11-01-2006

Establishing new bank

Establishing new bank

No one can start a bank in United States (and in many other nations as well) without the excess approval of federal or state authorities .the
public need for a new bank must be demonstrated and the honesty and competence of its organizers and proposed management established .sufficient protection against failure must be provided in the form of equity capital pledged founding stockholders .only the banking commissions in each of the 50 states and the office of comptroller of the currency - a division of the US treasury department -can issue a charter of incorporation to start a new bank the chartering process typically begins with a group of people or a bank holding company organization becoming convinced that a new bank is needed in a particular city .

Some questions will be asked of the organizers of the new bank by the regulators like ; the population , geography ,competing banks or organization ,number of banks ,type and size ,and the traffic patterns in the proposed bank area ,the growth of the population and their income . The organizers are asked to describe the banking history of the local community and who owns the stock issued by the proposed bank, especially the amount to be hold by the bank organizers, directors. The answers to these questions are often supported by detailed economics analysis of the local market, prepared by an economist or professional business analyst.

To establish a bank under federal (national) law, one must obtain
approval of the U.S. Department of the Treasury’s Office of the Comptroller of Currency (OCC). To establish a bank under state law, one must obtain approval of the bank chartering authority for the state at issue. Whether chartered under state or federal law, the bank will be required to carry deposit insurance. Applications for
deposit insurance coverage are filed with the Federal Deposit Insurance Corporation (FDIC).

An individual seeking to establish a bank in the United States may be required to file an application under the Change
in Bank Control Act. The person should confer with the applicable chartering authority (state or federal) or the FDIC
to determine if an application is required under the circumstances and with which regulatory agency the application
must be filed.

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Measuring risk for bank project

Risk to a bank means the perceived uncertainty connected with some event. For example will the customer renew his or her loan? Will deposits grow next month? Will the bank stock price rise and its earnings increase? Are interest rates going to rise or fall next week and will the bank lose income or value if they do?

Bankers are concerned with six type main type of risk
1. Credit risk
2. Liquidity risk
3. Market risk
4. Interest rate risk
5. Earning risk
6. Solvency risk
7. Inflation risk
8. Currency or exchange rate risks
9. Political risks
10. Crime risk

There exist also powerful tools that banks use against these risks.
As bank defense
1. Quality management
2. Diversification
3. Deposit insurance
4. Owner’s capital

Lets explain some of these risks and leave the remainder to the reader:

Credit risks for bank

The probability that some of the bank’s assets especially its loans will decline in value and perhaps become worthless is known as credit risks.

because banks little owners, capital relative to the aggregate value of their assets only a relatively small percentage of total loans needs to turn bad to push any bank to the brink of failure .

The following are four of the most widely used of indicators of bank credit risks:
1. The ratio of nonperforming assets to total loans and leases.
2. The ratio of net charge offs of loans to all loans and leases.
3. The ratio of annual provision for loan losses to total loans and leases or to
equity capital.
4. The ratio of allowance for loan losses to total loans and leases or to equity capital.
5. The ratio of total loans to total deposit.

non performing assets are income generating assets, including loans, that are past due for 90 days or more .charge offs, on the other hand are loans that have been declared worthless by the bank and written off its books .if some of these loans ultimately generate income for the bank, the amount recovered are deducted from gross charge offs to yield net charge offs. As both of the above
Ratios rise, the bank exposure to credit risks grows and bank failure may be just about the corner.

the two late credit risk indicators reveal the extent to which a bank is preparing for loan losses by building up its loan-los reserves(the allowance for loan losses)through annual charges against current income(the provision for loan losses)

As the last ratio grows, bank examiners representing the regulatory community
may become more concerned because loans are usually among the riskiest of all bank assets.

Liquidity risks for bank

Bankers are also concerned about the danger of not having sufficient cash and
borrowing capacity to meet deposit withdrawals ,loan demand and other cash needs .faced to liquidity risks a bank may be forced to borrow emergency funds
at excessive cost to cover its immediate cash needs ,reducing its earnings. Very few banks ever actually run out of cash because of with ease with which liquidity funds can be borrowed from other banks.

