For example, if somebody takes a maximum loan offered by 6+ major banks, using collateral of their existing stock.. in order to purchase a fortune 100 company outright.
How do these major banks analyze and underwrite the risks associated with being a part of a collective loan that exceeds their individual fractional reserve requirements?
Wouldn’t this defeat the purpose of the fractional reserve requirements? Or are the fractional reserve requirements designed around the potential outcome where all major US banks were maxed out on a single loan, and the government determined that it could safely bail out 90% of the economy should the single loan become defaulted?
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thats a great question to which there is no logical answer but crime
These are participation loans. There will be a lead bank which takes on the lion’s share of the risk by having the most exposure. In return the lead bank will dictate much of the terms and have first rights in default. The following banks will have a lower exposure. The total loan exposure by the borrower is much larger than any one bank’s lending limit, but the aggregate debt is split amongst multiple banks to reduce the risk.
Many banks will not be interested in participation loans since the risks are still higher than non-participation loans for a variety of reasons.
You are going to have to add some numbers in here because this is unclear as written. What is a maximum loan? Where do you think fractional reserve requirements come into play?
The purpose of fractional reserve requirements is to facilitate lending while making sure there’s some money held to mitigate a bit of the risk involved in lending, under normal circumstances (a healthy economy).
Loans can be, and often are more than the fractional amount they’re required to have because that fractional amount is only a fraction of deposits held. The rest is all free for loans/investments.
However, in the US, the fractional reserve requirement amount is currently 0% and has been since 2020 as a response to COVID and the economic situation we’ve had over the last 5 years.
>6+ major banks, using collateral of their existing stock..
You’re presuming the same stocks are used as collateral at the same time, but that’s not how it works.
Stocks and other assets (including cash) are held in a margin account, and that account is what is collateralized, not specific stock itself per se.
The specific assets can be moved in and out of that account so long as the estimated value of said account remains the same or increases. If it drops below a threshold, the loan is called and the assets frozen in that account until the call is settled (or the assets in the account are sold).
The threshold set for the account (it changes regularly) is the risk mitigation and used to mitigate the risks.