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What is...CORPORATE banking?

Corporate banking typically refers to financialservices offered to large clients ('wholesale

clients').

commercial banking

International transactions.

Investment banking.

Project finance.

syndicate

Insurance.

Advisory services.

Shareholding. participate in themanagement of own shares in

Although many wholesale clients arelarge corporations, they may also include otherinstitutions like pension funds, governments andother (semi-) public entities. Corporate banking is avery profitable division for banks, far moreprofitable than retail banking, which is aimedtowards households and small and mediumenterprises (SME's).

The services offered by corporate divisions of banksinclude (a) generalactivities, and (b) services particularly tailored tolarge clients such as multinational companies.

(a): Commercial banking activities includetraditional banking services like deposit taking,lending, lines of credit, and facilitation of variouskinds of financial transactions (e-banking, creditcards, etc.).

Households and small and medium enterprises(SME's) also rely on this range of services for theirfinancial needs.

(b): For wholesale clients, however, many additionalfinancial services are available, such as:

Internationalbanking services include trade financing andforeign exchange transactions. Banks also offerservices to protect firms against currency and

price fluctuations.

Large corporations andpublic institutions are financed not only throughloans, but through the sale of securities (stocksand bonds) to the public. The services related tothe issuing of securities are called 'investmentbanking', a business that used to be completelyseparated from traditional commercial banking.In recent decades, the distinction betweentraditional commercial and investment banks hasbecome blurred, and nowadays many banks

offer both types of services. Investment banksperform underwriting, that is they assist

companies in issuing bonds or shares, and buythe initial offers at a fixed price. Investmentbanking also includes providing advice andfinancing for mergers and acquisitions (M&A's).

For large infrastructure andother projects, banks offer specific loans whichare repaid based on the revenue generated bythat project. For some large and potentially riskyprojects, the bank can arrange a banking

, wherein a group of banks each lenda client a portion of a large loan. Project financecan also include the sale of project-specificbonds.

Banks may also sell insuranceproducts, although insurance is traditionally nota banking activity. Again, consolidation in thefinancial services industry has brought togethermany different financial services. These servicesallow corporate clients to access many different

services within a single financial institution.While banks may also offer retail insuranceproducts to individuals, corporate insurance maycover company activities, staff and management.

Wholesale banking activitiesalso include financial advising for all kinds of corporate and financial activities, such asmergers and acquisitions, asset management,and taxation (e.g. the use of tax havens)

Banks can, and ,

companies. A bank can, for example, buy acompany's shares to help to provide thecompany with some extra liquidity, if thecompany is in financial distress.

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The services offered

p r i v a t e f i n a n c e : a p u b l i c i n t e r e s t

Track

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Trends & Critical Issues

CSR Initiatives

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Speculative finance / Ponzi finance.

Conflict of interests.

Recently, there has been a trend towards morespeculative methods of financing. Previously,clients used to pay back both the principal andthe interest on loans through their cash flows;

nowadays many companies' cash flows are onlysufficient to service their debt -- that is, covertheir interest payments. Adverse circumstances,like small rises in interest rates or decliningcompany incomes, can result in the company notbeing able to service their debt at all. Thissituation can lead to Ponzi finance, where acompany constantly raises new funds, oftenthrough hidden or innovative systems, in order topay other creditors. This practice is often

facilitated by banks and other financial firms thatseek to make profits from increasingly complexfinance mechanisms. Obviously, an economydominated by such speculative 'Ponzi finance'may be fragile and susceptible to crisis, as itbecomes dependent on continuing asset priceinflation and larger amounts of debt.Increasingly, there are cases of companies thatget into trouble as a result of using Ponzifinance, and may go bankrupt. Authorities canintervene, but such intervention may onlyencourage more 'Ponzi finance' to a point wherethe excessive amount of debt is beyondsalvation.

As mentioned above,banks offer an increasingly broad scope of financial services to their corporate clients. Onecould argue this leads to a more comprehensiveprovision of financial services. On the other

hand, however, the danger for conflicts of interest to occur also increases, as banks andcompanies become more and more intertwined.For instance, if banks underwrite bonds for acertain company at a specific price, they may betempted to sell these bonds to investors whoseek the bank's advice in their assetmanagement decisions. Another risk that becameapparent in recent years stems from the use of the above-mentioned Ponzi schemes. When a

company is accumulating debt, and is not able tomeet its interest obligations, financial firms may

help develop all kinds of 'creative' mechanisms tochannel funds to the company, and hide thecompany's debt. Banks may become increasinglyinvolved in fraudulent practices, especially if bank representatives also have a seat in thecompany's board or own its shares. This

occurred in the collapse of Parmalat, the Italiandairy producer.

Of course, protecting investors from the practicesdescribed above is not really a matter of CorporateSocial Responsibility. The practices described, likefalse prospectuses and misleading advices, aresimply illegal. Following the corporate scandals inUnited States and Europe, governments have taken

some steps to reduce these conflicts, but criticsargue that the reforms have not gone far enough.

More traditional sustainability issues are also criticalfor the corporate banking sector. Given its role infacilitating all kinds of corporate practices, bankshave a great role and responsibility in advancingsustainability. Currently, CSR initiatives directed tocorporate banking mainly cover only a small part of company financing by banks. The EquatorPrinciples, for example, offers clear indicators towhat environmental and social conditions projectshave to fulfil to be financed. Several other bankshave adopted other environmental standards aroundforestry, oil & gas, and mining.

However, corporate banks have a long way to go inaddressing sustainability. For example, mostinvestment banks still do not perform environmentaland social screening on the companies for whichthey raise funds. Also, the practice of assisting

clients with the use of tax havens and otheroffshore markets is very dubious. Since September11, governments have paid more attention howthese offshore centres can be linked to all kinds of illegal and unsustainable activities. Although somesteps have been made to prevent moneylaundering, efforts to combat tax havens have beenlimited.

This fact sheet was produced by SOMO, centre for research on multinational corporations -www.somo.nl-for BankTrack, the campaigners network tracking the private financial sector.

T: +31-30-2334343, F: +31-30-2381112, E: coord@banktrack.org, www.banktrack.org

More info:

Factsheet commercial banking;Factsheet project finance;Factsheet investment banking;