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What is a Banking Syndicate?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 04 November 2016
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A banking syndicate is a group of investors, often a set of investment banks, who have come together in order to function as an underwriting group for a specific project. Typically, a banking syndicate is not a permanent entity, although the banks involved may maintain a casual communication for the purpose of being part of future financial opportunities to collaborate on financing projects. Here is some information on how a banking syndicate functions, and which factors may lead to the creation of this sort of alliance.

The formation of a banking syndicate usually takes place when an investment bank becomes aware of a potential project that shows great promise of creating an excellent return, provided that enough resources can be borrowed to launch and finance the project until it begins to generate revenue. In some cases, one investment bank may be unwilling or unable to supply the resources required to fund the project. Instead of counseling the borrower to seek funding elsewhere, the bank will contact other banks, with an eye toward jointly funding the project. With enough banks involved in the banking syndicate, it is possible for all the member banks to participate in the project, realize a return on the investment, and keep the risk factor within reason for all parties concerned.

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Underwriting groups such as a banking syndicate is more or less functioning as a purchase group. As part of the agreement to extended financial support to the borrower, there are usually concessions made in the way of collateral or the transfer of shares or other assets to the control of the syndicate for the duration of the loan. This helps to ensure that if the venture does ultimately fail, the banking syndicate has a reasonable chance to recoup at least part of their investment.

Because the nature of a banking syndicate is not that of a permanent entity, it is very possible for various combinations of investment banks to come together for a project, then go their own ways once the project has been completed. However, it is not uncommon for investment banks to maintain steady contact with one another on venture projects that come to the attention of any one of the banks. This keeps the option of forming another banking syndicate to fund a particular project both viable and reasonably easy to accomplish, especially if past joint ventures proved to be profitable for the banks who took part in a previous banking syndicate project.

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SuperJD
Post 4

@Farah1 - That is a very good question. The number of banks involved in a banking syndicate varies on a case by case basis.

When a bank buys securities that it thinks it can't resell on its own, then it will often form syndicates with other banks to help sell those securities. The larger the number of securities or the greater the risk involved, the more banks that will be involved in the syndicate.

I hope that answers your question.

Farah1
Post 3

How many banks are usually involved in a banking syndicate? Does it depend on the size of the investment?

Oski
Post 2

I work for a major investment bank in New York City. For a long time, we had a good relationship with another New York based investment bank. I think the owners of the two banks were old college friends. Our banks would form a banking syndicate at least twice a year. For the most part, these partnerships were profitable for both banks.

However, last year the other bank had to back out of an investment last minute. They were facing possible bankruptcy, and had to forfeit most of their investments. Eventually, the bank shut down completely. We were in a banking syndicate at the time, and they chose to pull out of the partnership. My bank did not want

to give up on the investment, so we fronted the amount of money that they pulled away with.

Unfortunately, the investment turned out to be a loss. But because we had a double share in the investment, our loss was magnified. I told my story to say that although there is a lot of good that can come out of a banking syndicate, it might not always turn out favorable.

goldenbears
Post 1

I studied business and banking in college. Although I currently work in marketing, I still remember a fair share of the banking concepts lectured by my professors. One of the topics covered was syndicate banking. I think syndicate banking is a very powerful tool that banks could use as a form of security and risk prevention.

For example, I used to work for a company that a group of investment banks invested in. I think in total, there were three banks that invested in an expansion project that the company was working on. Unfortunately, the project was not profitable, and the investment banks ended up losing money.

But, because we worked with a group of banks instead of

just one, the loss was spread out over the group. Had just one bank invested in us, then they would have absorbed all of the losses. Banking syndicates are a great way for investment banks to minimize the potential loss on an investment.

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