Lead banks are banking institutions that are charged with the responsibility of overseeing the management of any project involving more than one lender. Depending on the structure of the project, the lead bank may function as an agent that is authorized to act on behalf of all the other lenders involved. At other times, the bank functions as the facilitator for any actions taken regarding the project, keeping all partners in the project informed of current developments, then taking action once the group has reached a consensus on how to move forward. The designation of a lead bank is very common with syndicated loans where more than one institution is underwriting the cost of the loan.
There are several advantages associated with using this type of bank model for various investment strategies and other business deals. One benefit has to do with establishing an efficient line of communication between the lenders and the debtor. Rather than having to interact with multiple banks, the debtor is able to communicate directly with the lead bank on any matters related to the business deal. In turn, the bank is able to assess the issue, handle it if the issue is within the limits of the authorization granted to the bank by the other banks, and then report the activity to those banking partners. In the event that the issue requires consultation with the other banks before it can be resolved, the lead bank gathers all relevant information, and is able to present it to the other partners, without the need for each one to conduct their own research.
Depending on the structure of the deal, a lead bank may also assume a higher degree of risk than the other participants. This is often true when a bank forms a temporary partnership with other institutions in order to fund a major project, such as the building of a new shopping mall. Rather than absorbing all the expense on its own, the bank allocates a portion of the loan amount to each partner, while still remaining the primary dealer and maintaining a controlling percentage of the overall debt. This arrangement still places the majority of the risk on the lead bank, but reduces it to a point where the risk is considered reasonable for the amount of anticipated return.
The term is also used to define other functions that a bank may fulfill as part of a group of institutions. One of these has to do with functioning as an agent for a group of banks. This is true with the Eurobond market, where one bank may engage in identifying and qualifying potential loan opportunities for a syndicate of banks that wish to function as a unified underwriter for various projects. Some businesses consider the bank that they primarily do business with to be their lead bank, while any other bank where the business maintains smaller accounts is considered a secondary bank.
