35 years: Corporate banking
In the first part of this three part series on the ‘basics of lending’, Paul provides some context on its importance and discusses the lending strategy and objectives of a typical commercial bank.
In the first part of this three part series on the ‘basics of lending’, Paul provides some context on its importance and discusses the lending strategy and objectives of a typical commercial bank.
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5 mins 46 secs
Aggressive lending practices contributed to the 2008 Financial Crisis, largely because credit analysis was not the basis for issuing loans. Nowadays, commercial banks are more risk averse and focus on traditional and modern sources to assess a borrower's credit worthiness before issuing a loan.
Key learning objectives:
Outline the sources used to assess a potential borrower
Understand how lending practices impacted the 2008 Financial Crisis
Identify the aim of commercial banks in regards to lending
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The bank is seeking a ‘banking return’ rather than an ‘investment return’, so they need to be conservative; they expect to make a profit on the lending and cannot afford many loans not to be repaid.
In the commercial banking market, ideally, the lender gets their money back with interest, but the bank does not share the profits or upside of success - so they should not be participating in excessive risk taking. This should be left to investment or equity financiers rather than bank lenders.
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