Examples of financial innovation that help increase the liquidity of banks' portfolios and encourage banks to maintain a lending relationship with developing countries are:< 1. The transferable loan instrument (TLI). This provides a standardized means for transferring lending commitments from a primary lender to a secondary market and creates, in effect, a secondary market for bank loans. The holder of a TLI is entitled to receive interest and other benefits of the original loan agreement. It can be sold in various denominations and is typically repaid in one lump sum on a date determined by the scheduled repayment dates on the original loan. While from the borrower's point-of-view the amount, terms and conditions of the original loan remain intact, the lender is offered scope for more flexible management of assets.
2. The note issuance facility (NIF). This combines the characteristics of a traditional syndicated credit and a bond and comprises a medium-term loan which is funded by selling short-term paper, typically of three or six months' maturity. The availability of funds to the borrower is guaranteed by a group of underwriting banks which purchase any unsold notes at each roll-over date or provide a standby credit. As funds are drawn, the underwriter either sells the securities or holds them for its own account. While the borrower has guaranteed access to long-term funds, the underwriter holds a liquid, marketable security, potentially attractive to a wide range of investors. An added attraction to the borrower is that an NIF can be substantially cheaper than a standard Eurocurrency loan.
NIFs and similar hybrid instruments have expanded very fast. Banking regulators are concerned that banks might have to take high-risk loans on their books if a borrowing entity were not able to refinance its Euronotes in the market.
