Could profit pressure lead to risky bank lending?

Bank Lending Software

Though demand for loans has increased in recent years, it still has not come close to matching what banks enjoyed in the years leading up to the recession. As such, it is understandable that bankers feel pressure to boost profits any way they can.

However, as American Banker contributor Richard Parsons writes, banks should still be cautious. Though he argues that they do not appear to be compromising lending standards in order to attract more customers, he did caution that the increased use of fixed-rate lending may pose a threat.

According to the news source, the loan-to-deposit ratio in the third quarter of 2013 was 69.5 percent. This is significantly lower than what is has been in the past. In fact, between 2000 and 2009, that ratio reached a height of 90.5 percent.

But this lower level means that it is more difficult for banks to profit, making long-term, fixed-rate loans attractive. As Parsons points out, these loans are risky, since they are assuming that interest rates will stay low.

“Banking problems in this country don’t happen overnight,” Parsons writes. “Every crisis has its roots in risky behaviors that started off in small pockets around the country. Over time, in an effort to protect market share, other banks start picking up on these risky behaviors. Over the course of several years, the risk builds up until it is obvious to everyone that there is a problem. Too often the end result is financial losses and regionwide bank failures.”

Banks do need to regain their financial footing, but they need to do so wisely. This means using credit management software to seek out good bets.

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