Fin 464 Chapter 4 Establishing New Banks Branches
Fin 464 Chapter 4: Establishing New Banks, Branches & ATMs
4 -2 Respond to Changing Customer Demand • Financial-Service facilities are established today for the convenience of customers. • Historically convenience meant location, but today timely access to financial services is valued as well. • Growing use of internets, computers, cell phones, automated tellers, point of sale terminals eroded the significance of physical location • Important financial services still require physical presence • Ways to respond to the convenience of customers, financial firms has chosen following options: 1. Chartering New (De Novo) Financial Institutions 2. Establishing New Full-Service Branch Offices 3. Setting Up Limited Service Facilities
4 -3 1. Charters for New Banks Dual Banking System: Requires Approval from federal or state authorities or both Federal (National) Charter Office of the Comptroller of the Currency (OCC) Office of Thrift Supervision (OTS): A thrift institution is a financial institution formed primarily to accept consumer deposits and make home mortgages/ household loans. The primary types of thrift institutions are savings & loans association, credit unions & money market funds. OTS & OCC merged so that thrift institutions & national banks have same regulatory agency at the federal level. National Credit Union Administration State Banking Commissions in the 50 states for State Banks All Banks Obtain FDIC Deposit Insurance as part of the chartering process
4 -4 Benefits of a National Charter Brings Added Prestige Stricter Standards Bring Larger Deposits In Times of Trouble, Technical Assistance May Be Better Part of Federal Reserve System Federal Rules Can Preempt/Prevent State Laws
4 -5 Benefits of a State Charter Easier to secure a state charter Less costly to obtain as supervisory fees usually lower Bank does not need to join the Federal Reserve System The primary federal regulator of state member banks is the Fed The primary federal regulator of non-fed member state banks is the FDIC Subject to State law State May Allow Bank to Lend More of its Capital to a Single Borrower Customized service that national bank may not be able to offer Real estate brokerage
4 -6 Factors affecting regulatory decisions regarding Chartering a New Bank 1. Population and Geographic Boundaries of Primary Service Area (PSA): Target market 2. Competing Financial Institutions in the proposed PSA 3. Number, Types & sizes of Businesses in PSA: Demand of Businesses 4. Traffic Patterns in PSA for convenience to the commuters 5. Population Growth, incomes, age distribution, education levels, types of occupation in PSA 6. Banking History in PSA 7. Amount and Holders of Stock in New Bank to raise adequate capital 8. Business and Banking Experience of Organizers 9. Projections of deposits, loans, revenues and operating expense for New Bank in First 3 to 5 Years 10. Submit a detailed Business Plan to OCC
4 -7 Factors that Affect Decision for New Charter External Factors: i. Level of Economic Activity: generate sufficient service demand ii. Growth of Local Economic Activity iii. The Need for a New Bank: has population grown or moved ? Measured by population per banking office , recent earnings and deposit growth and by the no. of new residential construction projects. iv. The Strength and Character of Local Competition in Supplying Financial Services: measured by the no. of relative to area population and no of financial institutions. Internal Factors: i. Qualifications and Contacts of Organizers: strong enough to attract customer? ii. Management Quality: iii. Capital Pledged to cover filing fees
4 -8 2. Desirable Sites for New Branches Heavy Traffic Count: large flow of vehicle Large Number of Retail Shops and Stores Above Average Age of Local Populations Area Contains Substantial Number of Managers, Business Owners and Professionals Steady or Declining Number of Service Facilities Operated by Competitors Above Average Population Growth Above Average Population Density Relatively High Target Population per Branch Above Average Levels of Household Income
4 -9 Decision in Establishing a Full-Service Branch q The decision of whether to establish a branch office is a Capital Budgeting Decision. q Expected Rate of Return q § The present value of the future net cash flows should be larger than the initial outlay. § Compare the expected rate of return of the branch with the required/acceptable rate of return or with cost of capital of the bank. Branch economically viable if E(r) equals or exceeds the minimum acceptable return. § NPV = PV of inflows - Initial Investment Geographic Diversification Reducing a bank’s overall risk exposure to its total return by establishing service facilities in different market areas whose individual returns are not highly correlated with the returns from a bank’s existing market locations.
4 -10 3. Limited-Service Facilities The most effective service delivery systems in USA today to be multichannel, i. e. combining full-service branches and limited service facilities Point of Sale (POS)Terminals Automated Teller Machines (ATMs) Telephone Banking and Call Centers Online/Internet-Banking
4 -11 ATMs Less costly to set up and operate Efficiently utilize resources as requires limited resources But less effective at cross selling, less personal service, and more vulnerable to criminal activity Decision to install ATM: The bank examines the present value of the stream of cash savings from the new ATM machine NPV of New ATM = Present value of the stream of cash savings from new ATM discounted at required return or cost of capital Minus (-) Total cash outlay for the new ATM Install ATM if the NPV is Positive
4 -12 Services Provided Through the Internet Verify Real-Time Account Balance Move Funds Instantly Among Accounts Confirm Deposits Made, Checks Cleared and Online Transactions Have Taken Place View and Print Images of Checks Place Orders for New Checks Submit Applications for Loans and Credit Cards Carry Out On-Line Bill Paying
- Slides: 12