Refinancing risk, in banking and finance, is the possibility that a borrower cannot refinance by borrowing to repay existing

debt Debt is an obligation that requires one party, the debtor, to pay money Loan, borrowed or otherwise withheld from another party, the creditor. Debt may be owed by a sovereign state or country, local government, company, or an individual. Co ...

. Many types of commercial lending incorporate balloon payments at the point of final maturity. The intention or assumption is often that the borrower will take out a new loan to pay the existing lenders. A borrower that cannot refinance their existing debt and needs more funds on hand to pay its lenders may have a liquidity problem. The borrower may be considered technically insolvent. Even though their assets are greater than their liabilities, they cannot raise liquid funds to pay their creditors. Insolvency may lead to

bankruptcy Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the deb ...

even if the borrower has a positive net worth. To repay the debt at maturity, the borrower that cannot refinance may be forced into a fire sale of assets at a low price, including the borrower's own home and productive assets such as factories and plants. Most large corporations and

bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital m ...

s face this risk to some degree, as they may constantly borrow and repay loans. Most commercial banks provide long-term loans and fund this operation by taking shorter-term deposits. In general, refinancing risk is considered to be substantial for banks only during a

financial crisis A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with Bank run#Systemic banki ...

, when borrowing funds, such as interbank deposits, may be extremely difficult. Refinancing is also known as "rolling over" debt of various maturities and so refinancing risk may be referred to also as rollover risk.

References

{{Financial risk Banking Credit risk

See also

References