In a nutshell
Banking and finance lawyers deal with the lending and borrowing of money, and the management of financial liabilities. Their task is to help structure their clients’ transactions, to protect their clients’ best legal and commercial interests, and to negotiate and document the contractual relationship between lenders and borrowers. It’s a hugely technical, ever-evolving and jargon-heavy area of law. For anything banks do with capital raising or financial instruments, see Capital Markets.
"This area allows you to push yourself and increase the percentage of time spent doing things that are new, interesting, challenging and occasionally frightening." – James Florack, Davis Polk
Straightforward bank lending: a bank or other financial institution lends money to a borrower on documented repayment terms. Bank loans may be bilateral (made by one bank to the borrower) or syndicated (arranged by one or more financial institutions and made by a group of lenders).
Acquisition finance: a loan made to a corporate borrower or private equity sponsor for the purpose of acquiring another company. This includes leveraged finance, where the borrower finances the cost of an acquisition by borrowing most of the purchase price without committing a lot of its own capital (as typically done in leveraged buyouts).
Real estate finance: a loan made to enable a borrower to acquire a property or finance the development of land, commonly secured by way of a mortgage on the acquired land/buildings.
Project finance: the financing of long-term infrastructure (e.g. roads or power plants) and public services projects (e.g. hospitals) where the amounts borrowed to complete the project are paid back with the cash flow generated by the project.
Asset finance: this enables the purchase and operation of large assets such as ships, aircraft and machinery. The lender normally takes security over the assets in question.
Islamic finance: Muslim borrowers, lenders and investors must abide by Shari'a law, which prohibits the collection and payment of interest on a loan. Islamic finance specialists ensure that finance deals are structured in a Shari'a-compliant manner.
Financial services regulation: lawyers advise financial and other businesses on everything that they might need to know about the legal limits of their financial and investment activities. They focus especially on new and complex federal and state regulations. Major clients are usually banks, hedge funds, private equity firms, broker-dealers and insurance firms. Post-recession there has been a multifold increase in the volume of legislation governing the financial sector.
What lawyers do
- Meet with clients to establish their specific requirements and the commercial context of a deal.
- Carry out due diligence – an investigation exercise to verify the accuracy of information passed from the borrower to the lender or from the underwriter of securities to potential investors. This can involve on-site meetings with the company’s management, discussions with the company’s auditors and outside counsel, and review of material agreements and other documents.
- Negotiate with the opposite party to agree the terms of the deal and record them accurately in the facility documentation. Lenders’ lawyers usually produce initial documents (often based on a standard form or an agreed precedent), and borrowers’ lawyers try to negotiate more favorable terms for their clients. Lawyers on both sides must know when to compromise and when to hold out.
- Assist with the structuring of complicated or groundbreaking financing models, and ensure innovative solutions comply with all relevant laws.
- Gather all parties to complete the transaction, ensuring that all agreed terms are reflected in the loan documents, all documents have been properly signed and delivered and all conditions to closing have been met.
- In a secured loan (most bank loans to below investment-grade borrowers require collateral), ensure that the agreed-upon collateral has been properly granted and that all filings, registrations and other procedures necessary to ‘perfect’ the security have been or will be made.
“We work at the intersection of law and markets, so lawyers in our field not only need an understanding of the law, but an inquisitive mind and an interest in real-world economic and political developments." – Robert Tortoriello, financial services partner, Cleary Gottlieb
Financial services regulation
- Receive calls from banks and other financial institutions that seek guidance as to how business initiatives can be implemented most effectively in US markets, in full compliance with the letter and policy of US law.
- Sit down with the client – speaking to individuals at a very senior level – to find out what the client's business plan and intentions are.
- Analyze the implications of implementing that plan based on what current or future regulation looks like, or can be expected to look like, and what the legal, compliance, reputational, strategic, cross-border and related risks of that plan might be.
- Give advice on what changes may need to be made to the business initiative to achieve regulatory compliance and minimize risk.
- Regulatory lawyers are not just involved with compliance counseling: they also advise on enforcement and internal and external investigations; the restructuring and disposition of bank assets; the organization of bank units and subsidiaries; acquisitions, investments, strategic alliances and joint ventures; capital raising initiatives and the creation and distribution of bank securities and deposit and other financial instruments; the structuring of 'living wills' and recovery and resolution plans; and the implementation and evaluation of bank marketing, cross-selling and similar initiatives.
Realities of the job
- Some firms act for investment or commercial banks on highly complex and often cross-border financings, whereas the work of others generally involves more mainstream domestic finance deals.
- A good working knowledge of the bankruptcy laws is critical for lawyers practicing in the area of leveraged finance. Banking lawyers advise for the worst-case scenario, which is often a bankruptcy filing by the borrower. Understanding how the rules change once that filing is made is critically important, even for lawyers who never expect to set foot in a bankruptcy courtroom.
