Speaker 1: Welcome to brain Stuff production of iHeart Radio. Hey, brain Stuff,
Speaker 1: Lauren Vogelbaum here. Maybe you're a big fan of the
Speaker 1: classic movie It's a Wonderful Life and dream of operating
Speaker 1: your own version of Bailey Building and Loan. Or maybe
Speaker 1: you want to emulate Amadeo Peter Gannini, the early nine
Speaker 1: hundred fruit vendor who convinced immigrant families in San Francisco
Speaker 1: to deposit their savings in his new bank, which eventually
Speaker 1: became Bank of America. If so, provided that you have
Speaker 1: enough money, a good business plan, and the patients to
Speaker 1: make it through the regulatory process, you could actually start
Speaker 1: your own bank. Plenty of people have over the years.
Speaker 1: Unlike most industrialized countries in the world, which tend to
Speaker 1: have just a handful of big banks, the United States
Speaker 1: has thousands of them, ranging from small town institutions to massive,
Speaker 1: multi state behemoths. We spoke by email with one Edward J. Carpenter.
Speaker 1: He the chairman and chief executive of Carpentering Company, a
Speaker 1: Newport Beach, California consulting, private equity broker, dealer, and registered
Speaker 1: investment advisor firm that has assisted clients in starting hundreds
Speaker 1: of banks and savings and loans across the nation since
Speaker 1: the nineteen seventies. The company handles fort of new bank
Speaker 1: applications in the United States. He explained the US is
Speaker 1: the only industrialized nation in the world where a group
Speaker 1: of citizens can start a bank. Most of the would
Speaker 1: be bank founders who come to Carpenter for guidance are groups,
Speaker 1: but it's possible for a single wealthy person to start
Speaker 1: a bank and own one percent of it. Carpenter recalls
Speaker 1: several years back we did one in which an individual
Speaker 1: put in fifty million dollars and started his own bank.
Speaker 1: He said that solo founders are often civic minded individuals
Speaker 1: rather than someone motivated by the prospect of becoming even richer.
Speaker 1: In some instances, they're trying to take the place of
Speaker 1: a small local bank that recently closed down. But Carpenter
Speaker 1: says that people start banks for various reasons, and sometimes
Speaker 1: banks start up entrepreneurs think they can find customers in
Speaker 1: a particular community that's underserved by existing financial institutions. In
Speaker 1: one common scenario, a group of immigrants or family members
Speaker 1: of immigrants might decide to start a local bank to
Speaker 1: serve newly American customers in their original language. Other bank
Speaker 1: founders possess a specific sort of lending expertise that gives
Speaker 1: them a competitive advantage in some particular business, and sometimes
Speaker 1: that niche can be pretty arcane. Carpenter cites the example
Speaker 1: of one bank that was founded specifically to make loans
Speaker 1: on special engines that supports and government agencies used to
Speaker 1: retrofit old diesel trucks to run on electricity. Or maybe
Speaker 1: they have a plan to offer mobile banking or some
Speaker 1: other service that local competitors don't have yet. In addition
Speaker 1: to brick and mortar community banks, in recent years, companies
Speaker 1: involved in the financial technology field, also known as fintech,
Speaker 1: have also begun starting online banks to take advantage of
Speaker 1: innovations they've developed, such as software that automates and speeds
Speaker 1: up the loan application process. Starting a bank might sound
Speaker 1: like easy money, and you might expect that a lot
Speaker 1: of people would give it a try. Instead, there are
Speaker 1: only about twenty applications to start banks in the United
Speaker 1: States each year, and just ten new federally charted banks
Speaker 1: opened in the first three quarters of twenty nineteen. That's
Speaker 1: because starting a bank requires a lot of money and work. Typically,
Speaker 1: the process takes about a year and a half at
Speaker 1: the start. When potential bank founders come in to seek
Speaker 1: help from Carpenter, he first wants to look at their
Speaker 1: business plans. He explained. The bottom line when people come
Speaker 1: in is doesn't make sense or not make sense based
Speaker 1: on competition and the business plan. If it looks like
Speaker 1: a new bank has a good chance of success, that's
Speaker 1: when the complicated part begins. Bank founders need to put
Speaker 1: together a board of directors to oversee management, and then
Speaker 1: they have to go out and raise enough capital to
Speaker 1: fund the bank's operations. We're not talking about just taking
Speaker 1: a loan out of your four oh one k either.
Speaker 1: This requires serious money, Carpenter said. Most likely at the
Speaker 1: low end, we're talking about ten million dollars. We just
Speaker 1: opened a bank in New York for which they raised
Speaker 1: a hundred and thirty million. After that, it's time to
Speaker 1: apply to the government regulators who oversee banks. In some cases,
Speaker 1: bank founders may opt out to apply to a state
Speaker 1: agency for a charter, or they may go to the
Speaker 1: federal Office of the Controller of the Currency. Once a
Speaker 1: bank is chartered, it has to obtain insurance from the
Speaker 1: Federal Deposit Insurance Commission there's a certain amount of risk
Speaker 1: in the process because if regulators nix an application, the
Speaker 1: bank founders are out whatever they spent on advisors and
Speaker 1: other expenses. Once a startup bank gets through the regulatory process, though,
Speaker 1: things usually work out pretty well. In its third or
Speaker 1: fourth year of operation, a new bank typically is earning
Speaker 1: a ten to five teen percent annual return on the
Speaker 1: equity that the startup group has invested in it. But
Speaker 1: for all the new banks that are opening, others are
Speaker 1: closing or being bought up by bigger institutions. So the
Speaker 1: number of banks in the United States has gone from
Speaker 1: sixteen thousand, five hundred to around just five thousand, five
Speaker 1: hundred today, according to Carpenter. But although big banks and
Speaker 1: online banks powered by fintech increasingly are dominating the banking industry,
Speaker 1: there's still a place for small banks. Carpenter said they
Speaker 1: have just ten percent of the nation's deposits, but that's
Speaker 1: still a trillion dollars, and they make fifty of the
Speaker 1: small business loans. Today's episode was written by Patrick Jake
Speaker 1: Haiger and produced by Tyler Clang. For more on this
Speaker 1: and lots of other topics you can bank on, visit
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