Definition of the lending band
What is a loan strip?
A loan strip is a commercial loan an arrangement whereby the original lender on a long-term loan, such as a bank, can obtain financing for that loan from other lenders or investors.
A strip coupon represents a portion of the long-term loan (like a five-year loan). When the detached loan expires, its holder will receive an agreed sum of money. The maturity of a loan strip is generally short term (often 30 or 60 days). A detached loan is also known as a detached loan or, more formally, a short term loan participation agreement.
Key points to remember
- A strip coupon represents a share of a long-term loan and usually matures in 30 or 60 days.
- A bank or other lender will sell loan bands on a long term loan. For example, a 60-day detached loan would fund this portion of the loan.
- At maturity, the bank must resell the coupon to the same investor, find a new investor or finance the coupon itself.
How a lending band works
When a bank or other lender gives a long-term loan, it can sell strip coupons to investors in order to raise funds. Capital city to finance the loan. For example, when a bank sells a 60-day loan, it gets money to cover that part of the loan.
But after 60 days, the source of funding for the loan dried up. The bank must either resell the loan band to this same investor, find a new investor or finance the loan itself.
Loan Bands Regulations
Under certain circumstances, strip coupons may be classified as amounts borrowed in the bank’s quarterly financial report to regulators, known as appeal report. Since March 31, 1988, bank regulators have considered a detached loan as an amount borrowed if the investor has the option of not renewing the loan at the end of the term and the bank is obliged to renew it.
In this case, strip coupons are treated not as sales, but as loans. Stripped coupons are then considered to be deposits and become subject to the reserve requirements for depository institutions as defined by the Federal Reserve under Regulation D.
When a detached loan matures, the lender must either resell it or take responsibility for financing it.
In addition, if the initial investor chooses not to renew the detached coupon at the end of the maturity period, the deposit the institution that sold the lending band must take responsibility for financing the lending band itself. This is because the loan terms of the borrower usually extend well beyond the term of the loan.
For example, the borrower of the loan sold as strip coupons may have signed for a loan period of one, five years or more, or may have entered into a revolving line of credit of a similar duration. Indeed, detached coupons have the characteristics of a repurchase agreement because the bank which sells the coupon undertakes to buy it back from the purchaser at the option of the latter.
Dismemberment operations may involve deposit commitments, such as advance payments, promissory notes or other obligations. As such, exemptions from the definition of a deposit as described in Regulation D may be applied to these liabilities. For example, when a national bank sells a dismembered loan to another national bank, that dismemberment may be exempt from the deposit requirements set out in Regulation D.