Steadfast FinancesThis is How To Run a Bank: Take Deposits, Hold the Loans, & Implement the 3-6-3 Rule - Steadfast Finances

This is How To Run a Bank: Take Deposits, Hold the Loans, & Implement the 3-6-3 Rule

Filed in Banking , Business Trends , Peer to Peer Lending 7 comments

Now this is how you run a solid, old fashioned type of bank. CNBC interviewed a small, community bank CEO (Frank Sorrentino) from North Jersey Community Bank today, and if I was ever fortunate enough to run a bank, this is how I would hope to get it done.

The old school banking model:

  1. Take in deposits, and make loans with them. It’s the standard, old school 3-6-3 banking rule: pay depositors 3% interest on their savings, make loans at 6% interest, and out of the office playing golf by 3pm. Sounds like a pretty good life to me.
  2. Investigate the borrower, write the loan, and hold the loan until it’s paid off. Don’t sell or securitize them.
  3. Never have a rigid SOP when reviewing a loan and be willing to work with the borrower.
  4. Always be stable enough to survive the bad times, and hopefully, have the capacity to grow because of it. Strong companies should love the recession!
  5. Never put yourself into a situation where you require any funds from government stimulus (e.g. bailout money).

Hopefully, I can be as diligent and as patient in my Lending Club peer-to-peer lending experiment by picking high quality loans from borrowers with good credit, a high probability of repaying the loan, and simply watch the compound interest grow.

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Personally, I find it somewhat refreshing to find a banker who knows how to manage his money, doesn’t need tax dollars to survive, and has still managed to grow his business under these tough economic conditions. The same can be said of ING Direct’s CEO (Arkadi Kuhlmann), who stated that one of the reasons that ING Direct has so few mortgage defaults was that he only sold mortgages that he intended to keep — not sell.

It may seem old fashioned, but some things never go out of style.

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Posted by CJ   @   3 September 2009 7 comments
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Sep 4, 2009
9:48 am
#1 Donnie :

ING Direct also requires a 25% down-payment on mortgages, so you know that the borrowers have their finances in order.

Sep 4, 2009
10:02 am
#2 Matt :

@ Donnie,

Didn’t know that! A 25% down payment seems a little harsh, but then again, if you were a bank lending your own money… it doesn’t sound so bad.

Seems like just 2 or 3 years ago we heard nothing but zero down payment or ninja loans, so 25% down does seem a little refreshing.

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