Possible Applications of Financial Covenants in Corporate Banking

Abstract

Financial covenants are tools used to monitor the economic and financial performance of corporate debtors. Their fulfilment is a kind of confirmation of the implementation of financial projections analysed at the processing stage of credit applications. In turn, their violation offers objective proof that an obligor’s financial standing has deteriorated. It is expected that the increasing competition in corporate banking will see extensive implementation of financial covenants, as they improve the quality of monitoring, reduce the operational risk involved in proving that a debtor’s credit rating has deteriorated (thus providing grounds for terminating credit agreements), are a source of additional income for banks and allow flexible adjustment of the price according to the risk level.