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Bank organizers have several options from which to choose when forming their bank. This topic discusses these options, which depend significantly on the organizers' vision for the institution.
There are several decisions to make when considering a new charter. One choice is whether the depository institution will be a commercial bank or a savings bank/association. Another is whether it is to be state or federally chartered.
If an institution chooses a commercial bank charter, the decision is whether to apply for a national bank charter from the Office of the Comptroller of the Currency (OCC) or a state bank charter from the state regulatory authority. Commercial banks with a national charter are supervised by the OCC and are members of the Federal Reserve System. Commercial banks with a state charter are supervised by both the applicable state banking department and either the Federal Deposit Insurance Corporation (FDIC) for state nonmember banks or the Federal Reserve for state member banks.1
If an institution chooses a savings bank/association charter, the decision is whether to be a state-chartered savings association, primarily regulated by the state, or a federal savings bank/association, primarily regulated by the Office of Thrift Supervision (OTS).
Important points to consider when choosing a charter include the following:
Although filing required applications is the official start of the regulatory application process, it should not be the first step of the process. Organizers of new banks are strongly encouraged to contact bank regulators prior to filing the required applications. Pre-filing contact, in the form of a meeting or telephone conference with key organizers and supervisors, provides a forum for organizers to obtain specific instructions regarding the application process and filing requirements. Further, whether the de novo will operate with a minority focus or operate generally, the organizers will benefit from guidance regarding access to capital, organizing boards of directors, and regulatory expectations. Insight into these areas may improve strategic decisions, reduce costs, and speed the application process. Regulators can also provide feedback regarding potential issues related to specific charter proposals. For example, pre-filing contact allows for identification of any issues that might be revealed through advance background checks of the organizers, analysis of initial capital adequacy, and study of management's business plan for reasonableness.
In the past, some MOI and de novo organizers have faced challenges during the chartering process that could have been prevented by pre-filing contact with bank regulators. Early recognition of issues allows them to be addressed before submission of the application, facilitating efficient processing of the application.
The Interagency Charter and Federal Deposit Insurance Application (interagency form) is a combined interagency form issued by the OCC, the OTS, and the FDIC. This form helps to eliminate duplicative information requests by consolidating the reporting requirements of the above-mentioned regulatory agencies into one uniform document.
All three agencies use the interagency form, regardless of the type of charter under consideration. However, the decision to grant or deny the charter application is independent of the decision to grant or deny deposit insurance. Further, depending on the chartering agency (i.e., OCC, OTS, or the state) and membership status (i.e., Federal Reserve member or nonmember), additional applications may be required by the appropriate state agency and the Federal Reserve, respectively. Regardless of membership status, state-chartered banks must file a separate charter application with the appropriate state banking agency, in addition to the interagency form. The Federal Reserve is in the process of changing the policy to allow one combined application to be filed. Further, for a Federal Reserve state member bank, a separate membership application (Form 2083 A/B/C) must also be filed, after preliminary charter approval is granted by the appropriate state chartering agency.
When a regulator reviews new bank applications, the primary objective is to ensure compliance with laws, regulations, and supervisory policy. For instance, certain factors must be given special consideration in approving de novo bank applications, including managerial factors, financial factors, capital adequacy, and convenience and need.
Managerial factors address the competence, experience, integrity, and financial ability of the institution's organizers and management. Financial factors address the viability of the business plan and the ability to achieve and maintain profitability. Capital adequacy addresses the bank's capital in the context of its future growth and earnings prospects, verifying that the bank is raising the required capital. Convenience and need address how the bank plans to serve the financial services needs of the community.
Along with chartering decisions, organizers should consider whether to have a bank holding company take ownership of their bank or remain independent. Bank holding companies allow banks to more easily expand geographically; to move into other product markets (nonbanking activities); and to obtain greater tax benefits and financial flexibility, thereby avoiding some of the constraints imposed by regulation, including limitations on leverage, the types of assets that can be acquired, and liabilities that can be issued.
Bank holding company formations and supervision are the responsibility of the Federal Reserve. The Federal Reserve has adopted, and continues to follow, the principle that bank holding companies should serve as a source of managerial and financial strength for their subsidiary banks. A separate application is needed to form a holding company. This application can be filed in conjunction with the charter application or at a later date.
There are direct regulatory costs to consider when chartering a new bank. These fees include charter fees, application fees, and ongoing supervision fees. Charter fees are a one-time charge, assessed when the bank is initially chartered. Application fees are associated with any subsequent application filed, including charter conversions, branching, purchase and assumption, merger/acquisition, and change in control applications. Supervision fees, or assessments, are charged for ongoing regulatory examinations.
While OCC fees are uniform across states, state fees vary from state to state and are generally lower than OCC fees. The Federal Reserve does not charge any fees. Although the FDIC does not charge fees, insurance premiums are imposed in connection with FDIC insurance.
In contrast to many other aspects of the supervisory process, the applications process is a very public function. Federal regulations require that notice of certain proposals be published in a newspaper of general circulation in the communities that will be affected by a banking proposal to allow the general public an opportunity to comment on the proposal. The public is notified upon receipt of certain types of applications, and the application itself is considered a public document available for review upon request (confidentiality can be requested for private information). Further, the outcome of the application is also made public.
Although the Federal Reserve membership application does not require newspaper publication, the action taken on such applications is still made available to the public.
As a condition of membership in the Federal Reserve, member banks (both state- and OCC-chartered) are required to subscribe to stock in their District's Federal Reserve Bank. The required subscription is equal to 6 percent of the bank's capital and surplus; 3 percent must be paid in, and the remaining 3 percent is subject to call by the Board of Governors of the Federal Reserve.
Holding stock in a Federal Reserve Bank does not carry with it the typical control and financial interest conveyed to holders of common stock in for-profit organizations. The stock may not be sold or pledged as collateral for loans; it is merely a legal obligation required with membership. Annually, member banks will receive a 6 percent dividend on their stock, as specified by law, and they can vote for some of the directors (class A and class B directors) of their Reserve Bank.