Refinancing Risk

In banking as well as finance, refinancing danger is the possibility that the borrower cannot re-finance by borrowing to settle existing debt. Various kinds of commercial lending include balloon payments in the point of final maturation; often, the purpose or assumption would be that the borrower take out a brand new loan to pay the present lenders.

 A customer that cannot refinance it's existing debt and doesn't have sufficient funds available to pay its loan companies may have a liquidity issue. It may be considered officially insolvent: although it's assets are more than its liabilities, it can't raise the liquid money to pay its lenders. Insolvency may lead to personal bankruptcy, even when the customer has a positive value.

In order to repay your debt at maturity, the actual borrower that cannot re-finance may be forced right into a fire sale associated with assets at a low price, such as the borrower’s own home, and effective assets such as industrial facilities and plant.

The majority of large corporations as well as banks face this particular risk to some degree, because they may constantly be lent and repay financial loans. Home refinancing risk raises in periods associated with rising interest rates, once the borrower may not have adequate income to afford the eye rate on a brand new loan.

Most industrial banks provide long-term loans, and account this operation if you take shorter term deposits. Generally, refinancing risk is just considered to be substantial with regard to banks in cases of monetary crisis, when credit funds, such as inter-bank build up, may be extremely difficult.

Re-financing is also known as “rolling over” financial debt of various maturities, and may end up being referred to as rollover danger.