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What is the Bank's Role?

Definition:

Banks can either make loans to issuers or purchase an issuer’s bonds through the capital markets process. Additionally, banks can act as underwriters if they have either an investment banking division or a capital markets division. 

Banks, in their traditional role, can assist issuers in generating proceeds for projects in multiple ways. Banks can loan money directly to an issuer, circumventing the process needed to sell bonds in the capital markets. However, this might not be the cheapest way to generate proceeds because the bank is looking to generate a profit from the lending or the bank might require some restrictive covenants that a bond financing might not require. 

Another way banks can help generate proceeds is by purchasing bonds in the open market. A special classification of municipal bonds called bank qualified bonds gives the bank extra tax benefits. This category of bonds is usually sold by issuers that don’t sell a large amount of bonds annually and don’t frequent the capital markets.

Banks can also have divisions that: 

  • Provide investment banking services
  • Act as a trustee for securities purchased by the issuer
  • Buy and sell bonds through the capital markets.  

Banks can also execute private placements by purchasing a series of bonds from the issuer at an agreed-upon cost. Less documentation is required to sell the bonds, and most private placement agreements limit when the bank can sell the bonds to the open market. 

Example:

Several large banks such as Bank of America and Citibank play a key role in the municipal market. Each is one of the top underwriters of municipal bonds in the US buying and selling large amounts of diverse municipal bonds to help support and provide liquidity to the market.

What’s important here?

Banks support the municipal market in many ways including buying and selling bonds in the capital markets, offering underwriting services to issuers, and making loans directly to issuers.