Greenclose v National Westminster Bank plc: Difference between revisions

Greenclose v National Westminster Bank plc (view source)

3 bytes removed , 12 August 2016

82,891

edits

@@ Line 12: / Line 12: @@
 The bank's theory here is interesting: "I will lend to you at a floating rate for ten years," says the bank. "But if interest rates rise too high, you may not be able to repay your loan. You may default. In that case, ''I'' lose. So therefore I need you to hedge your interest rate risk."
-At first blush, rising interest rates are the borrower's risk, but - once the borrower has blown up - they become the bank's problem. It was the Bank, not Greenclose, that insisted on the collar. You might think the Bank could otherwise manage that risk by lending at a ''fixed'' interest rate. But it's easy to be wise in hindsight.
+At first blush, rising interest rates are the borrower's problem, but - once the borrower has blown up - they become the lender's. It was the Bank, not Greenclose, that insisted on the collar. You might think the Bank could otherwise manage that risk by lending at a ''fixed'' interest rate. But it's easy to be wise in hindsight.
 So NatWest charged Greenclose a premium to reduce its own tail risk to Greenclose's insolvency. With a kicker:  Of course, capping future exposure to interest rates that you expect to go up is an expensive business: To reduce the cost, NatWest suggested Greenclose limit its ''downside'' interest rate risk also, and make it a collar - thus limiting Greenclose's exposure to interest rates between  5.07% and 6%. This locked in a rate of at least 5.07% on the loan.