Funding Loss: In Search of the Lost Logic

This post is also available in:

Extracts from an independent analysis of funding loss and the reinvestment or break indemnity claimed by the bank on the early repayment of a credit, written by one of this site’s authors together with Jelle Vandenbroucke. The analysis was published in late 2017 in the volume “Actualités en droit bancaire”.

An economic climate of falling interest rates encourages borrowers to refinance their bank debt at a more favourable rate. In such a context, credit institutions have faced a resurgence of cases involving the voluntary repayment of loans and credits before the term stipulated in the contracts with their professional clients.

Against this background, the scope of Article 1907bis of the Civil Code has been examined repeatedly and from every conceivable angle. Borrowers see a particular interest in that article, since it caps at a maximum of six months’ interest the indemnity payable to the bank on the early repayment of the commitments entered into with it.

The mass of scholarship and case law arising from this issue nonetheless risks disappointing those who hope to find a clear answer to whether a bank may legitimately claim from its professional client a reinvestment indemnity exceeding that statutory cap. How is it that the interest-bearing loan, a named contract governed by law for centuries, still stirs such passion in banking-law scholarship and case law?

We attempt here to set aside partisan positions and offer a modest historical, economic and practical analysis, in a rational and open manner. We successively recall the current state of the legal debate on early repayment, illustrate it with the case law our litigation practice allows us to know, revisit the historical origin of the hostility towards interest-bearing loans, and return to the present by explaining how a commercial bank operates and addressing the economic dimension of the question.

See also a summary on the recharacterisation question, and the Court of Cassation’s judgment of April 2020.

This article is a translation. Only the French version is authoritative. It is provided for information purposes and does not constitute legal advice.