LAS VEGAS – A lot of banks bailed out of auto leasing when residual losses became overwhelming in the late 1990s and early 2000s.

Now that leasing is making a comeback of sorts and residual forecasting has become more accurate, should banks get back in?

That would be unwise, says Bruce Harris, a vice president at VW Credit Inc., a captive finance firm and subsidiary of Volkswagen of America Inc.

“Leasing is a game banks should not be playing,” he says. “It is a tool used by manufacturers to keep plants going. It’s a game manufacturers must play, because fundamentally you have too much product chasing too few customers.”

Banks got into leasing to make money – and many did, until the wheels came off.

That happened when a growing number of vehicles came off lease with actual residual values far below values forecasted at the beginning of the leases. Residual values are important because lease terms are based on them; the higher the residual prediction, the lower the monthly payment.

“There is no substitute for properly set residual values,” Harris says at a recent Auto Finance Summit here.

At one point early on, residuals were coming in higher than forecasted, says Chas Roscow, senior vice president of Chevy Chase Bank’s consumer lending division. “Then it seemed like nothing but losses.”

Although today’s leasing environment is much more controlled, the competition remains as tough as ever.

Banks are at a disadvantage going up against auto makers’ leasing operations, Harris says.

“If you are a bank, you are competing against manufacturers who have auto auctions and a remarketing channel,” he says, referring to the need to resell off-lease vehicles. “If you are in leasing, you are in the used-car business.

“Banks can’t play that game,” says Harris, who helps oversee VW’s certified pre-owned vehicle program, in which off-lease vehicles are sold as premium used cars with factory warranties. “The risk is too great and they don’t have the secondary channels to compete against the captives.”

Nor do banks offer lease incentives like auto makers’ captive finance firms do, he notes.

Some lessors rely on third parties to set residuals on leased vehicles. VW Credit does it in-house. It is an inexact science.

“You are trying to predict the value of an asset three to four years out,” Harris says. “No one has the magic formula. No one can tell you precisely what a car will be worth, because too much is going on. If they call it precisely, it’s just dumb luck.

“You can be dead wrong, because it is a volatile market. Anyone who enters leasing must realize it’s far riskier than any loan transaction.”

And there are no rewards to the lessor if a vehicle comes off lease worth more than its predicted residual value.

When that happens, either the dealer or lessee usually exercises an option to buy the undervalued vehicle, Harris says. “If the vehicle is worth less than predicted, then you get it as a loss situation.”

Some banks are “pretty successful” at vehicle leasing, concedes Harris, citing Wells Fargo.

But he calls it a “tactical error” for a bank to lease too wide a range of makes and models.

“You need to build a portfolio around a particular brand or segment and in-house have a group of experts focused strictly on those models or segments,” Harris says.

“A boutique firm focuses on five or six models and really knows them, because leasing a Chevrolet and leasing a Porsche 911 are totally different,” he says. “Know the market, the segment and your car in the market. And know your competitors.”

What additional advice does he have for bankers determined to enter or re-enter auto leasing?

“Get psychiatric treatment.”