When I joined Standard Chartered - over twenty years ago now - part of the induction for newly appointed senior executives was a session on how the bank manages a loan when it goes bad. I remember thinking it an unusual topic to encounter so early. Only later did I understand why it came near the beginning. The moment a loan becomes distressed is often the moment a bank’s relationship with its customer undergoes its most profound change - and the customer, whose livelihood sits on the other side of that same event, receives no comparable preparation, and no real voice in what follows.
This piece is about that transition, and about an application of mediation that, as far as I am aware, has received little attention: not resolving lending disputes once they have matured into litigation, but helping to manage the organisational transition that so often creates the conditions for dispute in the first place.
In most banks, a performing loan sits with a relationship manager (the “RM”) whose role is to support the customer while protecting the bank’s commercial interests. If the loan deteriorates beyond a defined point, responsibility passes to a specialist restructuring or recovery unit. The names (frequently euphemistic) vary - Special Assets, Business Support, Recoveries - but the purpose is broadly the same: preserving value, managing risk and protecting the bank’s position.
From the bank’s perspective, this transition is entirely rational. Distressed lending requires different expertise, different controls and different priorities.
However, viewed through the lens of organisational psychology, something more subtle is happening.
The bank has changed not simply the people managing the account, but the very nature of the relationship. The objectives, incentives and language have shifted. What is an entirely logical internal reorganisation can feel, from the customer’s perspective, like a sudden change in personality. The trusted relationship manager disappears. In their place arrives a specialist whose responsibility is no longer to grow the relationship, but to manage its deterioration.
Neither perspective is wrong. Both are understandable. The difficulty is that no one manages the transition itself. Up to this point, the relationship has a manager. After it, the relationship has an adversary. Nothing manages the transition between the two. The boundary.
That boundary is precisely where trust often begins to erode.
Banks devote enormous resources to managing credit risk. Sophisticated systems monitor covenant compliance, assess collateral values and identify early warning indicators. Comparatively little attention is given to what might be termed relationship risk: the possibility that deteriorating trust will itself destroy value.
Once an account enters a recovery environment, conversations naturally become more positional. Borrowers may feel that years of relationship banking have been replaced by process. Recovery teams, meanwhile, operate under legitimate obligations to protect shareholder capital, satisfy regulators and maximise recoveries.
The consequences are almost predictable. Communication becomes more guarded. Assumptions harden. Options narrow.
The dispute has not necessarily arisen because the parties disagree about the legal position. The relationship itself has become the dispute.
This is where mediation may have something distinctive to offer.
Traditionally, mediation is viewed as an alternative to litigation. Distressed lending presents a different opportunity. At the point a facility transfers into restructuring or recovery, there are often still many commercial options available. Facilities can be restructured, covenants amended, assets sold in an orderly fashion, new equity introduced, management strengthened, repayment profiles revised.
These are not simply legal questions. They are negotiations involving uncertainty, commercial judgement and human relationships. Mediation is designed precisely for that kind of environment, by facilitating exploratory and creative dialogue.
The objective would not be to constrain the bank’s commercial discretion, nor to replace experienced restructuring professionals. It would be to provide a structured, independent process at precisely the point where relationships begin to change character and positions start to harden.
The strongest case is not the business that is fundamentally insolvent. Where an enterprise is no longer viable, orderly recovery processes remain entirely appropriate, and mediation cannot conjure value that is not there.
The case that matters is the fundamentally sound business caught in a cyclical downturn.
During my banking career I saw this repeatedly, in sectors such as commodities. Businesses that remained operationally strong could become temporarily distressed because markets had moved against them. Liquidity disappeared. Covenant ratios deteriorated. Facilities were
transferred into recovery - not because the underlying enterprise lacked long-term value, but because the timing had become unfavourable. I watched sound businesses handed across that boundary not because they had failed, but because a model showed that a ratio had slipped.
At precisely this point, lender and borrower may still share an important objective: preserving enterprise value until conditions improve. Whether that proves possible depends not only on financial analysis but on maintaining enough trust for meaningful commercial discussion to continue.
