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Partners may not like it, but new banking rules will affect their borrowings
The Basel III rules on capital requirements for banks, due to come into force in January, will have a wide-ranging effect on the finance industry, but law firm partners could bear the brunt of the changes too.
The nature of professional practice loans to partners, used to their fund capital input into firms, means that banks are lending cash to clients for a long period. In most cases currently, partners only pay back interest while they are still at the firm, handing back the principal when they leave.
But the new standard for banks means this may change. Banks that lend to partners are taking a close look at how they do so, leading to a probable end to what they term as ‘evergreen’ lending. This refers to loans that do not require repayment of the principal in a set period of time.
The likely outcome of this will be loans whereby partners pay interest in the first year and, on top of that, 5-10 per cent of the principal in early following years. The percentage will then increase year-on-year.
Precisely how all this will pan out is unclear.
Dan DiPietro, chairman of Citi Private Bank’s law firm group, says: “I don’t mean to suggest that partners will have a harder time finding banks to lend them money. [Law firm managers’] biggest challenge will be to manage partners’ expectations.
“Partners at law firms are change-averse. I think there will be some grumbling, but there will be an understanding and a recognition.”