Chapter Four Establishing New Banks, Branches, ATMs, Telephone Services, and Websites Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

Key Topics Chartering New Financial-Service Institutions 4-2 Key Topics Chartering New Financial-Service Institutions The Performance of New Banks Establishing Full-Service Branches and In-Store Branching Establishing Limited-Service Facilities ATMs and Telephone Centers The Internet and Online Banking Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

4-3 Introduction Financial-service facilities are usually established today for the convenience of customers For most of the history of financial-service providers, convenience has meant location Customers’ views about what is convenient are changing rapidly partly due to technology In deciding how they will respond to customers’ changing demands, financial firms today have several options: Chartering new (de novo) financial institutions Establishing new full-service branch offices Setting up limited-service facilities Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

Chartering a New (De Novo) Financial-Service Institution 4-4 Chartering a New (De Novo) Financial-Service Institution No one can start a financial firm in most countries without the express approval of federal or state authorities, sometimes both In the case of banks, the public’s need for a new (de novo) bank in a particular location must be demonstrated Usually the founder stockholders must supply enough start-up capital to cover several years and show that the proposed new institution will achieve adequate levels of profitability Government chartering agencies believe financial-service providers need special scrutiny for several reasons: They hold the public’s savings Many financial firms are at the heart of the payments process to support trade and commerce, so their failure could disrupt business activity They have the ability to create money (through granting credit)ding power), which suggests that chartering too many might Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

The Bank Chartering Process in the United States 4-5 The Bank Chartering Process in the United States Only the banking commissions in each of the 50 states and the Office of the Comptroller of the Currency (OCC) can issue a charter of incorporation to start a new U.S. bank Generally, federal standards for receiving a bank charter are more rigorous than the rules of state banking commissions Organizers often seek a federal bank charter for the added prestige it conveys in the minds of customers, especially large depositors The choice between pursuing a federal or a state charter usually comes down to weighing the benefits and costs of each for the particular bank and its location(s) Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

The Bank Chartering Process in the United States (continued) 4-6 The Bank Chartering Process in the United States (continued) Benefits of Applying for a Federal (National) Charter It brings added prestige due to stricter regulatory standards that may attract larger deposits In times of trouble, the technical assistance supplied to a struggling institution by national authorities may be of better quality, giving the troubled bank a better chance to survive Federal rules can pre-empt state laws Benefits of Applying for a State Charter It is generally easier and less costly to secure a state charter and supervisory fees are usually lower The bank need not join the Federal Reserve System Some states allow a bank to lend a higher percentage of its capital to a single borrower State-chartered banks may be able to offer certain services that national banks may not be able to offer Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

4-7 Questions Regulators Usually Ask the Organizers of a New (De Novo) Bank What are the population and geographic boundaries of the primary service area (PSA) from which the new financial firm is expected to generate most of its account activity? How many competing banks, credit unions, finance companies, and other competitors are located within the service area of the proposed new financial institution? What are competitors’ services, hours of operation, and distances from the proposed new institution? What are the number, types, and sizes of businesses in the area? What are the traffic patterns in the area, adequacy of roads, and geographic barriers to the flow of traffic? Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

4-8 Questions Regulators Usually Ask the Organizers of a New (De Novo) Bank (continued) What is happening to population growth, incomes, types of occupations represented, educational levels, and the age distribution of residents in the proposed service area? The organizers often are asked to describe the financial history of the community served, the frequency with which new financial firms have appeared and their track record Who is to own any stock issued? What amount of stock will be held by the organizers, directors, and officers? How experienced are the organizers, management, and board of directors of the new institution? What are the organizers’ projections for deposits, loans, revenues, operating expenses, and net income for the first few years? Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

Factors Weighing on the Decision to Seek a New Charter 4-9 Factors Weighing on the Decision to Seek a New Charter External factors the organizers should consider include: The level and growth of economic activity The need for a new financial firm The strength and character of competition in supplying financial services Internal factors the organizers should consider include: Qualifications and contacts of the organizers Management quality Pledging of capital to cover the cost of filing a charter application and getting under way Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

Volume and Characteristics of New Charters 4-10 Volume and Characteristics of New Charters The number of new depository institutions chartered in the United States annually has averaged over a hundred new banking firms in many recent years There appears to be considerable public demand for more personalized service sometimes not available from large financial firms Analysis of charter approvals suggests that most new banks are chartered in relatively large urban areas As population increases relative to the number of financial firms operating in a given state, increased numbers of new charters are issued The great recession of 2007-2009 tended to reduce bank chartering activity Significant increases in concentration ratios tend to reduce chartering activity, as does the expansion of existing branch office networks Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

How Well Do New Charters Perform? 4-11 How Well Do New Charters Perform? Launching a new financial firm entails risk Most new financial firms grow at a moderate to rapid rate Despite a track record of loan losses that generally exceed those of established banks, most new banks are often profitable within two to three years after opening their doors Research also suggests that early performance is strongly tied to the experience, financial strength, and market contacts of those who put the organization together New charterings have competitive effects that generally serve the public interest Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

How Well Do New Charters Perform? (continued) 4-12 How Well Do New Charters Perform? (continued) The most recently chartered banks show evidence of being “financially fragile” and more prone to failure than established banks New banks tend to underperform established banks in profitability and efficiency until they reach maturity One reason for new banks’ tendency to underperform is that they appear to be more vulnerable to real estate crises Today new banks are more closely supervised by government regulators than are established institutions and tend to be examined more frequently Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

4-13 Establishing Full-Service Branch Offices: Choosing Locations and Designing New Branches When an established financial institution wishes to enter new markets or when its valued customers move, an important vehicle for market entry is the creation of new branch offices Establishing branches is usually much cheaper than chartering new financial-service corporations The branching leader in the United States, the Bank of America, has more than 6,000 U.S. offices of various kinds The location, design, and services offered by a branch office depend upon the preferences of customers and the preferences of management and employees Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.