Increased costs

The following Banking & Finance practice note provides comprehensive and up to date legal information covering:

  • Increased costs
  • Costs of funding
  • Increased costs clause
  • Excluding costs from the increased costs clause
  • What is meant by increased costs ‘carve-outs’?
  • Basel II
  • Basel III/CRD IV/CRD V
  • Dodd-Frank
  • Bank Levy
  • Brexit
  • More...

Increased costs

This Practice Note considers the costs that a lender will incur when providing funding to a borrower and the steps that it will take within the facility documentation to ensure that any increase in these costs will ultimately be met by the borrower. It considers those particular costs that a lender will seek to cover through any increased costs clause, as well as the protections that a borrower will seek to negotiate to protect their position.

Costs of funding

There are a number of costs involved in funding a loan and lenders will normally factor these in when pricing the facility.

Loans may be funded by borrowing in the interbank market—this gave rise to the concept of matched funding, whereby the lender borrowed at the LIBOR rate for a loan, and lent the equivalent amount to a borrower at LIBOR plus a margin, see Practice Note: Interest—reference rates and margin. With LIBOR being phased out and loans now based on Compounded or Term SONIA, this is no longer such an important concept. In a fixed-rate loan, the lender will try to ensure the interest rate is high enough so that the cost of its own borrowing will be covered even if that cost increases.

There may also be certain mandatory costs, ie costs to the lender of being regulated. These are:

  1. the Financial Conduct Authority (FCA)/Prudential Regulation

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