Establishing New Banks Branches ATMs Chapter 4 Responses

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