by tonytran2015 (Melbourne, Australia).
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#recession, #loan recall, #depression, #deleverage,
Your bank may make you bankrupt in a coming recession.
This scenario has happened to me (with no bad consequence as I was well prepared) and also to one company I unfortunately invested in.
1. The scenario.
Your banker may be quite accommodating to your requirements and give you the best interest rate. You may have been happy for a few years and have lost your ability to move to another bank (having sunk into a too highly geared or “highly leveraged” condition, being unable to lower your debt to asset ratio to suit the market).
When the values of your assets come down during the RECESSION or when the bank wants to reduce its exposure in some types of loan, you may be DELEVERAGED by your bank, and no other bank can accept your high debt ratio for any new substitution loan.
So your assets are destined for a fire sale with terrible consequences. If this is the case for a company then an administrator or liquidator will have to step in.
2. How to avoid this scenario?
1. You have to avoid receiving “special deals” and avoid any deal involving exclusive rights and sole rights to any particular bank.
(Added on 09 Feb 2017) Your bank manager may also try to trap you! See reference  for some interesting details.
2. You have to always keep your debt ratio acceptable by at least two different banks, and only borrow half of the necessary loan from each bank, even at the cost of paying higher interest rates.
If ownership and policy of one bank suddenly change, you can borrow all your loan from the other bank and have time to shop for a replacement for your first bank.
3. Always maintain the ability to reduce your debt to asset ratio to suit the anticipated market condition. This requires financial discipline and up to date knowledge of the market condition.
For example, in the final stage of a share market bubble or housing bubble, you should not take on additional loans and so you may miss the chance for making a quick buck but you don’t carry the risk of having a fire sale of your assets.
4. During good time, try to reduce the principal of the loan so that when bad time comes your repayment obligation can be reduced.
5. Have plans for sustainable repayments in bad time . When time is too tough, you may have to talk to the bank to show your plan for repayment and to ask the for an extension of your loan.
6. Never borrow money to deposit into an interest earning account (even in the same bank). This exposes you to a real risk of losing money while still owing a loan.
. Ex-HBOS banker ‘sold his soul for swag’, bbc new, http://www.bbc.com/news/business-38842723, 2 February 2017.