Starting a bank is less glamorous than it sounds. Unlike entrepreneurs, who are famous for creating products in their garages with little money, a would-be banker needs a hefty amount of startup capital, not to mention hours of regulatory oversight before even opening his doors. Edward Carpenter, chairman and chief executive of Carpenter & Co., an Irvine-based investment bank specializing in financial institutions, is the point person many turn to when starting up a bank in California. Carpenter’s office is crammed with “tombstone” notices souvenirs of the hundreds of banks he has helped create.

Who can start a bank?


Any group of individuals can start a bank. The United States is the only country in the world that does not require action of the government to initially license a bank.

What are the barriers to entry?


First off, the president, chief executive, chairman and chief financial officer must have held their same positions at another bank previously. Some banks are denied charters if their executives do not have the required experience. Second, 25 percent of the directors must have been directors previously at successful banks. Third, the organizers must raise the seed capital and then the equity capital for the bank.

What are the first steps?


Decide whether to seek a state or federal charter. Currently, there are more applications being filed with the state government than federal agencies. State-chartered banks file applications with both the California Department of Financial Institutions and the Federal Deposit Insurance Corp. Federal-chartered banks file applications with both the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. The application includes a business plan, a set of three-year pro forma financials, information on members of the board and management team, including statements of net worth and various policies and procedures for the bank. At this point, organizers have only raised the seed capital, which is spent on filing fees, an advisor and a law firm.

How does the application get approved?


Once the application is filed, the directors and officers are individually interviewed by both chartering agencies. The documents are reviewed, and the chartering agencies determine if there is a market need for the bank. If there is a need and all executives and directors have the requisite experience, preliminary approval is given to open the bank. It takes approximately 120 days to be approved. At that point, you must raise equity capital and get the bank’s physical space organized.

What happens once the bank is approved?


You go out with your stock offering, if the bank’s stock is to be publicly traded. Banks that have opened this year in L.A. County have raised anywhere between $10 million and $36 million in initial equity. Assuming the offering is successful, the money goes into an escrow account. At the same time that the bank is raising money, the new bankers find office space, arrange to install the computer and phone systems and hire employees. Regulators visit the premises. If all goes well, final approval is given and the state or federal agency issues the bank’s charter. The bank is then ready to open.

What does a bank need to do to succeed and become profitable?


Once opened, the bank begins to take deposits and make loans. The faster it grows assets, the faster it can become profitable. The typical bank starts to earn a profit in its 24th month in business.