Establishing New Banks, Branches & ATMs

Establishing New Banks, Branches & ATMs Chapter 4

Responses to Increase Customer Convenience • Chartering new financial institutions • Establishing new full-service branch offices • Setting up limited service facilities

Chartering New Financial Institutions Requires additional regulation and scrutiny because: • They hold the savings of the public • Inter-related with other financial firms via the payment system • They create money (inflation risks). Charters can be issued via Federal Standards (more rigorous) or State Standards.

Federal (National) Bank • Brings added prestige • More Costly • Subject to stricter regulatory framework • Larger deposits/loan • Technical assistance from national bank authorities • Part of Federal Reserve System • Federal banking rules can pre-empt (prevent) state laws

State Bank • Easier to secure state charter • Less costly (supervisory fees lower) • Not part of federal reserve system • Subject to state law • Can lend a higher portion of its capital to single borrower • Able to offer other services which National banks cannot

Factors affecting regulatory decisions regarding Chartering a New Bank • Target market (primary service area) • Competing financial institutions within the service area • Sizes of business in the service area • Level of competition • Traffic pattern • Population density, growth, income, age, education, occupation etc. • Financial history of the service area • Ownership of the stocks (capital) • Experience of the organizers • Projected deposits, loans, revenues and expenses (quality of the projection)

Chartering a New Bank • External Factors • Internal Factors

External Factors • Level & Growth of Economic Activity (Is it high enough to generate sufficient service demand?) • Need for a New Financial Institution (Has the population grown or dispersed to areas not currently receiving convenient financial services?) • Level of Competition (How many and how aggressively competitive are the existing financial institutions?)

Internal Factors • Qualification & Quality of Management (Do the organizers have adequate experience and strength in reputation? ) • Experience (Have the organizers recruited a CEO and other key posts with adequate skills and expertise in specialized areas?) • Capital to cover cost of charter application and getter underway (Is the net capital contribution of organizers enough to meet the legal requirements?)

Favorable Factors for Sites of Full-Service Branches • Heavy traffic count • Large number of nearby business activities • Population: above average age; entrepreneurs, managers and professional executives; above average population growth and density and household income • High targeted population per branch (Total population of area served/ number of branch offices in the area) • Steady or declining financial-service competitors

Establishing a Full-Service Branch(Capital Budgeting Decision) • Expected Rate of Return - Compare the expected rate of return of the branch with the required/acceptable rate of return or with cost of capital of the bank • Geographic Diversification - New branch increases or decreases the return and risk of the bank

Other Financial Service Facilities • In Store Branching • Point-of-Sale Terminals: Offline (Accumulates all of customer’s transactions and deducts at the day end) Online (Each payment deducted from customer account as purchase is made) • Automated Teller Machine (ATMs)

Decision to Install a New ATM (Capital Budgeting Decision) • NPV of New ATM = Present value of the stream of cash savings from new ATM discounted at required return or cost of capital Minus (-) Initial cash outlay for the new ATM • Install ATM if the NPV is Positive

Establishing New Banks, Branches & ATMs