The terms “bank” and “credit institution” are often used synonymously, with the term bank being the more open. There are banks that are not credit institutions (for example central banks). In the following, reference is made to credit institutions – also when using the term “bank” – within the scope of the definition of Section 1 (1) of the German Banking Act (Kreditwesengesetz – KWG).
In the financial market, banking services fulfill three functions:
- First, they bring capital investors and those looking for capital together, whereby the banks act in their own name and for their own account, although in the broader sense it is an intermediary activity.
- Secondly, the credit institutions carry out a period adjustment in which they lend part of the savings deposits as long-term loans. (Maturity transformation).
- Thirdly, the banks compensate for the different risk profiles between investors and those looking for capital (risk transformation), either through risk decomposition (a larger risk is divided into several smaller ones) or through risk transfer (parts of a risk are taken out and transferred to a third party, for the latter’s risk appetite this fits.)
“Traditionally, net interest income accounts for around 70% of the operating income of German institutes; it is by far their most important source of income. At the current level of interest rates, it is already a challenge for the institutes to maintain the interest result, and the earnings potential from maturity transformation is likely to decrease further. A sudden turn in interest rate policy would not necessarily bring relief, however. Above all, it could pose problems for institutions that offer long-term financing.“[1]
“The essence of the loan lies in the fact that the lender provides a service in the present and thus becomes a creditor, while the borrower, as the debtor, undertakes to pay the liability in the future.“[2] For companies, loans received represent borrowed capital. The KWG regulates the term “credit” in Section 19 (1) and (1a), which is more comprehensive than the term “loan”. The concept of credit in the KWG is evidently derived from a risk that exists for the credit institution that the consideration will not be provided in the future, or not provided in full. For simplicity’s sake, the lending business of banks can be divided into two types of business: either the bank lends money (money lending) or it gives its name, i.e. its credit rating (credit lending). The types of credit named in the KWG are either variants of these two types of business or preliminary stages thereof (e.g. a credit commitment is the obligation entered into by the bank to provide a loan in the future), or they are derivatives. Derivatives are not loans in the classic business sense, but from the bank’s point of view there is a fulfillment risk for the customer, which it may have to take itself to in order to fulfill the transaction with the external partner. In this respect, from the bank’s point of view, there is a risk of counterparty default on the market value of the derivative positions that it has sold to its customers. Against this background, a supervisory allocation to the lending business is understandable.
The business with guarantee (guarantee business) and the letter of credit business as part of the documentary international business count as credit lending, and these are also referred to as liability credits. The credit lending is formally the promise or the obligation of the bank to pay a predetermined amount to a third party under certain conditions – essentially an agency agreement according to BGB[3] §675, if necessary depending on the specific product, extended by relevant regulations (e.g. BGB §765ff. In conjunction with HGB[4] §349 in guarantee business). Since credit lending typically has little or no effect on liquidity, there is little or no effect of the market interest rate on pricing. In colloquial terms, however, everyone thinks first of all of a loan when it comes to lending money: “From a legal point of view, every loan that is used to provide cash or book money is a loan. A loan is the provision of money or other justifiable property with the borrower’s obligation to repay items of the same type, quality and quantity at a later date.[5] Incidentally, a promissory note is a loan, not a bond.
The purpose of a loan can be divided into three groups:
| Credit type | Usage | Repayment through |
| Productive credit | For the production and distribution of goods | The respective revenues of the manufactured goods |
| Speculative credit | Purchase of valuable objects (e.g. land, securities) | Resale (with appreciation) |
| Consumer credit | Satisfying the needs of private individuals | Borrower’s Labor Income |
Table: Uses of credit (Hein, 1993, p48)
The productive loans can be divided into working capital loans and investment or plant loans. Working capital loans are all loans that are used to finance raw materials, semi-finished products, stocks or the payment terms of the customer. Investment or plant loans serve to expand and / or modernize production possibilities; this can apply to the purchase as well as the creation / erection of machines, systems and buildings.
The most common form of a working capital loan is – due to the flexibility in terms of utilization and repayment – the overdraft facility. „Characteristic for the account is the constant juxtaposition of outgoing payments for wages, salaries, material purchases and incoming payments due to the sale of the products, whereby the difference between incoming and outgoing (and thus the amount of credit utilization) fluctuates from day to day.“[6]
Up until the 1960s, consumer credit was of little concern to German banks. It was only through the general spread of wage and salary accounts that these loans came more and more into the focus of the universal banks, and were no longer trapped in a niche existence with the installment credit institutions.
