BANKING

DEPARTMENT OF BANKING AND INSURANCE

DIVISION OF BANKING

General Provisions

Capital Requirements of New Depositories Applying for Charters

Proposed Amendments: N.J.A.C. 3:1-2.1, 2.18 and 2.19

Authorized by: Nicholas Ketcha, Acting Commissioner for Banking, Department of Banking and Insurance

Authority: N.J.S.A.17:1-8.1, 17:1-15e, 17:9A-4, 17:9A-8, 17:12B-20 and 17:12B-248

Calendar Reference: See Summary below for explanation of exceptions to calendar requirement.

Proposal Number: PRN 2001- 416

Submit comments by December 14, 2001 to:

Karen Garfing, Assistant Commissioner
Regulatory Affairs
New Jersey Department of Banking and Insurance
P.O. Box 325
Trenton, NJ 08625-0325

Fax: (609) 292-0896

E-mail: Legsregs@dobi.state.nj.us

The agency proposal follows:

Summary

The Department of Banking and Insurance ("Department") proposes to amend N.J.A.C. 3:1-2.18 and 2.19 relating to capital requirements of new depositories applying for charters. The Department has carefully reviewed the underlying policy decisions that have led to the current capital requirements that protect consumers and maintain the safety and soundness of New Jersey State chartered depositories, that is banks, savings banks and State associations.

The proposed amendments increase the required capital for a new depository from $5,000,000 to $6,000,000, which must in the case of a stock institution include at least $3,000,000 in capital stock, up from $2,500,000. The proposed amendments increase the required capital for a new depository incident to the purchase of a failed institution from $4,000,000 to $5,000,000, which must in the case of a stock institution include at least $2,500,000 in capital stock, up from $2,000,000. Therefore, the ratio of capital stock to required capital is unchanged. In addition, the new depository incident to the purchase of a failed institution must agree to raise additional capital to reach $6,000,000, up from $5,000,000, within one year following issuance of the Certificate of Authority.

The Department has not changed the required capital for a new limited purpose trust company. It has been set at $2,000,000 since 1996. The Department has determined that since these institutions do not take deposits from the general public, the current capital requirement is sufficient.

In an effort to ease the effect of the increased capital requirements, the proposed amendments reduce the burden of a mandatory charter condition, that is, at present, as set forth at N.J.A.C. 3:1-2.18(a)5, a depository must maintain a Tier 1 capital capital-to-assets ratio, as that ratio is defined in 12 C.F.R. § 325.2(k), that is at least 10 percent of the bank’s total assets for a period of five years. The proposed amendments would reduce that ratio to eight percent and reduce the number of years from five to three years. The Department also proposes as part of this relaxation to amend the rule to highlight that a fully funded reserve must be maintained and to amend N.J.A.C. 3:1-2.1, the definition section of the subchapter, to define "fully funded reserve."

Lastly, the Department proposes to amend N.J.A.C. 3:1-2.18 and 2.19 to make it clear that the capital stock requirements only apply to stock institutions and not mutual institutions. The capital requirements do apply to both stock and mutual institutions.

After careful review and consideration, the Department has concluded that the existing initial capital requirement should be increased in light of the fact that the $5,000,000 amount was set in 1996, a more economically prosperous time period and the current economic climate must be taken into consideration in the periodic review of that amount. The mean starting capital of the 27 new depositories chartered by the Department since January 1997 was $6,800,000 and ranged from $5,000,000 to $15,000,000. The Department believes that with the proposed $6,000,000 minimum capital, the Department can reduce from five to three years and from 10 to eight percent the current ongoing capital maintenance requirement. The Department believes that this will have the effect of encouraging the growth of a start-up depository. The proposed amendment to require a fully funded reserve constitutes safe and sound banking practice already enforced.

This rule proposal provides for a comment period of 60 days, and, therefore, pursuant to N.J.A.C. 1:30-3.3(a)5, is not subject to the provisions of N.JA.C. 1:30-3.1 and 3.2 governing rulemaking calendars.

Social Impact

The proposed amendments would apply to all applications to charter a New Jersey depository. The proposed amendments will require new depositories to begin their operations with the capital that the Department believes is necessary at the current time to be successful and to adhere to safe and sound banking practices. Requiring a minimum of $6,000,000 in capital to charter a depository provides the depository with sufficient capital to withstand lean years, especially the difficult, formative years. A depository without sufficient capital could reduce public confidence in the industry and cost significant amounts in deposit insurance. A depository with sufficient capital can expand its services and access to consumers. Therefore, even in good economic conditions, an increased capital requirement is beneficial.

