Unshackling Syndicated Lending
Current settlement periods of 19 business days or more limit the growth of the syndicated loan market by tying up precious capital on the sell-side and building costly credit lines on the buy-side.
There is a need to move from a product or process approach to an application-oriented approach to ensure that syndicated loans catch up with the other asset classes with shorter settlement cycle and more efficient processing.
Straight-through processing has been a challenge in syndicated lending compared to other asset classes because of its contract-intensive nature and the amount of information that is exchanged between buyers, sellers, and agent banks.
Reducing cycle time to settlement can potentially reduce counterparty risk, drive more efficient capital allocation, increase market liquidity, and reduce settlement costs.
Straight-through processing releases capital for the lender, including the lead arranger, who should set aside regulatory capital for the time that the exposure has not been syndicated. Trading desks can also engage in new trades if position limits are reduced through quicker settlement.
While the syndicated lending market has made progress on cutting down paper-based processes, the current scenario is still far from ideal. Investing in more contemporary technology architecture offers the opportunity for banks to interoperate with other core systems in a more seamless manner, reduce processing time and take on larger, more complex loan arrangements.