Banks have a maximum amount, deemed as their legal lending limit, they can lend to a single borrower. This amount is calculated based on a percentage of the bank's capital and surplus. For over 27 years, the Office of the Comptroller of the Currency (OCC) has regulated this, setting a standard cap at 15%. An exception allows this figure to increase to 25% on the condition that the excess amount is fully collateralized.
Loans like those guaranteed by the U.S government or bankers' acceptances are exempt from these limits. Given that these restrictions correlate to a bank's capital, they're typically relevant to large institutional borrowers rather than everyday consumer lending.
Both the OCC and the Federal Deposit Insurance Corp. (FDIC), which provides insurance to U.S. depositors, participate in the national bank chartering process. They also ensure that these banks adhere to the rules outlined in the United States Code, specifically in Title 12, Part 32.3 which established the legal lending limit for national banks.
These lending limits apply nationwide to national banks and savings associations. According to the federal code, such institutions may not offer a loan that exceeds 15% of an establishment's capital and surplus.
The allowable increase to 25% requires the loan to be secured by marketable securities. State-chartered banks may also have legal lending limits. For instance, New York-chartered banks can lend up to 15% of their Capital-Undivided Profits-Surplus (CUPS) and up to 25% if an appropriate collateral secures the loans.
Some loan types, such as those secured by bills of lading, warehouse receipts, installment consumer paper, or livestock, may be subject to higher lending limits. Others may not have any lending limits.
However, since legal lending limits are based on a bank's capital and surplus, they mainly apply to very large loans. This makes them more pertinent to institutional and corporate borrowers rather than ordinary consumer lending.
Banks divide their capital into two tiers based on liquidity: Tier 1 and Tier 2. Tier 1 consists of the most liquid capital, such as statutory reserves, with Tier 2 comprising undisclosed reserves and general loss reserves. National banks must maintain a total capital-to-assets ratio of 8%.
The surplus portion involves various components like profits, loss reserves, and convertible debt. The legal limits for national banks, determined as a percentage of the institution’s capital and surplus, enforce a cap at 15% of the bank’s capital to avoid over-lending to individual or financially dependent related parties.
State-regulated banks generally follow similar guidelines for maximum lending limits. However, because such limits are tied to a bank's capital and surplus, they apply primarily to substantial loans made to institutional or corporate borrowers rather than routine consumer loans.