Legal Lending Limit

Legal Lending Limit

The legal lending limit is the maximum amount of money a bank is allowed to lend to a single borrower. This rule exists to protect the bank and its depositors by making sure the bank does not take on too much risk with one customer.

In simple terms, it stops a bank from "putting all its eggs in one basket." For example, if a bank has $100 million in capital and surplus, and the general limit is 15%, it can lend up to $15 million to one borrower. If the loan is fully secured by easily sellable investments like stocks or bonds, the bank might be allowed to lend up to $25 million.

This limit applies not only to individuals but also to companies or groups of borrowers who are financially connected. For example, if a corporation and its subsidiaries are borrowing, their loans may be combined when calculating the legal lending limit.

These limits are set by regulators like the Office of the Comptroller of the Currency (OCC) for national banks, while state regulators oversee state-chartered banks. The rules help ensure that banks keep a diversified loan portfolio and avoid major losses from one bad loan.

Why it matters: Legal lending limits are a key part of keeping banks safe and stable. By limiting exposure to any one borrower, banks reduce the risk of big financial losses. This also helps maintain trust in the banking system and keeps credit flowing to a wide range of borrowers.

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Disclaimer: This post is for informational purposes only and does not constitute financial, legal, or investment advice. Please consult a qualified professional for guidance tailored to your situation.

For personalized support, contact GLOBAL ABAS Consulting, LLC with your specific questions or concerns.

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