Banking License

A banking license is an authorization issued by a government authority that permits a company to operate as a bank. Its defining feature in almost every country is the right to accept deposits from the public; the license usually also covers lending, payment services and a range of related activities. Carrying on banking business without one is a criminal offence in most jurisdictions, and the use of the word "bank" in a company's name is generally restricted to license holders.

The license is called a bank charter in the United States and authorisation as a credit institution in European law. Licensing is the gateway to the rest of bank regulation: once licensed, a bank is subject to capital and liquidity rules, ongoing supervision and resolution arrangements, and in return gains access to deposit insurance, central bank accounts and payment systems.

Deposit taking is what separates a bank from other financial firms. A bank may use deposits to fund loans for its own account, creating the maturity transformation at the centre of the banking model, whereas a payment or electronic money firm must keep customer funds set aside. A full license typically also allows the holder to issue cards, execute payments, deal in foreign exchange, provide guarantees and offer custody.

Many countries offer narrower forms. Some issue restricted or phased licenses that limit the volume of deposits while a new bank builds its systems. Others have separate categories for a commercial bank, a savings institution, a microfinance bank, an Islamic bank or a wholesale bank that deals only with institutions. Several Asian jurisdictions have created a digital bank license for branchless banks.

Although the details differ, regulators look for the same things in an application.

• Capital. The applicant must hold a minimum capital requirement at the outset and show that it can meet ongoing ratios under standards based on Basel III as it grows.
• Business plan. Multi-year financial projections must show a viable route to profitability, with stress scenarios.
• Owners and management. Significant shareholders are vetted for reputation and financial strength, and directors and senior managers must pass a fit and proper assessment.
• Governance and controls. The bank needs risk management, compliance, internal audit, anti-money laundering systems and resilient technology in place before it opens.
• Exit planning. Newer regimes ask for recovery arrangements and a plan for an orderly wind-down.

The process commonly takes one to two years from first contact with the regulator and requires substantial spending before any revenue is earned.

The United States has a dual system. A national bank is chartered by the Office of the Comptroller of the Currency, and a state-chartered bank by the banking department of its home state. In either case a bank that takes retail deposits needs separate approval for insurance from the Federal Deposit Insurance Corporation, and a company that controls a bank generally must be approved by the Federal Reserve as a bank holding company.

Special charter types exist alongside the full-service bank, including the industrial loan company, which may be owned by a commercial firm, trust charters limited to fiduciary activities, and the proposed special purpose national bank for fintech companies. Newly formed banks are known as de novo banks, and few were approved in the decade after the 2008 crisis.

European Union law defines a credit institution as an undertaking that takes deposits or other repayable funds from the public and grants credit for its own account. The minimum initial capital is five million euros, though national law and supervisory practice usually demand more. Within the euro area, applications are filed with the national supervisor, and the final decision is taken by the European Central Bank under the Single Supervisory Mechanism. A bank licensed in one member state can serve the others through passporting.

In the United Kingdom, a firm applies to the Prudential Regulation Authority, which decides with the consent of the Financial Conduct Authority. New banks may be authorised with restrictions, a stage called mobilisation, during which they can hold only a small amount of deposits while completing their build.

Because a banking license is costly to obtain and maintain, many companies choose lighter permissions matched to a narrower activity. An electronic money institution can hold customer balances and issue cards but cannot lend those funds or offer insured deposits. A money transmitter or payment institution can move money. Others rely on a licensed bank through a bank-fintech partnership. Some financial technology firms that began this way later apply for a bank license, mainly to fund lending with deposits and to reduce dependence on partners.

A license can be withdrawn if the bank no longer meets the conditions on which it was granted, breaches the law seriously, fails to start business within a set period or becomes insolvent. Withdrawal is normally the final step after supervisory measures have failed, and it is coordinated with resolution or liquidation so that insured depositors are paid.