What Is a Consortium Bank?
A consortium bank is a subsidiary bank, which numerous other banks create. These banks might create a consortium bank to fund a large-scale project that is too large for one bank to complete itself, such as providing affordable homeownership for low- and moderate-income home buyers or to execute a large deal, such as selling loans in the loan syndication market.
The consortium leverages individual banks' assets to achieve their objectives. All member banks have equal ownership shares and no one member has a controlling interest. After the consortium bank meets its objective, it typically dissolves.
- A consortium bank is a bank created by numerous banks to fund a project that is too large for one bank to do alone.
- The purpose of creating a consortium bank is to leverage the assets of individual banks.
- All members in a consortium bank have equal ownership and no one bank has a controlling interest.
- A loan syndicate is similar to a consortium, but it is usually in reference to an extension of a loan, particularly involving international transactions and multiple currencies.
Understanding a Consortium Bank
When projects arise that are too large for one bank to finance on its own, many banks pool their resources to create a consortium bank to carry out that project. A legal contract generally governs the consortium bank and delegates responsibilities among its members. This can include a common appraisal, documentation, and follow-up, as well as a decision to portion out equal ownership shares in the transaction.
Consortium banks originated in the early 1960s for the purpose of enabling smaller banks to participate in international banking activities. They are most common in Europe. Consortium banks are not as active as they have historically been, however, strong examples still exist in the U.S. and overseas. Member banks may be headquartered in different countries.
Consortium Bank vs. Loan Syndicate
While similar in many ways, a loan syndicate differs from a consortium bank in that a loan syndicate is the extension of a loan to one borrower all at once. Furthermore, a loan syndicate usually involves international transactions and multiple currencies. Loan syndication generally needs a group of partners to both guarantee payments and reduce exposure given the high level of risk.
One managing bank will usually head a loan syndicate. A borrower may initially approach this manager to arrange credit. From there, the managing bank will in most cases negotiate conditions among other partners and make additional arrangements for the syndicate although it might not always be the majority lender. Depending on the credit agreement, any of the participating banks may lead the process of lending.
Example of a Consortium Bank
In 2018 in Grand Rapids, Michigan, the non-profit, Start Garden, developed a project to provide $1,000 mini-grants as part of their 100 Days/$100,000 initiative to foster entrepreneurship among neighborhood businesses. The project was funded in partnership with a consortium bank, which formed for the purpose of this project. Over several years the aim is for the consortium to invest millions of dollars in the local ecosystem in order to help alleviate poverty. Given the large sum of money involved in the project, various banks pooled their resources to create a consortium bank to provide this investment.