41stfloor
Active Member
It is possible that another bank could take an assignment of a failed bank's loans and commitments to make loans, but this is never a certainty, particularly if those banks also need to conserve cash.
regarding an earlier post, falling share prices don't give a bank a right in and of itself to call a loan. But it does cause other problems. One problem is that the bank in question may experience an increase in cost of funds to itself in the LIBOR or other wholesale lending market. Sometimes (but not always) there are provisions in loan agreements (particularly in more recent ones) that allow a lender to raise the interest rate charged to its borrower if its own cost of funds rises. This makes the financing more expensive for the developer.
Outside of rights in the agreement to raise rates, interest rates charged to borrower are now also being increased at every other available opportunity. This isn't because the bank wants to gouge the borrower, but is because the bank may otherwise lose money on the loan given its own cost of funds. If a borrower requests an amendment to a loan agreemen to deal with an unforseen situation, banks take the opportunity to raise the interst rate. This too makes the financing more expensive for the developer.
Another problem is that the bank may not be able to raise the funds at all or may need to conserve cash to cover bad loans and to keep its regulatory capital at required levels. In these cases, the bank itself may default on its obligation to make an advance to a borrower when the borrower requests it. Banks don't just hand over all the money required to build a project at the beginning. They dole it out slowly as the developer needs it to make payments to the contractor(s). If the bank doesn't hand over the money when required, this can cause delays or other issues for the developer.
Banks may also become insolvent and be liquidated or be nationalized if their share capital price falls too far. Capital must be kept at a certain level for regulatory pruposes and if depositers and pref share holders think the bank may fail, there can be a run on the bank or other disatrous consequences, reducing the required regulatory capital levels. If the bank is not nationalized (saved by the government), then it may well be liquidated. This has happened with Lehman Brothers this past fall (although it was not a conventional bank). It was a lender on many syndicated credit agreements and when it wen bankrupt it defaulted in its obligations to make advances to borrowers.