Speculative credit – that is in the nature of things – the banks want to avoid or, for the most part, do not offer them. For a small, wealthy clientele, however, these loans represent attractive opportunities because investments with a speculative objective do not require any other liquidity to be released and used. The aim of speculation is to take profits based on the expected performance of an asset. The associated risk is then that the expected performance will not materialize or may even be reversed. Typical for speculative loans are extensively provided securities, which are intended to ensure repayment of the loan even in the event of incorrect speculation. However, BGB §280 paragraph 1 sentence 1 sets clear limits here: a bank acts contrary to duty if it induces a customer to speculate on credit.[7]
Borrowing capacity and creditworthiness are the prerequisites for taking out bank loans. “Borrowing capacity is the ability to legally enter into credit agreements. Individuals with full legal capacity, legal entities under private and public law and commercial partnerships (OHG[8], KG[9]) are (basically) creditworthy.“[10] The creditworthiness check is intended to assess whether the borrower can be expected to fulfill his obligations under the loan agreement in accordance with the contract. A personal creditworthiness (reliability, qualification, skills) and a material creditworthiness (economic situation) are checked. Depending on the context, the borrower often has to provide collateral in order to obtain a positive credit decision from the bank. The loan agreement can then be concluded. It ends with repayment, time lapse or termination.
A fixed-rate loan (also known as a loan with a fixed interest rate) is a „fixed loan with a fixed interest rate for the entire duration of the loan or for an agreed period of time (e.g. 5 years). During the fixed interest period, special repayments are generally not possible or only possible to a very limited extent.“[11] This lack of option for special repayments is perceived as insufficiently flexible in some companies and industries, and there are more and more complex financing structures in which, for example, several financings are to be combined within the term, or the amount of the individual repayment installments can depend on various parameters (e.g. the profit made, etc.). The so-called roll-over loans have enjoyed growing popularity in Germany since 1974; the formation of the euro zone triggered another boost and further increased its spread in Germany. “The roll-over loan is a medium to long-term loan on the euro money market with a special interest rate agreement. The interest rate is not set for the entire term, but is periodically adjusted to the market (reference) interest rate (e.g. EURIBOR, LIBOR). The credit period is subdivided into interest periods (roll-over periods) (time span usually one to twelve months); the interest rate remains constant during this period. After the interest period has expired, there is an adjustment for the next interest period. The debtor bears the risk or chance of a change in interest rates. This type of interest rate agreement makes refinancing easier for the lender, as changes in money market conditions can be passed on to the borrower as a result of the interest rate adjustment. This means that short-term refinancing is possible even with long-term loans. „[12] Since the bank refinances these loans only on a short-term basis, the borrower can make full or partial repayment at every roll-over date – without incurring early repayment damage.
[1] BaFin, 2015, p. 15
[2] Hagenmüller/Diepen, 1987, p. 372
[3] BGB = Bürgerliches Gesetzbuch = German Civil Code
[4] HGB = Handelsgesetzbuch = German Commercial Code
[5] Grill/Perczynski, 1998, p335
[6] Hein, 1993, p54
[7] cf. Palandt/Grüneberg, 2011, comment on §280, margin number 56
[8] OHG = offene Handelsgesellschaft = General Partnership
[9] KG = Kommanditgesellschaft = Limited Partnership
[10] Grill/Perczynski, 1998, p338
[11] Springer Gabler Verlag
[12] Springer Gabler Verlag
Ressources
Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) (2015): Jahresbericht der Bundesanstalt für Finanzdienstleistungsaufsicht 2014. Bonn: Projekt-PR URL: http://www.bafin.de/DE/DatenDokumente/ Dokumentlisten/ListeJahresberichte/liste_jahresberichte_node.html [Stand: 10.11.2015]
Grill, Wolfgang und Perczynski, Hans (1998): Wirtschaftslehre des Kreditwesens. 32. Auflage. Verlag Dr. Max Gehlen GmbH & Co. KG, Bad Homburg von der Höhe
Hagenmüller, Karl Friedrich und Diepen, Gerhard (1987): Der Bankbetrieb. Lehrbuch und Aufgabensammlung. 11. Auflage. Betriebswirtschaftlicher Verlag Dr. Th. Gabler GmbH, Wiesbaden
Hein, Manfred (1993): Einführung in die Bankbetriebslehre. 2. Auflage. Verlag Franz Vahlen, München
Vertriebsmanagement 