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Banking Question
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John Burns
Posted 9/20/2016 11:19 (#5539382 - in reply to #5539320)
Subject: RE: Banking Question



Pittsburg, Kansas

Interesting information. Thanks.

That would certainly surprise me if we had 20% forced liquidation. Bankers have the same emotions as anyone else and there is usually a "hope" year in there before things turn bad. For a 20% liquidation this year it would mean things were actually pretty bad last year and this would be the "give up all hope of not having a loss" this year.

I would think we are still a year away from that, but I have been wrong plenty of times before so don't take that idea "to the bank" so to speak.

Unless the banks themselves are in trouble to the point examiners are giving them no slack with their own customers. Then all bets are off.

One problem with large operations (operations that are large enough that the lead lending bank can not loan the full amount because it would expose the bank to too much risk in the case of default) that most people would never have reason to consider is that in a participation loan (multiple lender loans) it only takes one single bank to blow the whole deal up. Maybe an example is in order, because unless a person is a large borrower or in the banking industry many farmers may not even know what a participation loan is. Lets say a large operator needs a total loan commitment of 20 million. Bank A is the customers bank but is either too small or the loan would be too high percentage of a specific category of its overall loan portfolio. So bank A participates the loan out to other banks. Bank A retains 5 mil of the loan (other banks always like the lead lender to have "skin in the game"), Bank B says it will take 1 million, Bank C takes 10 million, and bank D takes the remaining 4 million. The customer may or may not know his loan has been "participated out". As the lead lender Bank A will have all the contact and correspondence with the customers. The other banks are like silent partners. Now the loan gets in trouble. Bank A and customer work on a "work out" plan and come up with a plan that looks sensible and will work best and for the bank(s). Loan terms extended, interest write down, whatever. But a plan of action is determined. But the lead lender has to get the approval of not only its own internal authority, but also Banks B, C and D. But in this example Bank D happens to be a bank that is not really up to speed on farm lending (or whatever) but only took on the participation because they had excess funds to lend and they wanted to diversify their own portfolio. The loan has already been flagged as troubled and sent to the collections department. Powers that be say "get out of it". So bank D will not cooperate wit the work out plan. Says liquidate. Banks A,B and C have a decision. Either take on Bank D's position and take on even more risk than they already have and go for the work out plan, or liquidate the loan. In other words foreclose and sell the customers assets to cover the loan repayment. Seen it happen. What would have been a workable plan for everyone got sold out because of one banks collections department. This is one problem that businesses of a certain size face. Their loan is too big for a single bank, yet not big enough to do like the major corporations do and sell their debt to the public via bond sales.

More than most probably wanted to know, but things like this do come into play with large operations.

John

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