What is a "Balance Sheet Bank"

Was talking to an Associate at WFS and he told me that they are essentially a "Balance Sheet Bank". What does this mean? I can't find any useful relevant information online. Thanks!

Balance sheet banks explained

A balance sheet bank is a bank that makes loans directly from its balance sheet. These banks win deals by leading with their ability to provide financing. The bank stands to benefit directly but also holds the risk. These banks are usually the larger global banks such as BAML and

relationship loans (where the bank funds the client) are also used to build relationships for IBD, which then can be parlayed into advisory mandates.

Boutiques/non-balance sheet banks don't have the capital to backstop underwrites or make relationship loans and also often don't have equity sales/leveraged loan & bond sales desks to distribute underwritten equity/debt issues.

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Best Response
FeedMeDealFlow:

or more generally, any bank that has a balance sheet they lend from, ie. they lend out cash from their balance sheet to borrowers

Not just lending, but also underwriting. This is important in the IBD context as you need balance sheet to underwrite ECM and DCM deals (eg IPOs, LBO financing) and often underwriting is used as a way to build the relationship so you can win advisory fees on the deal being underwritten or subsequent deals.

Relationship loans (where the bank funds the client) are also used to build relationships for IBD, which then can be parlayed into advisory mandates.

Boutiques/non-balance sheet banks don't have the capital to backstop underwrites or make relationship loans and also often don't have equity sales/leveraged loan & bond sales desks to distribute underwritten equity/debt issues.

That means they can't crack the relationship through taking balance sheet risk on the client. Often, this means they have to provide higher quality advice and more independent* advice than the balance sheet banks ie the latters' (sometimes) lower quality advice is subsidised by the value that underwriting or relationship loans provides to the client.

  • independent - bear in mind that lead left underwriters have at least two clients - the client the bank is raising funds for (ie the person the bank is selling money to) and the clients that the bank is raising funds from (ie the person the bank is selling equity/debt to). The underwriting bank has a conflict between (a) its relationship with the customers providing the funding and (b) its relationship with the customers it is providing the funding to.

Clients in camp (a) - often repeat institutional clients they deal with day to day who represent $XXm of revenue pa.

Clients in camp (b) - sometimes corporates who the bank may see a few times over 5 years (maybe $Xm of revenue over 2-3 years). Sometimes frequent repeat customers (eg PE sponsor firms) ($X - XXm in revenue pa, depending on the strength of the relationship).

Using a non-balance sheet banks who are only serving one client removes the noise caused by this conflict.

Of course, the non-balance sheet bank is more focused on getting the fee revenue, which makes them more focused on getting the deal done (even if it's a bad deal), so it's not like non-balance sheet banks are conflict free or providing unbiased advice.

Those who can, do. Those who can't, post threads about how to do it on WSO.
 
hhodik:

It's also worth to note that a bank like Credit Suisse claims to NOT be a balance sheet bank, even though they do have underwriting and lending. This is because the focus is still on the advisory and they mainly market their expertise, since their balance sheet is relatively small

True. There are other houses that have thinner balance sheets (and sometimes are not regulated as banks in the US) but still underwrite eg Jeffries, Macquarie.

"Balance sheet bank" tends to indicate banks with big, fat balance sheets that can be used and abused more readily and often for lower returns. I didn't make this distinction clear at all in my post and made it look more like balance sheet banks were any banks that could underwrite.

As hhodik says, there's banks with balance sheet that do underwrite but aren't "balance sheet banks".

Those who can, do. Those who can't, post threads about how to do it on WSO.
 

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