Some what more in common is a shortage of liquidity due to no expectedly heavy deposit withdrawals, which forces a bank to borrow funds at an elevated interest rates other banks are paying for similar borrowings .a significant decline in a
bank liquidity position often forces it to pay higher interest rates to attract
negotiable money market CDs, which are sold in million-dollar units and therefore are largely unprotected by deposit insurance .

One usual measure of liquidity risk exposure is the ratio of:
Purchased funds (including Eurodollar, federal funds, security RPs , large CDs
or commercial papers)to total assets.
Heavier use of purchased funds increase the chances of a liquidity crunch in the event deposit withdrawals rise or loan quality decline .other indicators of a bank’s exposure to liquidity risk include the ratios of:
1. Net loans to total assets
2. Cash and due from deposit balances held at other banks to total assets
3. Cash assets and government securities to total assets

Cash assets include vault cash held on bank premises, deposits the bank holds at the Federal Reserve Bank in its district, deposits held with other banks to
compensate them clearing checks and other interbank services ,and cash items
in the process of collection(mainly uncollected checks )standard remedies for reducing a bank exposure to liquidity risk include increasing the proportion of
bank funds committed to cash and readily marketable assets such as government securities ,or using longer term liabilities to fund bank’s operations

Default or solvency risk

Bankers must be directly concerned about risks to their institutions ,long term survival ,usually called solvency risks .if the bank takes on an excessive
number of bad loans or if a large portion of its security portfolio declines in market value ,generating serious capital losses when sold ,then its capital account ,which is designed to absorb such losses may be overwhelmed. If investors and depositors become aware of the problem and begin to withdraw their funds, regulators may have no choice but to declare the bank insolvent and close its doors.

A bank’s failure may leave its stockholders with none of the funds they committed to the institution .depositors not covered by insurance also risk losing a substantial portion of their funds. for this reason, the prices and yields on bank stock and on large uninsured deposits can serve as an early warning sign of bank solvency problem .when investors believe that a bank has an increased chance of failing, the market value of its stock usually begins to fall and it must post higher interest rates on its borrowings in order to attract needed funds .economist call this phenomenon market discipline.

There exist also powerful tools that banks use against these risks,
As bank defense.
1. Quality management
2. Diversification
3. Deposit insurance
4. Owner’s capital

International banking,

In the pursuit of business around the world banks use a wide variety of organizational structures to deliver services to their international customers.

Representative offices
The simplest organizational presence for a bank active in foreign markets is the representative office, a limited-service facility that can market the services supplied by the home office and identify new customers, but does not take deposits or book loans. These offices are established to supply services both to the parent bank and its customers.

Agency offices
Some what more complete than the representative office is an agency office ,which in many jurisdictions does not take deposits from the public ,but make commitments to make or purchase loans, provides seasonal and revolving agreements ,issues standby letters of credit ,provides technical assistance and advice to customers (primarily corporations and governments),administers their cash accounts ,and assists with customer security trading .

Branch offices
The most common organizational unit for most international banks is the branch office, offering the bank full line of services. Foreign branches are not separate legal entities, but merely the local office that represents a single large banking corporation. They can accept deposits from the public subject to the regulations of the country where they are located and may escape some of the roles for deposit taking faced by branches of the same bank in its home country.

Subsidiaries
When an international bank acquires the majority ownership of a separate legally incorporated foreign bank is referred to as a subsidiary of the international bank. Because the subsidiary possesses its own charter and capital stock, it will not necessarily close down if its majority owner fails.
Similarly a subsidiary bank can be closed without a substantial adverse effect on the international bank that owns it .subsidiaries may be used instead
of branches because local regulations may prohibit or restrict branching or because of tax advantages .

Joint ventures
A bank that is particularly concerned about risk exposure in entering a new
foreign market, lacks the necessary expertise and customer contact abroad ,or wishes to offer services prohibited to banks alone may choose to enter into a joint venture with foreign firm ,sharing both profits and expenses .

Edge act corporations
Edge acts are separate domestic US companies owned by US bank or by a foreign bank, but located outside the home state of the bank that owns them .these subsidiary corporations are limited primarily to international or foreign business transactions.

Shell branches
In order to escape the burden of regulation, many international banks have established special foreign offices that merely record the receipt of deposits
and other international transactions .

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Source: ArticleTrader.com

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