"Governing bodies generally have a rather light-weight approach to risk management that often relies on management assurance, rather than a true understanding of the risks facing their organisation. "
With the changes afoot in the sector, it is more important than ever that risk is not only understood by governing bodies, but that it is used to drive the decision making process. The regulator is not the only body concerned by this.
Private lenders too have a growing concern that some RSL's simply take the funders for granted. Three years ago, loan covenants may have been a list of seemingly minor conditions buried deep in a loan agreement, which in turn is buried deep in a filing cabinet. Loan covenants can be described as a set of conditions for the loan.
Some can be quite technical, like interest cover or gearing, other could simply be sending in quarterly management accounts. Many loans made to RSL's which are more than 3 years old could be "under water" which means that the lender is losing money by having to pay more for the funds than the borrower is paying. Where this is the case the lender will do almost anything to increase their margin, including picking up on any "minor" breach. RSL's should not fall into the trap thinking their lender will not want to lose business and goodwill.
Under-water loans are being watched closely by lender's credit committees in London or further afield. While the day to day local contact may not wish to take advantage of RSL's having taken their eye off the ball, others further up the tree may look for any excuse to add a few more basis points to a loan, sometimes with disastrous consequences.
