In brief:

• The Increased Cost clause is a 'risk allocation' provision designed to protect lenders in the event regulatory changes result in the rise of the cost of a loan or the reduction in receivables under a loan after a borrower has signed his loan agreement.

• The lender which invokes the clause has to decide how much of a cost (which arises from changes to the capital adequacy requirement) is attributable to a particular loan.

• The clause can be subjective because it tends to look at the financial state of the lending bank as a whole and not just the loan in question which the lender is funding.

The main costs that a lender incurs in providing its loan are its funding costs – for example, EIBOR and the cost of complying with capital adequacy and liquidity requirements applicable to that loan.