Transfer of negative interest rates to borrowers

Transfer of negative interest rates to borrowers

As is known, the interest rate for financing has declined significantly in recent years. The relevant interest rate indicators for variable-rate loans have, for years, fallen below the limit of 0 and are still negative (3M-EURIBOR since 2015, 3M-CHF-LIBOR since 2014). This favorable situation for borrowers is saddened by the fact that lenders often do not pass on the advantages of the lower or negative interest rates to the customers. As a result, a court review of banks’ practices on interest rate adjustment has been carried out by the Supreme Court (OGH) in the recent past.

From a legal point of view, “non-consumers” such as municipalities or private sector companies can also refuse the non-transfer of negative interest. The OGH has recently emphasized that contracts which provide for a linkage of interest rate adjustments to EURIBOR or LIBOR is primarily a question of the contractual interpretation. From the point of view of the OGH, the wording of the current credit agreements clearly means that a negative interest rate indicator (EURIBOR or LIBOR) is to be passed on to the customer. According to the OGH, the bank is thus neither entitled to interpret the interest rate adjustment clauses unilaterally in the sense that an interest rate ceiling of “0” is assumed, nor is it entitled to unilaterally effect a subsequent amendment of the contract to an “interest limit” of “0” in the contract collect. According to OGH, the customer is not to be credited with interest from the bank because that would be contrary to the nature of the credit agreement, but the “premium” is very probably to reduce the negative interest rates so that the customer does not pay interest (and no premium ), insofar as the negative interest rates are as high as the mark-up. Especially in the case of small premiums, this fact leads to a customer interest rate of currently “0”.

Many banks have moved to provide “minimum interest rates” in new credit agreements. According to OGH, this procedure is also inadmissible because it violates the principle of uniformity and twofoldness of interest rate adjustment clauses. Credit agreements that have a “floating” clause down should therefore also be subject to an interest rate agreement (“interest cap clause”) in order to be valid.

These decisions have an enormous impact on the cost of borrowing, especially of municipalities and private sector companies. The financial value of unlawful interest rates can be precisely determined by financial mathematical calculations. This demonstrates the advantages derive from the practice.

If the municipality fails to take measures to reclaim excessively paid interest or clarify the treaty, the possible limitation of the claims plays the part of the banks. In many cases the banks even argue that the customer had “forfeited” the claim because no “contradiction” had been raised on the customer’s side (unauthorized) interest rates.

By way of illustration, we may use a sample calculation to illustrate the possible effects of the non-transfer of negative interest rates to your municipality or company. In our example, we issued a EUR 1 million outstanding debt liability as of January 1, 2015, which is repaid on a quarterly basis and the interest is linked to the 3-month EURIBOR. The savings for the municipality depends on the residual term (“RT”) and is (1 – historical value) composed of the amount that has been paid too much and (2 – future value) a future value over the total remaining time, which can no longer be charged in the case of a legal procedure.

The following table shows you an overview of your total savings depending on the respective remaining term with a credit volume of EUR 1 million.

RT (1) historical value (2) future value Savings
in EUR in EUR in EUR
2022                    3.942,07                  4.289,57               8.231,64
2027                    4.443,68                  8.837,40             13.281,08
2032                    4.658,68                13.188,31             17.846,99
2037                    4.777,09                17.805,41             22.582,50

 

If you now have a financing volume of EUR 5 million with a residual term up to 2037 in the municipality, the above table would give you a theoretical total savings of EUR 112,912.50 (based on the current market situation and forecasts).

If you have financings that are still outstanding in CHF, the total saving is even significantly higher than the above figures. Together with the currently weak CHF rate, this can lead to an attractive exit scenario from the foreign currency.

As a municipality, you are responsible for calculating the amount of recovery. On their own, the banks will not make the refunds and will not adjust the contracts. For the correct determination of the reimbursement amounts and also for the calculation of the value of the Bank’s unlawful conduct for the future according to current market and forecasting requirements, we need professional system and data equipment.

Please do not hesitate to contact us at support@frc-consult.com for the quick and efficient processing of the reimbursements of overpaid interest. We look forward to hearing from you.

About The Author

Heinz Hofstaetter
Over 20 years of international experience in senior management positions in the areas of consulting, banking, finance, asset management, valuation and Real Assets.