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Bankers’ Hours column: Big banks make more loans, small ones give you more attention

Pat Dalrymple
Bankers’ Hours

Banks of all sizes chase the same deposit dollars, the wholesale commodity that’s turned into loans and other assets, and the pursuit takes place on the same playing field, whichever way it’s tipped: It’s never level.

But the face of competition changes on the retail side, when that raw cash is marketed as various loan products. This is because all banks will take money from anybody (except known criminals). It’s different when wholesale dollars (deposits) turn into loans and other investments. Much of this is due to exigencies of banking regulation.

A primary reg of banking relates to a bank’s lending limit for any given loan it makes, the so-called Loan to One Borrower rule. Being a formal regulation, there are nuances to it, but, simply stated, it says that a federally insured financial institution can’t make a loan to one borrower in excess of 15% of that bank’s net worth. This is an oversimplification, but if a bank CEO keeps just this basic definition in mind, he or she will probably stay out of trouble — or jail. The rule is integral to the activity, like “green side up” in landscaping.

Let’s apply this rule to our fictional bank, the Second National Bank, in our imaginary town, Downriver, Montana, which we’ve mentioned before. A bank’s net worth, on which that 15% number 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 banking operation like the Federal Home Loan Bank.

To continue operation without regulatory restrictions, a bank should be classified as “well capitalized” by regulators, with a net worth — “capitalization” — of at least 8% of total assets (total assets are generally referred to as “size” in banking parlance). If they can, institutions like to round that number up to 10%. Say that Second National is $200 million in size, then management would like capital, net worth, to be 10%, or $20 million. Consequently, that bank’s lending limit, the maximum loan to one borrower, is just $3 million dollars: 15% of $20 million.

Now, even though one of the TBTFs (Too Big to Fails) might fight head to head with Second National for consumer deposits, it’s a whole different world on the lending side. There are four U.S. banks that are over $1 trillion in size, and a lot more that are a lot of billions big. These operations have lending centers all over the world, making scores of $3 million dollar loans every day. It’s just another day at a lot of offices for Chase. Imagine what 15% of 10% of $1 trillion is. (You’ll have to imagine it. Neither my calculator or brain can accommodate that number.)

But that $3 million deal is a big deal for Downriver’s home town bank. Maybe an entrepreneur walks in to the Second National lobby with a proposal to build a 10-unit townhome project needing, say, a $2.8 million construction loan. He or she may talk to the bank’s CEO right off the bat. Or maybe the chief credit officer picks up the ball. Either way, if the deal looks like a keeper, the president will see the package early, and ride herd on it until it gets to the loan committee.

Which illustrates one of the fundamentals of banking: You won’t get a better rate or terms on a loan at a small bank, but you’ll get a lot more attention. Sure, a big organization and a small one make many of the same kinds of loans — car loans, home loans, small business loans, home equity loans — but, in the instance of the lightweight, 100 home loans is a business line. To the heavyweight, maybe a nanosecond of production in banking time.

When it comes to deposits, everybody feeds at the same trough. But, if you’re a borrower, it’s probably a good idea to get selective in picking a lender.

Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is pdalrymple59@gmail.com.


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