Syndication in Finance

What is Syndication?

To protect from any adverse scenario, the bank may decide to disperse credit risk for a given loan across several other lenders through syndication. This mechanism is only used for substantial loans. Typically, the lead bank in the syndicate will retain approximately 20% of the loan and find a series of other banks willing to hold the remaining 80%.

Example of Syndication

Syndication has broadly two examples: Firm Commitment and Best Efforts. A firm commitment is when a lead bank guarantees an issuer that it will get the full loan requested. If the lead bank cannot find other banks to share the credit risk, they will be forced to assume all risks themselves. While in the Best-efforts, issuers give no guarantee that they will be able to borrow all of the desired funds. The lead bank will do its best to secure partner banks, but the issuer may receive fewer loan proceeds than expected if unsuccessful.