What is Banking Consortium? Definition of Banking Consortium, Banking Consortium Meaning and Concept
The banking consortium, or banking syndicate, is a group of financial entities that come together, temporarily, to carry out an operation that, due to their characteristics, they could not undertake individually.
The most common operations in which a banking consortium takes place are those of high amounts or high risk. In the consortium, the financial entities remain independent of each other: they only come together for a specific operation that they could not individually undertake. This union is materialized through the syndication agreement, which we will talk about throughout the text.
Operations in which a banking consortium occurs
Although the banking consortium can be carried out with any operation, in practice the following two usually occur:
- Syndicated loans : These credits or loans have the same characteristics as those issued by any financial institution, but with the main difference that, in this case, they are issued by the bank consortium or syndicate, that is, by several entities. They are usually medium or long-term credits or loans, of a very high amount and with a relatively high risk of insolvency of the debtor.
- Issuance of securities ( stocks, bonds, etc.) : In this case, the consortium usually affects those issues of securities of large companies or those with a relatively high risk of insolvency. They usually occur in international markets, although they can also be carried out in national ones.
Members that make up the banking consortium
The consortium can be made up of three types of members:
- Lead bank : These are the banks responsible for the consortium. They are in charge of negotiating and setting the conditions with the beneficiary. In addition, they are also in charge of finding the other financial entities to form part of the consortium. There may be one lead bank or several.
- Agent banks : This is chosen by all the participating banks of the consortium and is in charge of the administration of the union. Its functions include, for example, collecting interest on loans or credits or carrying out the issuance of securities.
- Other participating banks : These are the other financial entities that participate in the consortium.
Normally, the lead bank is the one that assumes the most amount or the most risk in the operation. When all entities participate in the same amount of funds, all of them are usually director banks at the same level and the consortium is called a club deal.
The banks that make up the union sign the syndication pact, which is like a contract where the rules of the consortium are set out. The syndication agreement usually includes the way to solve possible disputes that may arise between members or possible sanctions in the event of non-compliance by any entity.