Bankers’ Hours column: Big banks give more loans, small ones pay you more attention
Banks of all sizes are chasing the same deposit dollars, wholesale products that are turned into loans and other assets, and the chase takes place on the same playing field, however it is stated: it doesn’t. is never equal.
But the face of competition is changing on the retail side, when that raw money is marketed in the form of various loan products. This is because all banks will take money from anyone (except known criminals). It’s different when big dollars (deposits) turn into loans and other investments. This is largely due to the requirements of banking regulations.
A bank primary reg refers to a bank’s loan limit for any given loan it makes, the so-called borrower lending rule. Being an official rule, there are nuances, but, simply put, it says that a federally insured financial institution cannot grant a borrower a loan greater than 15% of that bank’s equity. It’s an oversimplification, but if a bank CEO just keeps this basic definition in mind, he or she will likely avoid trouble – or jail. The rule is an integral part of the activity, such as “green side up” in landscaping.
Let’s apply this rule to our shell bank, the Second National Bank, in our make-believe town, Downriver, Montana, which we talked about before. A bank’s net worth, on which this 15% figure is based, is the difference between its assets and liabilities, the latter being deposits, which are borrowings from the public, and other loans, probably from a central bank operation like the Federal Home Loan. Bank.
To continue operating without regulatory restrictions, a bank must be classified as “well capitalized” by regulators, with a net worth – “capitalization” – of at least 8% of total assets (total assets are usually called “size” in the banking industry. language). If they can, establishments like to round this number down to 10%. Let’s say Second National is $ 200 million in size, then management would like the capital, net worth, to be 10%, or $ 20 million. Therefore, the loan limit of this bank, the maximum loan to a borrower, is only $ 3 million: 15% of $ 20 million.
Now, while one of the TBTFs (Too Big to Fails) may go head-to-head with Second National for consumer deposits, it’s a whole different world on the lending side. There are four US banks that are over $ 1 trillion in size, and many more that are in the billions of dollars. These operations have lending centers all over the world, making dozens of $ 3 million loans every day. It’s just another day in a lot of offices for Chase. Imagine what 15% of the 10% of $ 1,000 billion is. (You’ll have to imagine it. Neither my calculator nor my brain can accept this number.)
But that $ 3 million deal is a big deal for Downriver’s hometown bank. Maybe a contractor will enter the Second National lobby with a proposal to build a 10-unit townhouse project that requires, say, a $ 2.8 million construction loan. He or she can talk to the CEO of the bank upfront. Or maybe the credit manager takes the ball. Either way, if the deal looks like a keeper, the president will see the package early and ride on it until it gets to the loan committee.
Which illustrates one of the fundamentals of banking: You won’t get better rates or terms on a loan from a small bank, but you will get a lot more attention. Sure, a large organization and a small organization make many of the same types of loans – auto loans, home loans, small business loans, home equity loans – but in the case of lender loans, 100 home loans make up an industry. ‘activity. At heavyweight, maybe a nanosecond of production in banking time.
When it comes to deposits, everyone feeds in the same feeder. But, if you are a borrower, it is probably a good idea to be selective in choosing a lender.
Pat Dalrymple is originally from western Colorado and has spent over 50 years in the mortgage lending and banking business in the Roaring Fork Valley. He will be happy to answer your questions or hear your comments. His e-mail is [email protected].