Banking and finance

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

Bank lending 

• 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 senior counsel, 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, senior counsel 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.” 

Current issues

June 2023

• Due to the rise in the central bank’s rates to fight inflation, Russia’s war in Ukraine and the spread of COVID in China, the International Monetary Fund (IMF) projects global growth will fall from an estimated 3.4% in 2022 to 2.9 % in 2023. But it’s not all bad news: the IMF estimates a recovery to 3.1% in 2024.
• At the end of February 2022, the White House confirmed that the US, along with the UK, Canada, and Germany, would move to block several Russian banks out of the international payments network Swift, in response to Russia’s invasion of Ukraine. SWIFT (the Society for Worldwide Interbank Financial Telecommunication) is the largest secure and frictionless system by which to send cross-border payments and is an essential mechanism for smooth international trade.
• The US consumer price index (CPI) reached peak inflation at 9.1% in June 2022. Since then, the CPI has seen a steady decrease, falling to 5% in March 2023. However, in the light of bank failures, including SVB and Credit Suisse, Fed chair Jerome Powell holds this is not the end of interest rate hikes.
• The COVID-19 pandemic led to accelerated technological development in financial markets. Global Fintech funding in 2021 more than doubled on the 2020 total, accounting for 21% of all venture capital dollars. With the rapid growth of developments in Fintech changing the way money is used and stored, banks are working to respond to the resulting shifts in the global financial system.
• AI and machine learning are feeding new opportunities in banking and finance. Funds and investment firms are moving toward using a combination of automated software and reduced human intervention.
• Interest in blockchain (the technology which underpins cryptocurrency) continues to heat up. The relative security and transparency of the technology (blockchain allows anyone using it to track the movement of cryptoassets such as cryptocurrency), as well as the broadly irreversible nature of the transactions, are all part of its appeal for financial institutions. Although the adoption of cryptocurrencies is yet to go fully mainstream, fintech experts are firm that blockchain technology is here to stay and cryptocurrency will continue to become the locus of a lot of work for banking and finance lawyers. The Office of the Comptroller of the Currency (OCC) recently released guidelines outlining how financial companies can use digital currencies in transactions in an effort to increase confidence in their use.
• With banks under increasing pressure to incorporate ESG (Environmental, Social and Governance) issues into their practice, financial institutions are becoming more responsive. An increasing number of banks are working to achieve certifications such as B Corp (or B Corporation) certification, a corporate social responsibility standard established by non-profit B Lab, and the Global Alliance for Banking on Values, a banking-specific standard awarded to banks that incorporate environmental initiatives into their practice.