WEBVTT - Can You Start Your Own Bank?

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<v Speaker 1>Welcome to brain Stuff production of iHeart Radio. Hey, brain Stuff,

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<v Speaker 1>Lauren Vogelbaum here. Maybe you're a big fan of the

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<v Speaker 1>classic movie It's a Wonderful Life and dream of operating

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<v Speaker 1>your own version of Bailey Building and Loan. Or maybe

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<v Speaker 1>you want to emulate Amadeo Peter Gannini, the early nine

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<v Speaker 1>hundred fruit vendor who convinced immigrant families in San Francisco

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<v Speaker 1>to deposit their savings in his new bank, which eventually

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<v Speaker 1>became Bank of America. If so, provided that you have

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<v Speaker 1>enough money, a good business plan, and the patients to

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<v Speaker 1>make it through the regulatory process, you could actually start

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<v Speaker 1>your own bank. Plenty of people have over the years.

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<v Speaker 1>Unlike most industrialized countries in the world, which tend to

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<v Speaker 1>have just a handful of big banks, the United States

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<v Speaker 1>has thousands of them, ranging from small town institutions to massive,

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<v Speaker 1>multi state behemoths. We spoke by email with one Edward J. Carpenter.

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<v Speaker 1>He the chairman and chief executive of Carpentering Company, a

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<v Speaker 1>Newport Beach, California consulting, private equity broker, dealer, and registered

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<v Speaker 1>investment advisor firm that has assisted clients in starting hundreds

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<v Speaker 1>of banks and savings and loans across the nation since

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<v Speaker 1>the nineteen seventies. The company handles fort of new bank

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<v Speaker 1>applications in the United States. He explained the US is

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<v Speaker 1>the only industrialized nation in the world where a group

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<v Speaker 1>of citizens can start a bank. Most of the would

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<v Speaker 1>be bank founders who come to Carpenter for guidance are groups,

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<v Speaker 1>but it's possible for a single wealthy person to start

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<v Speaker 1>a bank and own one percent of it. Carpenter recalls

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<v Speaker 1>several years back we did one in which an individual

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<v Speaker 1>put in fifty million dollars and started his own bank.

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<v Speaker 1>He said that solo founders are often civic minded individuals

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<v Speaker 1>rather than someone motivated by the prospect of becoming even richer.

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<v Speaker 1>In some instances, they're trying to take the place of

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<v Speaker 1>a small local bank that recently closed down. But Carpenter

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<v Speaker 1>says that people start banks for various reasons, and sometimes

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<v Speaker 1>banks start up entrepreneurs think they can find customers in

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<v Speaker 1>a particular community that's underserved by existing financial institutions. In

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<v Speaker 1>one common scenario, a group of immigrants or family members

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<v Speaker 1>of immigrants might decide to start a local bank to

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<v Speaker 1>serve newly American customers in their original language. Other bank

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<v Speaker 1>founders possess a specific sort of lending expertise that gives

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<v Speaker 1>them a competitive advantage in some particular business, and sometimes

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<v Speaker 1>that niche can be pretty arcane. Carpenter cites the example

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<v Speaker 1>of one bank that was founded specifically to make loans

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<v Speaker 1>on special engines that supports and government agencies used to

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<v Speaker 1>retrofit old diesel trucks to run on electricity. Or maybe

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<v Speaker 1>they have a plan to offer mobile banking or some

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<v Speaker 1>other service that local competitors don't have yet. In addition

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<v Speaker 1>to brick and mortar community banks, in recent years, companies

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<v Speaker 1>involved in the financial technology field, also known as fintech,

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<v Speaker 1>have also begun starting online banks to take advantage of

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<v Speaker 1>innovations they've developed, such as software that automates and speeds

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<v Speaker 1>up the loan application process. Starting a bank might sound

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<v Speaker 1>like easy money, and you might expect that a lot

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<v Speaker 1>of people would give it a try. Instead, there are

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<v Speaker 1>only about twenty applications to start banks in the United

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<v Speaker 1>States each year, and just ten new federally charted banks

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<v Speaker 1>opened in the first three quarters of twenty nineteen. That's

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<v Speaker 1>because starting a bank requires a lot of money and work. Typically,

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<v Speaker 1>the process takes about a year and a half at

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<v Speaker 1>the start. When potential bank founders come in to seek

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<v Speaker 1>help from Carpenter, he first wants to look at their

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<v Speaker 1>business plans. He explained. The bottom line when people come

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<v Speaker 1>in is doesn't make sense or not make sense based

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<v Speaker 1>on competition and the business plan. If it looks like

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<v Speaker 1>a new bank has a good chance of success, that's

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<v Speaker 1>when the complicated part begins. Bank founders need to put

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<v Speaker 1>together a board of directors to oversee management, and then

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<v Speaker 1>they have to go out and raise enough capital to

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<v Speaker 1>fund the bank's operations. We're not talking about just taking

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<v Speaker 1>a loan out of your four oh one k either.

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<v Speaker 1>This requires serious money, Carpenter said. Most likely at the

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<v Speaker 1>low end, we're talking about ten million dollars. We just

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<v Speaker 1>opened a bank in New York for which they raised

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<v Speaker 1>a hundred and thirty million. After that, it's time to

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<v Speaker 1>apply to the government regulators who oversee banks. In some cases,

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<v Speaker 1>bank founders may opt out to apply to a state

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<v Speaker 1>agency for a charter, or they may go to the

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<v Speaker 1>federal Office of the Controller of the Currency. Once a

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<v Speaker 1>bank is chartered, it has to obtain insurance from the

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<v Speaker 1>Federal Deposit Insurance Commission there's a certain amount of risk

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<v Speaker 1>in the process because if regulators nix an application, the

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<v Speaker 1>bank founders are out whatever they spent on advisors and

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<v Speaker 1>other expenses. Once a startup bank gets through the regulatory process, though,

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<v Speaker 1>things usually work out pretty well. In its third or

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<v Speaker 1>fourth year of operation, a new bank typically is earning

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<v Speaker 1>a ten to five teen percent annual return on the

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<v Speaker 1>equity that the startup group has invested in it. But

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<v Speaker 1>for all the new banks that are opening, others are

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<v Speaker 1>closing or being bought up by bigger institutions. So the

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<v Speaker 1>number of banks in the United States has gone from

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<v Speaker 1>sixteen thousand, five hundred to around just five thousand, five

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<v Speaker 1>hundred today, according to Carpenter. But although big banks and

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<v Speaker 1>online banks powered by fintech increasingly are dominating the banking industry,

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<v Speaker 1>there's still a place for small banks. Carpenter said they

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<v Speaker 1>have just ten percent of the nation's deposits, but that's

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<v Speaker 1>still a trillion dollars, and they make fifty of the

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<v Speaker 1>small business loans. Today's episode was written by Patrick Jake

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<v Speaker 1>Haiger and produced by Tyler Clang. For more on this

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<v Speaker 1>and lots of other topics you can bank on, visit

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<v Speaker 1>how Stuff works dot com. Brain Stuff is production of

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