Banking New Methods Flashcards
Syndicated lending
* Loan granted by a …
* Each lender has a …
* Originating banks, called the “senior” (or lead) syndicate members, provide key financial intermediation services, such as:
…
* The other syndicate members, called the “junior” banks, provide…
group of lenders/banks, called the syndicate.
separate claim on the borrower.
– Conducting credit analysis
– Designing the loan contract
– Interest collection and monitoring
a portion of the funding but take an otherwise passive role.
Syndicated lending
* Senior lenders diversify credit risk exposure:
– Seniors avoid … while still ….
– Free up …
- Junior lenders participate in the syndicate without the …:
– …
– Exposure to the borrower, which may …
excessive exposure to a single borrower; earning a fee for their origination expertise
regulatory and economic capital
costs of investing in origination expertise
Loan portfolio diversification
create the possibility of establishing a relationship and making repeat business in the future
- Limits of loan syndications:
– May …(monitoring, restructuring, …)
weaken the originating banks’ incentive to do the best possible job in servicing the loan
Contingent Claims
Contingent claims stay off the balance sheet of banks.
Examples?
Loan commitments (credit lines)
Letters of credit
Derivatives
Swaps, credit default swaps (CDS), other derivatives
Contingent Claims: Letters of credit
* why are commercial letters of credit used?
* Suppose a German firm exports goods to Turkey.
* Turkish importer uses a bank to make the payment.
* Once goods are delivered German exporter presents the shipping documents to the Turkish importer’s bank.
and then?
(Why are letters of credit needed?)
Commercial letters of credit are used to facilitate trade (mostly international).
- The bank makes the payment to the German exporter.
- Bank makes fees, the German exporter deals with a bank.
Contingent Claims: Loan commitments
* what is it?
* Interest rate on the loan: …
* Maturity
* Use of ..
* …
* Usage fee paid for …
* Servicing fee to cover the bank’s transaction costs.
A loan commitment is a promise to lend up to a prespecified customer at prespecified terms.
Fixed or floating.
borrowed funds.
Commitment fee paid upfront.
the unused portion of the credit line.
Does the bank always give the loan? What if the firm goes into trouble in the meantime?
* …
* Allow the bank to… if the customer’s financial condition has materially deteriorated between the …
* MAC are not used very often.
* The bank wants to …
Material adverse change clauses (MAC) to protect the bank.
dissolve the commitment; time the commitment was issued and the time customer wants to use it.
maintain its reputation as a credible lender
Traditional banking: Regulatory requirements
* Banks are subject to certain regulation and requirements.
* Reserve requirements:
– …
– Not very…
* Capital requirements:
– Basel capital requirements forces …
The bank keeps a minimum fraction of its deposits as liquid assets (cash or reserves at the central bank).
binding and lost effectiveness over time.
banks to hold 8% of their risk- weighted assets and capital.
Non-traditional banking…
- Loan sales
- Securitization
- Pooling and tranching
Loan sales
* what is it?
* Banks have traditionally sold loans to other banks.
* Volume of these sales have…
* An increasing number of banks are involved in …
* An increasing number of loans is sold …, foreign corporations, other foreign institutions
Sale of a loan originated by a bank to an outside buyer.
increased dramatically over time.
loan sales as lenders and buyers.
outside the US to foreign banks
Loan sales
* Originate and …
– Capitalizing …
– Regulatory and …
* Risks with loan sales:
– Monitoring expertise: Once having transferred the loan to a third party, the…
distribute rather than hold it on the balance sheet:
on origination expertise (fee income!) while avoiding risk exposure
economic capital relief
bank may no longer have an incentive to fulfill its monitoring job.
What type of assets are securitized?
* A wide range of assets are securitized
…
- Mortgages
- Commercial and Industrial Loans
- Auto loans
- Credit cards
