Luke Parker || Banking || Blockchain Adoption || Syndicated Loans
The initial stage of a project to demonstrate how blockchain technology can be used to improve the syndicated loan market has been successfully completed. Led by Credit Suisse and managed by R3 CEV, the proof of concept will continue through the end of the year and includes participation from a number of agent banks, service providers and fund manager.
Participating banks are all R3 consortium members. Banco Bilbao Vizcaya Argentaria (BBVA), Danske Bank, Royal Bank of Scotland, Scotiabank, Société Générale, State Street, U.S. Bank and Wells Fargo represent the sell-side firms. Participating buy-side firms are AllianceBernstein (AB), Eaton Vance Management, KKR and Oak Hill Advisors.
R3 currently counts over 60 of the world’s largest financial institutions as members. Together, they aim to develop commercial blockchain applications for the financial services industry.
Syndicated loans are typically offered by a group of lenders to a single, borrower such as a corporation or government with a large project to fund. According to the Federal Reserve Bank of Boston, there are several benefits, “syndication allows banks to diversify, expanding their lending to broader geographic areas and industries.” In addition, the structure allows banks that are constrained by their capital-asset ratios to participate in loans to larger borrowers.
According to Thomson Reuters' Global Syndicated Loans review, global syndicated lending reached US$2 trillion during the first half of 2016. This was down 9 percent compared to the same period last year and was the slowest start to the year since 2012. Syndicated lending fees are down 17 percent. Syndicated loan volume in the United States amounted to US$699 billion, which is 34 percent of global volume. Europe accounted for 18 percent.
Friction within the industry was highlighted by Bank of Canada Senior Deputy Governor, Carolyn Wilkins, in aspeech last June. Citing a Santander InnoVentures estimate, she reiterated that banks could save as much as $20 billion a year in global back-office costs by implementing blockchain technology.
“One interesting application is in the syndicated loan market, where loans can take up to 20 days to go through the clearing and settlement process,” said Wilkins. “[Distributed Ledger Technology] could reduce this to about seven days by providing a secure database that all participants share across a distributed private network.”
Emmanuel Aidoo, head of the Credit Suisse distributed ledger and blockchain effort states that “by connecting a network of agent banks through blockchain, we can achieve faster and more certain settlements in the loan market.” The company also leads a team of seven financial institutions developing a blockchain prototype for reference data purposes, announced last week.
“This project demonstrates the potential for blockchain technology to fundamentally reshape the syndicated loan market and the capital markets more broadly,” says Aidoo. “This demonstration sets us on a path to increase efficiency and reduce costs, which will benefit banks and clients alike.”
The project uses blockchain solutions from Synaps Loans LLC. This newly formed entity is a partnership between Symbiont and Ipreo, a global provider of technology and financial services firm. Ipreo is privately owned by Blackstone and Goldman Sachs Merchant Banking Division and has more than 1,000 employees.
The two companies already announced a blockchain system for syndicated loans in March. “Our solution addresses actual use cases and meets production standards for maintainability, security, privacy and throughput,” Joseph Salerno, Ipreo Managing Director and CEO of Synaps Loans LLC said. “We are demonstrating that distributed ledger technology can be put to work now.”
The new project involves Synaps providing loan investors with direct access to data. By reducing manual reviews, data re-entry and systems reconciliation, the system provides the company with immediate cost savings. “In the future, loan data processing can be done exclusively on the distributed ledger,” Tuesday's announcement reads. This will eliminate the need, and cost, for each market participant to maintain its own separate lending system.
On of the largest participants in the proof of concept is BBVA, the second largest bank group in Spain according to Accuity's Bankers Almanac. In a report published last October BBVA suggested that “loans could be stored as smart contracts in the blockchain, together with the collateral ownership information.” The bank contends that “if the borrower misses a payment, the smart contract could automatically revoke the digital keys that grant his access to the collateral.”
Symbiont CEO and Co-founder, Mark Smith, shares a similar sentiment. He claims that “Smart contracts can revolutionize the entire lifecycle of a loan, from creation to settlement in secondary market trading.” Symbiont has developed a platform for financial institutions to create Smart Securities™ which are self-executing digital contracts that are stored in a blockchain. Users can issue, manage, locate and trade them on the Symbiont platform.
Thomson Reuters' Vice President Scott Manuel also sees added benefits beyond costs. Last January he wrote that “reducing the time between execution and settlement can meaningfully reduce cybersecurity risk, ops risk and funding costs.”
A further problem in the syndicated loan market is transparency. An August 2013 working paper published by the Federal Reserve Bank of Kansas City revealed that a loans lead arranger could have “private informational advantage over participants.” For example, the lead bank could withhold information about the borrower from other banks, misleading them into making riskier loans. In addition, the report explains that the lead could put less effort into monitoring when it retains a smaller loan share.
Blockchains could offer a solution. According to a December 2015 report from Deloitte, the technology “offers a way of recording transactions or any digital interaction in a way that is designed to be secure, transparent, highly resistant to outages, auditable, and efficient.”
Applying blockchain technology to syndicated loans is also being investigated by a leading underwriter of syndicated loans, Mizuho Financial Group. The group announced that it was exploring using Microsoft Azure BaaS for its syndicated loan business last February. According to Thomson Reuters, Mizuho Financial Group has the largest market share of syndicated loans in Japan but ranks fifth globally.
U.S. Bank Capital Markets Group is also in the market for a solution. Antoine Shagoury, State Street Executive Vice President and Global Chief Information Officer, recently revealed that his company is testing and pursuing new opportunities in this area. “Blockchain has the potential to change the loan issuance and servicing lifecycle,” he concluded. Robert Berk, Senior Vice President and Chief Operating Officer, said that his company is “excited to prove the technology works with players throughout the loan ecosystem to truly understand its value."
“We know, however, that many of the true desired benefits of Blockchain, for this application and others which require network participation, can only be achieved through industry collaboration and so we are thrilled by the prospect of playing a role in taking this proof of concept into the pilot phase with our industry peers,” said Antoine Shagoury, State Street Executive Vice President and Global Chief Information Officer.
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