This lending institution then recruits other banks to participate and share the risks and profits.
Credit unions can also participate loans in the same manner.
A separate contract called a loan participation agreement is structured and agreed among the FI's.
Loan participations can either be made on a pari passu basis with equal risk sharing for all loan participants, or on a senior/subordinated basis, where the senior lender is paid first and the subordinate loan participation paid only if there are sufficient funds left over to make the payments.
The most compelling reasons that financial institutions use participation loans are as follows: