A proposed bank’s activities must be confined to those set out in the Business Plan which will have been submitted to the authorities for approval at the time an application for a licence is made. The Business Plan must set out, inter alia:

• The proposed commercial activities.

 

• The business objectives as well as the type and source of business contemplated.

 

• The applicant’s proposed initial assets and its anticipated assets and liabilities and income usually over a projected period of two years.

 

• The applicant’s policy on large exposures and the system of control. Exposure limits of branches, where applicable, should be confirmed and guaranteed by the head office of the bank, in writing

• Details (including qualifications and experience) of the proposed management and senior personnel

• The reasons for choosing the jurisdiction as an operating base.

• The anticipated customer base (which may be restricted to a specific class making such a bank a captive one).

At the time an application is made, the applicant will be asked to explain policies and procedures as they relate to internal controls, investments, operations and internal audits. Applications on behalf of an existing overseas bank will require the written approval of its board of directors.

Two types of licence are usually available, namely, a General or a Restricted licence. One licence (General) allows activities within the jurisdiction and the other (Restricted) only permits banking activities outside the jurisdiction. In either case, the bank must have a physical or representative presence in the jurisdiction. A combined licence can be granted.

The various licence fees are, approximately, $5,000 (initial) and up to $50,000 (annual) depending upon the jurisdiction and the type of licence required.

Branches of major international banks are particularly welcome as they will be able to offer not only traditional retail banking, but also services such as investment management, back-to-back loans and documentary credit facilities, credit card services and trust management. Applications other than those from major international banks will be considered, provided that they have similar resources, credentials and connections.

The management of a proposed bank will be required to display a sound knowledge of banking with evidence of ability and experience.

Those banks wishing to deal with the general public, without restriction, will be required to have substantial capital resources. In assessing capital adequacy, the following criteria will be applied:

1. Quality of assets and its distribution. Those banks with superior quality assets will be able to operate with a lower capital base. Generally, 10% of capital should be targeted to total deposits. The lower the level of liquidity, the higher the capital base will need to be.
2. The policy towards dividends, provisions for losses and capital reserves derived from retained earnings.
3. The credit policy, including its design and control. Risk diversification versus concentrations of credit in relation to economic sectors, individual customers and economically-linked groups is a factor for consideration.
4. Competency of management in general, but particularly in relation to liquidity control. It is accepted that whereas a common liquidity ratio cannot be applied, a guideline would be the creation of a reserve representing 5% of the total liabilities plus a liquidity level equivalent to 25% of total deposits.
5. The operating environment of the bank.
6. The volume and nature of the business conducted.
7. Composition of liabilities. A deposit base, for example, where in-flow is greater than earning retention will require a greater level of capital support.

Although captive banks, as opposed to major banks, will have less of a risk exposure in relation to customers, all of whom will be expected to be sophisticated in financial affairs, banking commissioners will place great importance on the competency of a bank’s auditors. The auditors are expected to have a specialised knowledge in the field of banking and should be qualified in terms of training and experience; normally they do not have to maintain a practice in the jurisdiction.

All licensees should conduct their banking business in a prudent manner. Licensees are expected to ensure that capital resources, liquidity and provisions for bad and doubtful debts are adequate. Judicious limits should be observed in respect of the size of exposures to individual customers. Any loans exceeding 10% of capital should not be the norm unless exceptional circumstances exist, and exposures to a single borrower should not exceed 25% of capital. At the same time, banks should have an effective system for monitoring movements in interest and foreign currency rates.

In summary, the commissioner will need to be satisfied that a bank’s management, control and accounting systems, administration and lending procedures, are satisfactory for the type and scale of business being undertaken.