After 25 years as a banker and bank regulator, I know what it takes to insure bank success. The delicacy of asset or loan management sounds provocative, as intended. The liability or deposit side of the balance sheet provides a whole other set of challenges. However, this focus is the asset or loan side of the balance sheet and its role.
Follow my thinking closely, and you will appreciate just how delicate the process. When a bank’s loan volume is high, there is great potential for earnings. But if the lending process erodes, earnings lessen, even reverse. And, loans do comprise the largest and most profitable sector of any bank’s earning assets. Moreover, this investment of customer deposits in assets with risk is significant. Thus, bank examiners insure that lending activities are legal, prudent and made within a stated loan policy.
Therefore, if loan volume is hard to generate, lending management cannot perform as planned . The pressure to meet loan volume budgets is overwhelming. Unwanted pricing concessions confront management. Lesser quality loans are made unwittingly under that pressure. Therefore, it is probable that the market is neither fertile nor large enough to satisfy all of the lenders in that market.
In the end, it is essential that a bank has a well conceived identity and position in the marketplace. Management needs to know the talent level and technical ability of its personnel. And finally, ownership must learn what it takes insure long term viability. The process can be overpowering yet the balance is delicate.