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What is a Lead Bank?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 20 September 2016
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    2003-2016
    Conjecture Corporation
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Lead banks are banking institutions that are charged with the responsibility of overseeing the management of any project involving more than one lender. Depending on the structure of the project, the lead bank may function as an agent that is authorized to act on behalf of all the other lenders involved. At other times, the bank functions as the facilitator for any actions taken regarding the project, keeping all partners in the project informed of current developments, then taking action once the group has reached a consensus on how to move forward. The designation of a lead bank is very common with syndicated loans where more than one institution is underwriting the cost of the loan.

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There are several advantages associated with using this type of bank model for various investment strategies and other business deals. One benefit has to do with establishing an efficient line of communication between the lenders and the debtor. Rather than having to interact with multiple banks, the debtor is able to communicate directly with the lead bank on any matters related to the business deal. In turn, the bank is able to assess the issue, handle it if the issue is within the limits of the authorization granted to the bank by the other banks, and then report the activity to those banking partners. In the event that the issue requires consultation with the other banks before it can be resolved, the lead bank gathers all relevant information, and is able to present it to the other partners, without the need for each one to conduct their own research.

Depending on the structure of the deal, a lead bank may also assume a higher degree of risk than the other participants. This is often true when a bank forms a temporary partnership with other institutions in order to fund a major project, such as the building of a new shopping mall. Rather than absorbing all the expense on its own, the bank allocates a portion of the loan amount to each partner, while still remaining the primary dealer and maintaining a controlling percentage of the overall debt. This arrangement still places the majority of the risk on the lead bank, but reduces it to a point where the risk is considered reasonable for the amount of anticipated return.

The term is also used to define other functions that a bank may fulfill as part of a group of institutions. One of these has to do with functioning as an agent for a group of banks. This is true with the Eurobond market, where one bank may engage in identifying and qualifying potential loan opportunities for a syndicate of banks that wish to function as a unified underwriter for various projects. Some businesses consider the bank that they primarily do business with to be their lead bank, while any other bank where the business maintains smaller accounts is considered a secondary bank.

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Discuss this Article

anon948035
Post 3

What impact does an accounting information system have on bank lead?

Glasis
Post 2

Although more lenders can mean more fees, a borrower cannot overlook the benefit of having several banks involved in a project.

Each bank commits to provide a certain percentage of the overall loan amount, and, as the article says, lead banks often agree to backstop the entire loan amount if there are funding issues.

The lead bank, or administrative agent, needs to consult with and get approval from each bank to declare defaults and make changes to the loan terms. This also can benefit the borrower.

Certlerant
Post 1

Having a syndicate of lenders, including a lead bank, is good for the lenders and can provide more assurance to the borrower that the entire loan will be funded for a project, but it does come at a cost to the borrower, as well.

As with any other personal or business loan, a percentage of each payment goes to lender fees. Put simply, the more lenders involved, the higher the fees.

Also, loans with multiple lenders often include syndication and agent fees, many of which the borrower is required to pay at or before closing.

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