It costs a lot of money to start a bank from the ground up, for obvious reasons. To get this starting capital, unless the person starting the bank is already wealthy enough to pay for it themselves, banking start-ups presumably need either investors or loans. Could a banking start-up potentially secure loans from other, already established banking institutions, or would such existing banks refuse to lend to a potential competitor? Would it change anything if the start-up was very unlikely to become a competitor, either due to location or business model?

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    They can borrow from a central bank if that counts. Nov 11 '21 at 22:18

Probably not. A bank does not get started by "borrowing" money. The purpose of the bank is to lend that money out to borrowers at a higher interest rate than they pay on their funds. Paying loan interest to another bank would kill their profits and make it nearly impossible to pay off the loan. The interest income would probably not be enough to pay the loan interest and pay it down.

In reality, that is not how banks get started. Banks more typically get started with an initial set of capital investors, and over time, grow by increasing their deposits. The banks can then lend that money to borrowers, charging them more interest that what they pay on deposits (subject to regulations that dictate how much of the bank's deposits can be lent out). Capital investors get "paid" by seeing their equity investment grow.

As they grow, if they need more capital becausue they've loaned out more than they are required to keep in deposits, then they can borrow money "overnight" from the Federal Reserve and pay a much smaller interest rate then they would get from a term loan from another bank.

That is a very simplistic view of the modern banking system, but hopefully it illustrates that they are not started via bank loans.

  • There is a lot wrong here. For purposes of capital sufficiency, loans and deposits count the same; they're both liabilities on the bank's balance sheet. If a bank tried to grow solely by taking deposits, it would quickly find that in order to maintain its required capital ratios it would be limited to holding zero risk-weighted assets, which don't earn very much. Also, borrowing from the fed or anyone else can't get a bank more capital because such borrowings are matched by liabilities (therefore, no change in capital).
    – Nobody
    Nov 12 '21 at 13:47
  • Like I said - it's a very simplistic view, but the core answer is that you probably can't start a bank (at least not successfully) by borrowing money from other banks.
    – D Stanley
    Nov 12 '21 at 14:53
  • I agree with that. The reason is that banking regulations require banks to have some of their own (i.e., their investors') money as a cushion, in case their assets incur losses.
    – Nobody
    Nov 12 '21 at 15:49

It is quite common for banks to lend and borrow money from each other. See https://en.wikipedia.org/wiki/Interbank_lending_market . However, this borrowing is done to even out capital requirements, not to fund the core founding capital. Banks often start out with one branch with some seed equity capital, and then expand into more branches. As they expand, they get more deposits and can attract more equity investments, and this fuels further expansion. There is also a tendency for banks to merge. The huge banks you see are generally a result of this gradual expansion and mergers, not someone borrowing several billion dollars to start a nationwide bank.

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