We have a detailed picture of what this boundary can produce when confidence in the process breaks down, thanks to the fullest available case study: RBS’s Global Restructuring Group.
A leaked independent review found widespread inappropriate treatment of businesses transferred into GRG. Although the most serious allegations were not upheld, the review identified a pronounced focus on generating income from fees and complex instruments, together with failures to follow the bank’s own standards. RBS subsequently established a customer complaints and redress process, supported by a £400 million provision. The Financial Conduct Authority concluded that GRG had fallen well short of the standards its customers expected, but that, because commercial lending was largely unregulated, its powers to act were very limited. Parliament’s Treasury Committee subsequently proposed a dedicated tribunal for SME disputes with banks.
One of the central concerns arising from GRG was whether the distinction between a temporarily distressed business and a genuinely failing one had been given sufficient and impartial consideration. That is precisely the distinction a neutral process at the point of transfer could help test honestly, while it still matters.
But the more important lesson extends beyond any single bank. The costs of a transition experienced as opaque or unfair were borne not only by customers but by the institution itself: substantial provisions, the collapse of trust across an entire customer segment and years of reputational damage. A trusted, independent process cannot remove difficult commercial decisions. It can improve confidence in how they are reached. As GRG demonstrates, the absence of that confidence can be extremely costly.
Two objections arise immediately, and both deserve a straight answer.
The first is power. The bank holds the security, controls the facility, commands the information and can appoint receivers. A mediation in that setting, the argument runs, is a fig-leaf over a predetermined outcome. The answer has three parts. It depends on the process being offered early, before the borrower is genuinely over a barrel. It depends on
the mediator’s skill in managing an imbalance of power - a real and teachable competence, not a platitude. And, most importantly, what a facilitated process offers the weaker party is precisely what the unilateral transition currently denies them: information, a voice, and the chance to put alternatives on the table before the machinery runs. In roles where both the public and private sides of a business reported to me, I saw how carefully banks manage - and are required to wall off - the information around a distressed name. Managing that asymmetry is the work, not a reason to avoid it.
The second is the bank’s incentive to take part at all. Here the answers are commercial rather than idealistic. Reputational insurance: GRG is the standing price of getting this wrong. Economics: a viable going concern often repays more than a fire sale, so preserving it can be the value-maximising choice rather than the soft one. And direction of travel: with the regulator’s powers over commercial lending limited, and a dedicated SME tribunal already floated, something is coming - and a bank that adopts a credible voluntary process gets ahead of it, and helps to shape it.
The argument becomes stronger still where lending involves multiple stakeholders.
Lending facilities are frequently syndicated before distress arises. Debt is sold into secondary markets. New investors, hedge counterparties and specialist funds enter the capital structure. What began as a bilateral banking relationship becomes a negotiation among creditors with very different objectives and horizons - original lenders who value the ongoing franchise, secondary buyers who want a fast recovery, loan-to-own funds pursuing a quite different agenda, hedged parties largely indifferent to the outcome.
As a member of the management team overseeing Standard Chartered’s Wholesale Bank, and later running financial markets across Asia through the crises that defined the period, I saw one lesson recur consistently: when a serious credit goes wrong, the most intractable conflict is frequently not between bank and borrower at all, but among the creditors themselves. Helping parties with genuinely divergent interests reach a commercially workable outcome is exactly what mediation is built to do - and the value destroyed by creditor coordination failure is enormous, yet no one currently owns the task of preventing it.
None of this suggests that mediation should replace restructuring or insolvency processes, nor that it will be appropriate in every case. Restructuring and insolvency mediation is, in any event, a recognised field, if an under-used one. The proposition here is more specific, and more modest.
Banks have become exceptionally sophisticated at managing credit risk. They understand probability of default, loss given default and capital allocation with impressive precision. They pay comparatively little attention to the organisational transition that occurs when a
commercial relationship becomes a recovery relationship. That transition changes behaviour. It changes incentives. It changes trust.
Those are precisely the circumstances in which mediation has proved its value across many other kinds of commercial dispute. The opportunity may not be to use it later in the life of a distressed loan, but earlier - at the boundary where the relationship itself begins to change.
Because that is so often the moment the relationship becomes the dispute.