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Greenclose v National Westminster Bank plc: Difference between revisions
Greenclose v National Westminster Bank plc (view source)
Revision as of 09:58, 15 August 2016
, 15 August 2016→The Loan and the interest rate hedge
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Mr. Leach, of [[Greenclose]], was a little old lady of the law. He was also, the court found, a sophisticated and successful owner of family business running small luxury hotels in and around Wales. But not sophisticated enough to avoid being the wrong end of the [[interest rate swap mis-selling scandal]], wherein banks lent to unwitting merchants on condition that they hedge their interest rate risk with derivatives. In this case NatWest required Greenclose to buy an interest rate collar for five years with an option to extend it for a further seven. | Mr. Leach, of [[Greenclose]], was a little old lady of the law. He was also, the court found, a sophisticated and successful owner of family business running small luxury hotels in and around Wales. But not sophisticated enough to avoid being the wrong end of the [[interest rate swap mis-selling scandal]], wherein banks lent to unwitting merchants on condition that they hedge their interest rate risk with derivatives. In this case NatWest required Greenclose to buy an interest rate collar for five years with an option to extend it for a further seven. | ||
The point of the hedge was to guard against rising interest rates. Being at an uncommonly low 4.5% in 2006, rates were generally expected to rise | The point of the hedge was to guard against rising interest rates. Being at an uncommonly low 4.5% in 2006, rates were generally expected to rise. | ||
Now the bank’s theory here is interesting: “We will lend to you at a floating rate for ten years,” it said. “But, if interest rates rise, you may default on your loan. In that case, ''we'' lose. So therefore you must hedge your interest rate risk.” You might think | Now the bank’s theory here is interesting: “We will lend to you at a floating rate for ten years,” it said. “But, if interest rates rise, you may default on your loan. In that case, ''we'' lose. So therefore ''you'' must hedge ''your'' interest rate risk.” You might think NatWest could better manage its own interest rate risk and lend at a ''fixed'' rate. But it’s so easy to be wise in hindsight. | ||
So to cut a long story short, NatWest | So to cut a long story short, NatWest made Greenclose by an option to reduce the bank's own risk to Greenclose’s insolvency. Of course, capping exposure to rates that you expect to rise is an expensive business, so to reduce the cost, NatWest suggested Greenclose also limit its ''downside'' interest rate risk also, making the optiont a collar. (You might think the bank could just as easily have lent at a fixed int ... Oh. I've already made this point, haven't I?) | ||
Greenclose therefore | Greenclose therefore entered an extendable collar transaction under a 1992 {{isdama}} - the edition is important - which would expire on 30 December 2012 unless NatWest gave proper notice of its extension before that time. | ||
====The collar renewal in 2012==== | ====The collar renewal in 2012==== | ||