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