In years past, small banks dominated the lending business. They were the place a person would go for loan of any size. Whether it was for a small business, a car, or to purchase a home, the local community bank was the place to get money. In recent years that frontier has seen some significant shifts. Today approximately 70% of small bank loan portfolios consist of real estate loans, the majority of which is development and commercial lending.
This swing is the byproduct of carmakers offering better and more creative financing options as a regular part of their business plan. Small banks were forced to find a lending niche in which they could compete in. For the past 10 years small banks have remained competitive with national banking institutions by developing key relationships with local developers making the closing process convenient for their customers.
Currently this wellspring niche for small banks is in jeopardy. Congress is currently reviewing proposed guidelines which would restrict the amount of real estate loans in any banks portfolio. The present proposal has two components which cause the threat.
- The bank cannot lend on construction or land development if it exceeds the institutions capital or net worth.
- The bank portfolio cannot exceed an amount over 3 times (300%) of the banks capital.
If passed, the proposal would mean banks either have to stop underwriting such loans or raise more capital to increase the banks cash value. It is believed such restrictions would serve the greater purpose of preventing a collapse if the real estate market tanks. The continued discussion of a decline in real estate sales has many nervous, including legislatures.
Las Vegas Real Estate is dependant upon a solid infrastructure from financial institutions. Everyone knows the average household leverages themselves to the hilt; I would hope that financial institutions would make more responsible decisions than the average American. Everyone has a tipping point, even the bank. While reform in this area will create some challenges, the proactive approach is sure to be good for the Las Vegas economy over the long run.
