As it is widely known, when entering into facility agreements, lenders consider as non negotiable, but as established practice, the incorporation of the so called “increased costs clause”, according to which, any increased cost of making or maintaining the loan as a result of a change in law is passed on to the borrower. A point which has raised interpretational issues is that the clause is triggered only by changes in regulatory matters which occur after the loan agreement is entered into. This matter has come into sharp focus at the present time.
On December 16, 2010, the Basel Committee on Banking Supervision announced the text of the Basel III regulatory framework which is intended to take effect gradually across the European Union over the period from 2013 to 2019. Given the lengthy period for the full implementation of the Basel III, the question of when the new rules will be actually introduced for the purposes of the increased costs clause, remains unanswered.
Contrary to borrowers` position, banks assert that the increased costs clauses in documents entered into before the full implementation of the Basel III should include those changes. The justifications presented by lenders is that they are unable at this stage to correctly price their loans including the new costs, given that the scope and effect of the changes remain unclear until any national laws or regulations are enacted as well as any changes to the risk-weighting strategy followed by a particular bank are concluded.
The value of banks` argument may be strengthened if we take into consideration the latest developments regarding the implementation of Basel III into EU law through the Capital Requirements Regulation and Directive (CRD IV). Having fallen behind with the international deadline of Jan. 1, 2013 for the enactment of the Basel III rules because of continual disagreements, EU representatives are still working towards a compromise solution. Interestingly, on Jan. 7, 2013, the European Commission made a new proposal regarding the liquidity standards, enhancing again lenders` uncertainty as to the final content of their obligations. In addition, with regards to the Greek bank industry, it is expected that the relevant European Directive will be transposed in Greece by amendment of Law 3601/2007 which will further delegate the Bank of Greece to define the way and the methods for the completion of its implementation. It is still difficult to determine in which cases the Executive Committee of the Bank of Greece will be called to issue Acts for the specification of the requirements of the law, since it is anticipated that the European Regulation will regulate issues that until present time have constituted a task of the Bank of Greece.
As a consequence, the question which should be answered is whether the changes published by the Basel Committee have reached the point where the impact on the relevant borrower would be certain. Actually, the answer to that question shall be negative. Nevertheless, in order to ensure their protection, it is advisable for lenders to expressly state in loan documents that the Basel III costs will fall within the ambit of increased costs clause. At the present time of uncertainty, this is the recommended prudent course for banks.