The reduction in the Tier I capital ratio and the time for the capital maintenance requirements should be conducive to growth of new depositories. The amendments, therefore, should have a beneficial social impact on the industry and consumers.

Economic Impact

The Department expects that the proposed amendments will have a positive economic impact. The greater initial capital requirement combined with the reduced Tier I capital ratio and length of time for the capital maintenance requirements should enable new depositories to increase their business, their market share and, therefore, their profitability and competitiveness with their financial intermediary counterparts more quickly. Consumers should benefit economically from the resulting stronger new depositories and the marketplace competition they provide.

New depositories may need to attract additional investors to reach the increased initial capital requirement. The Department expects that associated costs, such as underwriting and marketing fees, would be minimal.

Federal Standards Statement

The proposed amendments do not contain standards or requirements that exceed standards or requirements imposed by Federal law. These rules continue to apply to New Jersey depositories certain Federal standards, set forth at 12 C.F.R § 325.2.

Jobs Impact

The Department does not anticipate that any jobs will be lost as a result of the proposed amendments. If well capitalized new depositories are chartered, additional jobs will be generated and maintained.

The Department invites commenters to submit any data or studies concerning the jobs impact of the proposed amendments together with their written comments on other aspects of this proposal.

Agriculture Industry Impact

The Department does not expect any agriculture industry impact from the proposed amendments.

Regulatory Flexibility Analysis

Some New Jersey depositories are small businesses as defined in the Regulatory Flexibility Act, N.J.S.A. 52:14B-16 et seq. The proposed amendments will impose compliance requirements on these new entities. The compliance required will consist of requiring new depositories to have additional capital to obtain a charter and to meet capital maintenance requirements. The cost of compliance will vary from depository to depository. Depository start- up costs may increase because of the additional time it may take the depository in formation to raise the capital required. The proposed amendments reduce the ratio and length of time of the capital maintenance requirements, so there will be no increase in compliance costs and may be a reduction in such costs. The proposed amendments will not impose any additional reporting or recordkeeping requirements above what is already required by the existing rule. The Department does not anticipate that compliance with the amendments will require employment of additional professional services.

The Department does not believe that the compliance requirements are unduly burdensome and finds that they are consistent with prudent banking practices. The purpose of these requirements does not vary based upon business size and is based on ensuring financially stable new depositories. Accordingly, no differentiation based on business size is provided.

Full text of the proposal follows (additions indicated in boldface thus; deletions indicated in brackets [thus]):

3:1-2.1 Definitions

The following words and terms, when used in this chapter, shall have the following meaning unless the context clearly indicates otherwise.

. . .

"Fully funded reserve" means the allowance for loan and lease losses as that term is defined in 12 C.F.R. § 325.2(a) or its successor section.

. . .

3:1-2.18 Charter applications; conditions for approval

(a) The Commissioner shall condition approval of a charter application by a depository on the following factors:

1. (No change.)

2. [The] If the depository is a stock institution, it will issue and sell shares of its authorized capital stock in sufficient amount to raise its capital base before commencement of operations to at least the minimum amount set forth in N.J.A.C. 3:1-2.19, and will obtain prior approval from the Department for any person purchasing more than five percent of the authorized capital stock.

3. - 4. (No change.)

5. For the first [five] three years after issuance of the certificate of authority, the depository shall maintain [a]:

i. A tier 1 capital-to-assets ratio, as that ratio is defined in 12 C.F.R. § 325.2(k), that is at least [10] eight percent of the bank’s total assets unless prior written consent has been received from the Commissioner permitting a lower ratio; and

ii. A fully funded reserve; and

6. (No change.)

3:1-2.19 Minimum and maximum stock subscriptions

(a) Each charter application for a depository shall provide for stated capital of at least [$5,000,000 which] $6,000,000. If the depository is a stock institution, capital shall include at least [$2,500,000] $3,000,000 in capital stock, or such other amount as required by the Commissioner; except that an application for a charter for a trust company, which does not have authority to take deposits, may provide for a stated capital of $2,000,000 in capital stock; and except that an application for a charter incident to the purchase of a failed institution or a branch or branches of a failed institution, may provide for stated capital of [$4,000,000] $5,000,000, or more, or six percent of deposits acquired, whichever is greater, with at least [$2,000,000] $2,500,000 in capital stock for a stock institution, so long as the depository agrees to raise additional capital to reach [$5,000,000] $6,000,000 within one year following issuance of the Certificate of Authority while also satisfying the capital requirements set forth in N.J.A.C. 3:4.

(b) - (e) (No change.)