Syndicated loans are large loans where a group of banks or financial
institutions join forces to give funds to a borrower. There is usually one lead
bank who takes a percentage of the loan and syndicates the remaining amount to
other banks. The lead bank is usually called an arranger or an agent.
There are a few reaons why banks prefer to split their loans in this manner.
Like financial markets, banks too use risk based pricing where an interest rate
is charged depending on the risk of the borrower. Plus there are very few large
business loans and a a bank or financial institute by giving out large sums put
their entire money at risk and may end up losing their money if the borrower
fails to return it or goes bankrupt. Therefore, banks and financial institutions
opt for splitting large loans with each other.
A second reason for syndicated loans is that they help to reduce the amount
that is lost to smaller, more manageable losses. Small, predictable losses are
preferred by management teams because banks and financial institutions believe
that companies that have a more steady earning generally have a higher stock
price compared to their earnings. Critics, however, argue that if a bank can get
a representative sample by not syndicating and if syndicating reduces their
profit margin, then the bank can increase its profits by not syndicating. This
theory also holds true for the investment and insurance sectors where
syndication also takes place.
When a borrower is going for syndicated it loan, he usually has to deal with
just one bank who is the agent rather than dealing with all the banks or
financial institution involved.
In the United States the largest syndicate lenders are JP Morgan, CitiGroup
and Bank of America Securities LLC.
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