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Transfer Banks Rights Events Of Default Subordination Notes

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BDF - WS7 - TRANSFERRING A BANK'S RIGHTS, EVENTS OF DEFAULT & SUBORDINATION WHY SELL A LOAN?When a bank disposes of their loan = asset sale (i.e. the Loan is an asset of the bank which can be sold or bought)Under E-Law contractual rights can be freely transferred (unless contract states contrary) but transfer of obligations require consent of all the P's. Thus selling a loan requires borrower to agree to any changes in the bank's obligationsThe most basic aim of a bank in selling an asset (i.e. a loan) is to remove the risk associated with it

REASON Risk manage ment

Realising capital P.121

EXPLANATIONToo much emphasis on one type of loan or one type of borrower carries risk (concentration)A bank may sell some existing loans to allow it to make others to spread its risk (diversify)The most basic aim of bank in selling an asset (i.e. a loan) is to remove the risk associated with it Realising capital in long term loans will help improve bank's liquidity??

Balance sheet

If bank's capital is entirely allocated, can't participate in new loans (unless they carry a zero risk weighting)Unless bank can raise more capital, it must sell some existing loans to release capital for backing new ones. A bank may see an opportunity to make some short-term profit by selling a loan.E.g. if interest rates start to fall, an existing fixed interest loan might become very marketable.Conversely, if a borrower has defaulted or is performing badly, a lender may choose to sell its participation at a discount to crystallise any loss (see p4 ? 'types of assets sold'). Bank may want an initial involvement in a facility because it is high profile or important.Prestige

Syndicati on

If bank want to concentrate on a particular market, may sell loans outside of that market A bank's ability to lend is subject to internal & external requirements to retain a % of its capital as cover for its loans ('regulatory capital requirements' i.e.), thus,?

Could enable bank to take advantage of new lending opportunities which may give better returns.It may sell some or its entire share of the loan once it has derived any benefit to its market profile.?

Some forms of asset sale will allow a bank to keep its name to a loan but to lay off the lending risk. A bank may, either alone or with a small group of banks (Lead Arrangers), sometimes provide the full amount of a loan but bring in other banks to form a syndicate 'post-closing'.This 'postponement' of syndication allows large loans to be made quickly.

BDF - WS 7 - Transferring a Bank's Rights, Events of Default & Subordination


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