An Updated Bank Charter Primer

What are the different kinds of bank charters that are available?

As my colleague Michele Alt discussed with Peter Renton recently on the Fintech One on One podcast, the attitude in Washington has changed dramatically with the new administration, and there’s renewed interest in and optimism around a wide array of types of new bank charters with varying powers, limitations, requirements and regulatory regimes. The standard insured national and state bank charters are well known. We summarized several of the less well known options, including Industrial Loan Companies (ILCs), Merchant Acquirer Limited Purpose Bank Charters (M-A-L-P-Bs), and Special Purpose Depository Institutions (SPDIs) in this post. This post provides information on a few other charter types are also seeing renewed interest. 

National Trust Bank (NTB): A national trust bank is a national bank that does not have deposit insurance and whose operations are limited to those of a trust company and related activities. An NTB typically exercises fiduciary powers, allowing the bank to act as trustee, executor, administrator, registrar of stocks and bonds, guardian of estates, assignee, receiver, investment manager, or in another fiduciary capacity. NTBs can engage in some nonfiduciary activities, most significantly custody. They may be able to issue payment stablecoins. NTBs can operate nationwide without obtaining state licenses. Because NTBs do not have deposit insurance or engage in lending, owning an NTB does not require a company to register as a bank holding company. The parent company is not limited to financial activities or subject to Fed supervision. 

State Trust Company: A state trust company is the state-chartered version of a national trust bank. Many states restrict trust companies to fiduciary services. Other states are more flexible. New York has several trust companies that offer crypto custody services, issue stablecoins, and operate crypto exchanges. Nevada allowed one trust company to sell banking software to fintechs. State trust companies often need licenses to operate outside their home state. Owning a trust company that conducts a traditional trust business does not require a company to register as a bank holding company.

CEBA Bank: A CEBA bank is an uninsured state or national bank that does have deposit insurance and makes loans, but engages solely in credit card activities. A CEBA bank cannot make commercial loans or accept deposits subject to withdrawal on demand or by payment instrument. Owning a CEBA Bank does not subject a company to Fed supervision or limit the company’s activities to those that are financial. (CEBA is the Competitive Equality Banking Act of 1987, the law that confirmed these banks could exist.)

Connecticut Innovation Bank (CIB): A CIB is a full bank except that (1) it can’t take retail deposits, (2) it need not be FDIC-insured, and (3) it isn’t subject to Connecticut community reinvestment laws. Connecticut has chartered two CIBs, one of which obtained a master account at the Federal Reserve. CIBs can also obtain direct access to Visa’s and Mastercard’s payment rails. Depending on what the CIB does, its parent may have to register as a bank holding company.

Nebraska Digital Asset Depository Institution (DADI): A DADI is chartered to provide a digital asset banking business to customers. That does not include taking demand deposits or lending. DADIs can custody digital assets, issue stablecoins, process stablecoin payments, perform digital asset exchange, stake digital assets, and facilitate customer access to DeFi apps. Owning a DADI does not require a company to register as a bank holding company.

Stablecoin issuers: The GENIUS Act allows uninsured national banks, uninsured state banks, and nonbanks to issue payment stablecoins with a license. Regulators will develop the licensing process and operational standards over the next year. In general, licensed issuers will be limited to issuing and redeeming stablecoins, managing the reserves, and stablecoin custody. GENIUS seems to let licensed issuers operate nationwide, without regard to state licensing laws, though these provisions are untested.

The important thing is that when it comes to new bank formation and bank acquisitions, we are 180 degrees from where we were a few years ago. If you’re serious about getting a charter, there’s no better time, because the application funnels are filling quickly—reach us at michele@klarosgroup.com or roman@klarosgroup.com.