DEFINITION of 'Consortium Bank'

A consortium bank is a subsidiary bank, which numerous other banks create. These banks might create a consortium bank to fund a specific project (such as providing affordable homeownership for low- and moderate-income home buyers) or to execute a specific deal (such as selling loans in the loan syndication market).

The consortium leverages individual banks' assets to achieve its 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.

BREAKING DOWN 'Consortium Bank'

Debt transactions, which require more than a single lender, will often rely on a consortium bank. Several banks agree to jointly supervise a single borrower. 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 been historically; however, strong examples still exist in the U.S. and overseas. Member banks may be headquartered in different countries.

Consortium Bank v. Loan Syndication

While similar in many ways, a loan syndication differs from a consortium bank in that it generally involves international transactions, with varying 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 syndication. 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.) The borrower may pay the managing bank a fee.

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 is 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 of millions of dollars in the local ecosystem in order to help alleviate poverty.

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