Germany’s highest civil court – the Bundesgerichtshof (BGH) – recently ruled in a case from May 9, 2023, that lenders are not obligated to pay negative interest in connection with variable rate loans (case ref.: XI ZR 544/21).
It is commonplace for bank customers to receive interest from their bank on positive account balances, and for them to pay interest to their bank when taking out a loan. But the current sustained period of low interest rates has unraveled this orthodoxy, leading some banks to require that their customers pay negative interest for managing their account balances and resulting in variable interest rates for loan agreements going negative. And yet, according to the Bundesgerichtshof, borrowers are not entitled to demand interest from their bank in these instances. This would also seem to suggest that banks, for their part, are not allowed to demand that their customers pay negative interest in the form of custodial or deposit fees, explains MTR Legal Rechtsanwälte, a commercial law firm whose practice includes banking law.
The plaintiff in the case in question, the German federal state of North Rhine-Westphalia, had taken out bank loans back in 2007. After the loans were paid out, the state issued five identical bonds, each worth 20 million euros. The variable rate of interest was set at the 3-month Euribor rate plus an interest markup of 0.1175 percent p.a. While a maximum interest rate of 5 percent was agreed, no minimum rate was fixed.
From March 2016, following the 3-month Euribor’s drop into negative territory, the rate of interest trended negative, generating a sum of almost 160,000 euros by maturity. Citing the absence of an agreed interest rate floor in the loan agreement, the state of North Rhine-Westphalia demanded that the bank pay this amount as negative interest.
This notion of there being a right to demand payment of negative interest was rejected by the BGH. Even in the absence of an agreed minimum rate, a fall in the reference rate to below zero does not give rise to an obligation on the part of the lender to pay negative interest. The Court held that interest cannot be negative, and that there is an inherent interest rate floor of zero. If this figure is reached, the borrower is no longer obliged to pay interest. However, this does not give rise to a right to negative interest, according to the BGH.
Germany’s most senior court for civil affairs has thus clearly determined that German lending laws do not recognize negative interest. The same may also apply to custodial and deposit fees.
Banking law experts at MTR Legal Rechtsanwälte can provide counsel.