelines, and the specific capital adequacy requirements vary by state and may vary depending on its size, complexity, and risk profile. It is crucial to consult with legal and financial professionals or the appropriate regulatory authorities for the most accurate and up-to-date information.

FDIC Ratios

The Federal Deposit Insurance Corporation (FDIC) provides deposit insurance to protect depositors in the event of a bank failure. Banks are required to pay premiums to the FDIC, which are used to fund the deposit insurance program. The FDIC expense refers to the cost of these premiums for the Bank. 

The cost of FDIC insurance comes in the form of insurance premiums, which banks pay to maintain their FDIC coverage. These premiums are based on the bank’s risk profile and are assessed periodically, typically quarterly. The FDIC determines the premium rates using a risk-based assessment system that considers various factors, including the bank’s capital levels, the quality of its assets, and its risk management practices.

The insurance premium rates are applied to the bank’s assessment base, which is generally its average total assets minus its average tangible equity. The assessment base may also be adjusted for specific risk factors or financial conditions, as determined by the FDIC.

The FDIC Initial Base Assessment Rate (IBAR) is the starting point for calculating the deposit insurance assessment premiums that banks pay to the FDIC. The IBAR is determined by the FDIC for each bank based on its risk profile, which includes factors such as capital adequacy, asset quality, and risk management practices. The purpose of the risk-based assessment system is to ensure that banks with higher risk profiles pay higher insurance premiums, reflecting the increased likelihood of potential losses to the Deposit Insurance Fund (DIF).

Under the FDIC’s risk-based assessment system, banks are assigned to one of four risk categories: Risk Category I, II, III, or IV. Risk Category I is the least risky, while Risk Category IV is the riskiest. Each risk category has a range of initial base assessment rates, which are then adjusted based on additional risk factors and financial conditions.

As a “newly insured small institution” as defined by the FDIC, which begins operations after January 1, 2023, the Initial Base Assessment Rate ranges for the bank will be as follows:

• Risk Category I: 9 basis points (0.09%)
• Risk Category II: 14 basis points (0.14%)
• Risk Category III: 21 basis points (0.21% )
• Risk Category IV: 32 basis points (0.32%)

Notes: The above assumes that the bank will not anticipate having brokered deposits, thus this addon is not included. A “small bank” is one with less than $10 billion in total consolidated assets. Newly insured small institutions typically start with a lower risk profile, placing them in Risk Category I. However, the exact FDIC insurance premium rate will depend on the bank’s unique circumstances, such as its capital levels, asset quality, and risk management practices. There is no specific “average” FDIC insurance premium for newly insured small institutions, as the rate will vary based on the individual bank’s risk assessment. 

After 5 years of operation, the cost of FDIC insurance will be reduced to a Total Base Assessment Rate for a small bank is 2.5 to 32 depending on the risk category. 

Our Services

We can assist you to apply for a state banking license in the United States, beginning with drafting your business plan. Our team of experienced banking professionals has a thorough understanding of the regulatory and compliance requirements for obtaining a state banking charter.

Our consulting services will include the following:

1. Business Plan Development: Based on the findings of the feasibility study (below), we will develop a detailed business plan. This plan will include information about the proposed bank’s ownership structure, management team, products and services, marketing strategy, financial projections, and regulatory compliance.
2. Feasibility Study: We will conduct an initial feasibility study to assess the potential success of your proposed bank. This study will analyze the local market, competition, and financial projections. The study will also help to identify potential risks and opportunities. The purpose of this study will be to get past stage one of the application process. Additional reports may be required thereafter. 
3. Application Preparation: We will prepare the application to submit to the relevant state regulatory agency. The application will include all required documentation, such as the business plan, financial statements, and information about the proposed management team.
4. Preliminary Approval: After the application is submitted, the Board will review it and may request additional information or clarification. If the Board determines that the application is complete and meets all regulatory requirements, it may grant preliminary approval.
5. Organize the Bank: Once preliminary approval is granted, the applicant must organize the bank by obtaining the necessary capital, forming a board of directors, and completing other legal and regulatory requirements.
6. Final Approval: After the bank is organized, the applicant may submit a final application to the Board. If the Board determines that all requirements have been met, it may grant final approval.

Our consulting and document drafting services will help you navigate the complex process of obtaining a state banking charter and set your bank up for success. Please do not hesitate to contact us. We look forward to working with you to bring your vision of a new bank to fruition.

We begin US banking license application projects by drafting the business plan. Fees for this service are $50,000, with half up front and half upon completion of the plan. 

Once the business plan is completed to your satisfaction, we can remain on to assist in negotiations, building the business, and in other capacities as required by your situation. If the above is of interest, please contact me at info@banklicense.pro for more information.