This third installment in our series of insights on bank charter considerations describes the process for seeking regulatory approval to form or acquire a bank.1
Our first installment addressed the reasons why a nonbank provider of financial services might want to operate through a bank, the types of charters available, and considerations relevant to choosing the right charter. Our second installment addressed some of the consequences of operating through or controlling a bank.
Chartering Process
The application process for establishing a new full-service bank (whether federal- or state-chartered) generally takes at least one year. The process begins with the preparation of a detailed business plan, financial statements and projections, biographical information, operating policies and procedures, and various other application materials for submission to the chartering authority and other agencies with jurisdiction over the institution and its holding company, if any. An organizing group should identify the key members of management early in the process because their participation will be needed to develop the business plan and to hold prefiling meetings with regulators.
Groups proposing to form a bank will need to apply to the chartering authority for a charter and to the Federal Deposit Insurance Corporation (FDIC) and any applicable state excess deposit insurers for deposit insurance. If there will be a holding company or other company having direct or indirect control of a depository institution, organizers will also typically need approval from the Board of Governors of the Federal Reserve System and possibly from applicable state bank regulators to form a bank holding company or savings and loan holding company, an undertaking discussed in our second installment.
Organizers should also consider whether the bank will join a regional Federal Home Loan Bank, and organizers of a state-chartered bank should consider whether it will become a member bank in the Federal Reserve System because those applications are often submitted contemporaneously with the chartering process.
While drafting the business plan and other materials, and before filing any applications, the organizers should have one or more prefiling meetings with the primary federal regulator and any applicable state regulators of the proposed bank to discuss any novel or significant regulatory issues. When the application is filed, the applicant will be required to publish a notice that describes the filing and alerts the public to their ability to submit comments on the public portions of application. During the course of the regulators' review of the application documents, additional information will also be requested.
Once the charter is given preliminary approval by the chartering authority, the bank will be formed as a stock, public benefit, or mutual corporate organization. After satisfaction of any regulatory conditions imposed in connection with the approval, which typically require that any associated capital raise be closed, the bank can request final approval to begin transacting business. In some cases, federal or state bank regulators may also require a preopening inspection or examination before authorizing a new depository institution to commence business.
Composition of Management
A key factor considered by banking regulators in approving the formation of a new bank is the experience and quality of the proposed management. The regulators require that proposed officers, directors, and individual controlling shareholders complete detailed biographical and financial forms and, often, fingerprint cards. The board of directors should include individuals with prior banking experience and knowledge. A bank should also have a president or chief executive officer with prior banking experience. Other management officials may include a chief financial officer or treasurer, a compliance officer, a Community Reinvestment Act officer, and an anti-money laundering and Bank Secrecy Act officer. Organizers should confirm early in the process that proposed directors and management have nothing negative in their financial history or other history that may prevent them from being cleared by regulators.
Further, under FDIC regulations, each bank must establish an audit committee of its board of directors. For an institution with total assets of $500 million or more but less than $1 billion, the audit committee members must be outside directors, and a majority must be independent of management. For institutions with total assets of $1 billion or more, all audit committee members must be outside directors who are independent of management. The proposed board of directors should include a sufficient number of directors who meet these independence requirements. From a governance perspective, including one or more independent directors may be helpful, even when doing so is not required.
The National Bank Act and some state laws impose residency requirements on bank directors or management. For instance, under the National Bank Act, each director of a national bank must be a US citizen, and the majority of the directors must have resided in the state in which the national bank is located (or within 100 miles of the location of the main office of the national bank) for at least one year preceding their election and must continue to meet the residency requirement on an ongoing basis. The Office of the Comptroller of the Currency may waive this residency requirement, and it may waive the citizenship requirement for a minority of directors.
Federal banking laws and certain state laws also restrict director and senior management interlocks between competing and certain very large banking organizations. Any organization considering establishing or acquiring a depository institution must consider the effect of these management interlock prohibitions on the composition of management. The restrictions on interlocks not only apply to the board of directors and senior management of the bank but can also, in some cases, affect the composition of directors and officers throughout an organization.
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Chartering a bank is a significant undertaking, but it is one that can result in significant benefits. Please reach out to the Goodwin Banking team if you have any questions or would like to discuss further.
Footnote
1. We reference bank here to mean an insured depository institution.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
