The Federal Court of Justice rejected the obligation of lenders to pay so-called negative interest rates on variable interest rate loans in a ruling on May 9, 2023 (Ref.: XI ZR 544/21).
With deposits, bank customers receive interest from the bank, and when they take out loans, they pay interest to the bank. This is essentially how banking law provides. However, the prolonged period of low interest rates has shaken things up, and banks began charging their customers negative interest rates for keeping their deposits, and variable interest rates in loan agreements turned negative. Borrowers in such cases cannot demand interest from the bank, the Federal Court of Justice has now ruled. Conversely, this should also mean that banks cannot charge their customers negative interest rates, so-called custodian fees, according to the law firm MTR Legal, which specializes in banking law.
In the case before the Federal Court of Justice, the state of North Rhine-Westphalia concluded loans with the bank in 2007. After the loan amount was disbursed, the state issued five identical promissory notes, each for 20 million euros. The 3-month Euribor plus an interest surcharge of 0.1175 percent p.a. was agreed as the variable interest rate. An interest rate cap of 5 percent was agreed, whereas a lower interest rate limit was not set.
The 3-month Euribor slipped into negative, and from March 2016, a negative interest rate emerged, resulting in an amount of nearly 160,000 euros by the end of the term. The state of NRW demanded this amount as negative interest from the bank because no lower interest rate limit had been agreed in the loan contract.
The Federal Court of Justice rejected the claim for payment of negative interest. Even without an agreement on a lower interest rate limit, a drop of the reference interest rate below zero does not result in the lender’s obligation to pay negative interest. An interest rate cannot become negative, and a lower interest rate limit of zero percent is inherent. When it is reached, the borrower’s obligation to pay interest ceases, but a claim for negative interest does not arise from this, according to the Federal Court of Justice.
With this ruling, the Federal Court of Justice made it clear that loan law does not recognize negative interest rates. This should equally apply to so-called custodian fees.
Lawyers experienced in banking law consult at MTR Legal Rechtsanwälte.
