I just recieved an interesting idea proposed by one of my investors. Bit of backstory, they are an UHNWI and proposed buying a small chartered bank and essentially running it as a private bank. Basically just continue to provide services to existing customers but lock out new clients and use the depository and lending abilities of the bank to run their own capital through.
Anyone ever looked into something like this? If so, what are your thoughts?
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Owning a bank is both incredibly profitable and unbelievably complicated. Also, it doesn't matter how rich you are--unless you have (or your team has) significant banking background the regulator will probably block the sale as their first priority is ensuring the depositors are going to be well protected from incompetent management. I'm not sure what specific benefit this individual was thinking about when he said he could run his own capital through, but he can't just give himself easy loans as that will ultimately--in time--reflect in the bank's riskiness and regulators will be all over it.
All that said, the risk-adjusted return in banking is obscene. If a bank purchased only 1-year Treasuries at 4.75% and paid, on average, 3.5% to depositors, there's a 1.25% gross spread. Subtract overhead (non-interest) costs of 25% and your ROA is 0.9375%. Let's say your tangible common equity ratio was 8% (this means you're more than 12x leveraged), that would be an 11.72% after-tax ROE...on Treasuries. ROE of 15+% after-tax is not uncommon in banking. In my view, it would be very smart to purchase a small bank while they are still around. My guess is that within 10 years, the opportunities will nearly all be gone.
I'm actually trying to do this now (since I have significant bank experience) but it's hard to find investors--it's a complicated and opaque business. And very public bank failures with investors being wiped out doesn't help the perception.
Thanks for the feedback. The concept here is to buy essentially a charter for a bank that has zero depository clients. Then to fund the depository arm of the bank with the individual(s) own capital and build a services suite to create product access to the individual or a small group of investors that only banks have access to. It's not about creating a bunch of really risky loans to themselves given that it is their own money that is being lent out. But rather utilize a bank charter to get preferential tax status, international capital flow access, etc. The relatively low cost of running a bank when compared to say, swift fees, could be highly beneficial to an individual or very small group of UHNWI.
I assume you’re talking about an American bank charter. There are probably a lot of business dealings your rich client understands that I don’t, though US banks routinely pay net taxes fairly close to statutory rates because there is generally not a lot of tax preferred business inside banks, e.g., depreciation on capital equipment or real estate.
Realistically, it’s unlikely the US regulator would approve of this kind of an approach to banking and probably wouldn’t approve the sale. But on paper there are great things a smart operator could do with a bank if they could actually obtain one.
Bank regulations are a big deal and they control activity (business lines) a bank can pursue. Especially for a startup (Denovo) there will be many things they are not allowed to do. Ran into this a lot when we were installing AM platforms within community banks. In almost all cases, they needed regulatory approval to add a product line, even though it was non-interest income based.
Why not adjust his thinking into investing in a well run bank and gaining a board seat? These guys do pretty well on roll ups.
The purpose of this idea is to actually have zero customers outside of the individuals capital.
I understand that. However it will be quite difficult to get the regulators onboard with that. To them, that doesn't represent a bank.
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