Rules for Smart Banking

Since deregulation in 1982, competition has required banking to operate on a thin profit margin. When a bank makes a successful loan, one that gets paid back on time, it earns only 4% or so. When a loan goes belly up, the bank can lose 100%, plus attorney fees.

Texas banks wrote off $2.2 billion worth of loans as losses last year; interest was not being paid on an additional $9 billion. Austin banking analyst Alex Sheshunoff believes that some specific lessons have emerged from the lending disaster afflicting his state.

“The real challenge to the banker is to back away when the economy starts to overheat,” Sheshunoff said. “There will be pressure from the board and others to participate, but that’s the time the banker needs to be pulling back.”

Sheshunoff often makes speeches to bankers, and he has come up with 10 rules of commercial real estate lending. Some are humorous, but all contain some truth:

1--Be prepared to run it if you loan on it.

2--Give no credence to financial statements whatsoever.

3--Look only to cash flows not related to real estate.

4--If there is an abundance of collateral, “just ask for more.”

5--Start getting out when real estate becomes a “commodity” to be speculated on.

6--Resolve to lose money only in your own trade territory.

7--Use referrals as a competitive weapon: Refer all marginal credits to overeager competitors.

8--Recognize that from the moment the commercial real estate loan is made, the lender owns the real estate; the borrower has the option to repurchase if it goes up in value.

9--There is a new federal deposit insurance corporation out there. It’s called FIRED, as in Federally Insured Real Estate Developer.

10--Values are contingent. Debt is forever.