As you review loan requests, a key concern is whether the loan exceeds the bank’s lending limit. Lending limits are intended to reduce loan concentrations and promote diversification in a bank’s asset holdings. These limits are set by the bank’s chartering authority and generally vary from 15 to 30 percent of a bank’s equity capital and surplus. As an example, you can see that Insights Bank and Trust’s legal lending limit is 15 percent of its equity capital and surplus.

It is important to note that lending limits pertain to the total lending relationship with a borrower, not just to an individual loan. In addition, you need to know that in many states, directors can be liable for a loss on that portion of a loan over the legal lending limit.

For most bank boards, the regulatory legal lending limit represents too great an exposure to a single borrower. Because of this, boards often establish a more restrictive in-house lending limit. The cut-off for this limit varies from bank to bank and depends upon an individual bank board’s risk tolerance. Many boards set their in-house limit to 50 percent of the bank’s legal lending limit. Insights Bank has followed this example.

Insights Bank and Trust’s Legal Lending Limit as of September 30, 1994 (the month before Insight’s fictional board meeting takes place)

Equity capital	$3,093
+Reserves	283
Legal Lending Limit	$3,376	x .15 = $506,400
In-house Lending Limit	$506,400	x .50 = $253,200

How familiar are you with your bank’s lending limits? In particular, it might be a good idea to review your bank’s loan policy to see the limits set on its lending.