Sales of credits: the position taken by associations of banks

by Finanzplatz München Initiative

The German government is considering enacting regulations on the sales of credits by banks. These possible regulations would be partially counterproductive, as they would yield no net benefits to either the issuers or to the recipients of credits. This is the position (in German) taken by the associations of banks participating in the Munich Financial Center Initiative (mfci).

The draft currently being considered would limit risks by obliging banks to offer credits whose contractual conditions preclude their sale to third parties. The position jointly taken by Bavaria’s Association of Banks, the Association of Bavaria’s Cooperative Banks and Credit Unions, and the Association of Bavaria’s Savings Banks points out that this obligation would be superfluous, for the simple reason that the country’s banks already offer such non-transferable credits. As this statement details, the draft foresees a beefing up of the protection against callings-in enjoyed by mortgagees. This extension would prohibit those banks issuing such credits, which customarily require a one percent amount of annual repayment, from calling in delinquent loans for periods of some twelve months. According to the associations, this prohibition would cause rises in the amounts of non-performing loans. Viewed on an individual basis, these rises in indebtedness “would hurt rather than help the debtors’ financial situations” state the associations.

The draft also grants mortgagees the right to complete repayment of their loans prior to term without being obliged to pay any recompense for such acceleration of repayment. According to the associations, this right would prevent banks from merging or restructuring. The promulgation of such a provision would have hindered such rescue operations as the merging of Sachsen LB, whose financial difficulties stemmed from the subprime crises, into Landesbank Baden-Württemberg. The associations maintain that a position paper (in German) formulated at the end of October 2007 under the leadership of Emilia Müller, Bavaria’s economics minister, and containing input from mfci offers a practicable way of re-regulating sales of credit-based receivables. One of the paper’s key proposals would require the pursuing of credit-based receivables according to a step-by-step procedure equitably protecting the interests of both the recipients and issuers of the credits.

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