Organizing and starting your own bank is a massive undertaking for a variety of reasons, with raising capital as only being one of them. Owning and operating a bank, needless to say, requires a lot more time and effort than simply having an account in one. If you’re looking to start a bank, you may be wondering how much capital you’ll need, and that’s a fair question — even if the answer isn’t particularly straightforward.
Just as banks can require customers to have a minimum balance in their account to get started, the bank itself needs to make sure they have enough capital to support their business plan. So, what is the minimum amount to start a bank?
The required amount of capital is determined by the financial projections you submitted within your business plan to the FDIC. The national average is between 18-22 million dollars of working capital once the FDIC has approved your application to start a new bank. Most organizers that start a bank acquire the capital through individual or corporate investments. There are also other means available such as capital investment companies and crowdfunding.
Factors That Influence How Much Capital You’ll Need to Start a Bank
Many factors play a part in determining the amount of capital you’ll need, but working with the FDIC, State Regulators, or professional consultants can provide you with guidance for your start-up bank. This will help to land an accurate number of capitals required. The more aggressive the business plan the more capital will be required. Also, business plans with greater risks can require more capital.
For good reason, the banking industry is filled with regulations. The liquidity that banks provide to the public is such a valuable service to the economy and your community, so it’s something worth protecting with industry regulations to keep consumers safe.
One way in which banks must protect themselves and their members is by providing a safety net of capital that ensures what depositors have entrusted them with. Take a moment to conceptualize that. For instance, think of where your own money is. If you’re like most people, a great deal of that sum is likely in the bank.
Now imagine the hundreds, if not thousands, of people in your community who use the same bank — who might even have their entire life savings poured into that bank — and it quickly becomes apparent that a great deal of money is required to ensure all of those funds.
Bank regulation in the United States can be described as “fragmented” when compared to other countries. That’s because US banks are subject to regulations not just at the federal level but also at the state level. Depending on the jurisdiction your bank falls under, you’ll have different constraints and privileges on how you can run your bank.
Banking regulations can vary greatly from state to state pertaining to many aspects of the business, including how ATMs are operated, what kinds of businesses you can accept money from, and the integration of fintech with your services. These regulations can change your approach to your business model, which in turn will influence the amount you need to raise in the capital. Speak with an experienced banking lawyer to investigate local banking regulations in your business area to be well informed of how they will influence your bank’s capital needs. BMA can offer you information on an experienced banking consultant or banking attorney so you can make the best decisions for your bank.
Placing your bank in a saturated market can play a part in your minimum capital required. If you want to start your bank in a place like Los Angeles or New York City where there are many major banks in every direction you look, you’ll have a hard time competing as a new contender, especially with so much competition. You’ll need to raise much higher capital to do business.
Edward J. Carpenter, chairman, and chief executive of Carpenter & Company, told “How Stuff Works” about a deal he was involved in with a new bank in New York — a saturated market if there ever was one — where the founders raised about $130 million in the capital. Compare this to a smaller bank with less competition, where capital necessary to get started might be somewhere around $10 million. That’s still a considerable sum that won’t be easy for the average person to raise, but it’s an order of magnitude smaller than that of a bank in a crowded market.
Services You Provide
The financial products you offer at your bank will also affect your minimum capital. Remember that a high percentage of the money deposited into your bank needs to be deployed in qualified loans that the bank approves. Banks can’t loan money that they themselves don’t own, so it’s important that they have capital — not only to ensure the money that’s been entrusted to them but also to legitimately loan money or provide other services to their customers. These services can include the following:
Checking and Savings Accounts
These standard services are a mainstay of banking, and a great deal of your capital is raised with the goal of ensuring these deposits. The types of accounts will assist in raising deposits in your new bank.
Loans are the big revenue source of banks, as the interest payments generate the profit margin for the bank. In your business plan, provided to the FDIC, you will detail the kind of loans you plan to deploy from your bank, and you will need to be sure that you’ve raised enough capital to cover the loans you are projecting.
Safe Deposit Boxes
Though safe deposit boxes are not insured by the FDIC, including them in your physical bank branches requires real estate within your building’s floor plan. You’ll need to weigh the potential profits they might bring to your business against the possibility that your floor space might be better used for other, potentially higher-earning services. Consider your market and whether or not it’s financially worth it to provide safe deposit boxes at your bank, and plan your capital accordingly.
Investments and Certificates of Deposit (CDs)
Your customers’ deposits into investments and CDs are also FDIC-insured, so make certain that these are built into the capital you raise if investing is part of your business model.
Technology and Software
Overhead items will also have an impact on your bank capital. Included in this are the technology and software solutions you use to do business, such as core processing, information retention, online and mobile banking, digital banking, ACH solutions, security measures, and the computers and software your team will use every day. It’s vital to remember these expenses when calculating the minimum amount, you’ll need to open your bank.
As a core software provider, BMA offers a wide array of software solutions specifically designed for banking, including ACH wire transfers, digital banking, online and mobile platforms, teller systems, and much more. For more information on how BMA can assist your bank, request a discovery meeting with our team today or visit our website at www.bmabankingsystems.com.