Syndicated Loans and Competition Law

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Companies have several options to turn to when looking for funding, including the issuance of bonds and shares or a conventional bank loan. Normally, the latter would come as a bilateral loan directly between the borrower and the lender, but if the requested amount is particularly large or the intended purpose extra risky, a collegium of lenders might be requested to provide this as a syndicated loan. Better risk management is not the only explanation for the proliferation of syndicated loans. Under EU’s financial regulation, the exposure to a single customer e.g. must not exceed 25 per cent of the institution’s eligible capital,1 and already at 10 per cent this would be defined as large exposure.2 Further limitations could follow from the requirement of minimum capital of 8 per cent of the bank’s risk-weighted assets3 and different capital buffers mandated by law.4 Some of these can be exceeded, but then the institution cannot pay out dividends or bonuses,5 and additionally, internal provisions might lower the ceilings. This has provided a basis for different forms of multi-banking lending, where one of these is syndicated loans, available where the financial requirement of a borrower is so great, or risky, that a single lender cannot or will not front this alone. The loan is instead granted by a syndicate, where each lender accounts for a share of this, and the loan later can be sold or re-syndicated, freeing or reducing the original lender’s commitments.