Basel II And Increased Cost Clauses

The implementation of Basel II (the new capital adequacy framework) may seem to be a rather remote matter. However, banks and borrowers should be considering its effects on increased costs clauses now to ensure that appropriate action is taken with regard to loan and other finance documentation.

In June 2004, the Basel Committee on Banking Supervision published the International Convergence of Capital Measurements and Capital Standards: a Revised Framework ("Basel II"). This is due to be implemented by bank regulators from 2006-2007 and it will replace the existing 1988 Basel Capital Accord (the "1988 Accord").

Both the 1988 Accord and Basel II deal with the way in which bank regulators set regulatory capital requirements. As such they are relevant to loan facilities because the provision and maintenance of those facilities results in capital costs for the banks providing them.