- Lawyers need to appreciate the internal policies and sensitivities of their clients in order to deliver pertinent advice and warn of the legal (and reputational) risks involved in the transactions. Deals may involve the movement of money across borders and through different currencies and financial products. International deals have an additional layer of difficulty: political changes in transitional economies can render a previously sound investment risky.
- Banking clients are ultra-demanding and the hours can be long. On the plus side, clients will be smart and dynamic. It is possible to build up long-term relationships with investment bank clients, even as a junior associate.
- Working on deals can be exciting. The team and the other side are all working to a common goal, often under significant time and other pressures. Deal closings bring adrenaline highs and a sense of satisfaction.
- You need to become absorbed in the finance world. Start reading The Wall Street Journal, the various deal-related trade publications or other good business-oriented websites.
- Regulatory lawyers need to remain constantly aware of the latest political developments (potentially) affecting regulations. “We are not management consultants, but our role involves a huge amount of market-based business analysis. Lawyers who want to work in this area need to become very knowledge-focused. Staying on top of the latest news in all the areas involved is a great ongoing challenge of the job,” says Robert Tortoriello, a partner in Cleary Gottlieb's financial institutions practice.
- Regulatory lawyers operate on shifting sands. “Abnormal is the new normal,” says Robert Tortoriello. “It is a constantly evolving practice. At present lawyers are advising on the 'likely' implications of the 'likely' regulatory framework that will emerge from the ongoing legislative process, which has come forth from proposed regulations.”
- The global pandemic is slowing economic activity and the increased risk will restrain companies' freedom to access finance. We're already seeing a slowdown in finance transactions, while companies take fewer risks to safeguard cashflow. In law firms we're seeing a shift of resources from banking teams to bankruptcy teams.
- Reforming the Dodd-Frank Act remains a priority for the Trump administration, largely focused on relaxing restrictions imposed on banks. Recent changes include the EGRRCPA (Economic Growth, Regulatory Relief, and Consumer Protection Act) which was signed into law in May 2018. The 197-page act amends a number of federal laws pertaining to the banking sector across the US and raises the threshold of banks 'too important to fail' from $50 billion to $250 billion.
- Another major focus for the Trump administration is tax reform. In December 2017, Trump signed the Tax Cuts and Jobs Act which included lowering the corporate income tax rate from 35% to 21%. Experts predict this will make the US more attractive for inbound M&A activity and may also increase the value of US-domiciled businesses. The changes will have a significant impact on deal-modeling, tax diligence and acquisition agreement negotiations.
- Following widespread cyberattacks on US financial institutions, the Department of Financial Services published requirements for financial services companies to boost their cybersecurity. One survey by PwC found that 69% of financial services’ CEOs reported being somewhat or extremely concerned about cyber threats. It also found that 81% of banking CEOs are concerned about the speed of technological change – more than any other industry sector.
- Fintech may only make up a small share of the market but it's rapidly growing. While these startups can compete directly with banks in areas such as wealth management, loans or payment products, larger financial institutions are beginning to explore the opportunities fintech platforms can provide in areas such as mobile banking apps or services. According to some estimates, the fintech market is poised to grow at an annual growth rate of 24.8% through 2022, to a height of $309.98 billion.
- Interest in blockchain (the database technology which underpins digital currency bitcoin) continues to increase. The security of the blockchain, its transparency – anyone using the system can view trades – and the irreversible nature of blockchain transactions have all proved attractive to financial institutions. Although the practice is yet to go mainstream, banks continue to experiment with how the tech can be applied to benefit their businesses.
- As Brexit continues to unfold down an unclear path, big US banks including Morgan Stanley, Citigroup and Bank of America are drawing up plans to try to avoid moving hundreds of jobs out of London before the UK leaves the EU. The UK's exit could have major implications for overseas banks based in London if their access to the wider continent is cut off or the UK's banking industry undergoes a regulatory overhaul. Some experts predict that Brexit could even allow US banks to extend their market share opportunity over their European counterparts.
- Research by The Banker has shown that the total pretax profits of the top 1,000 banks came in at $1,135 billion for 2019: higher than last year’s $1,112 billion and almost ten times higher than the $115 billion in 2009, in the immediate aftermath of the financial crash.
- Chinese banks remain the four largest in the world. This 'Big Four' comprises CBC, China Construction Bank, Agricultural Bank of China, and the Bank of China. Collectively, they have just under $1.1 trillion in Tier 1 capital. The next four biggest comprise JP Morgan, Wells Fargo, Citigroup, and HSBC with approximately $724 billion in capital.
- Although Chinese banks may be the biggest at the top end, research shows that American banks continue to prove to be far more efficient, represented in higher returns on both assets and capitals.