Unprecedented times, lenders owing money to borrowers. Aivars Lode
Subzero rates have put some lenders in an inconceivable position
The problem is just one of many challenges caused by interest rates falling below zero, known as a negative interest rate. All over Europe, banks are being compelled to rebuild computer programs, update legal documents and redo spreadsheets to account for negative rates.
Interest rates have been falling sharply, in some cases into negative territory, since the European Central Bank last year introduced measures meant to spur the economy in the eurozone, including cutting its own deposit rate. The ECB in March also launched a bond-buying program, driving down yields on eurozone debt in hopes of fostering lending.
In countries such as Spain, Portugal and Italy, the base interest rate used for many loans, especially mortgages, is the euro interbank offered rate, or Euribor. The rate is based on how much it costs European banks to borrow from each other.
Banks set interest rates on many loans as a small percentage above or below a benchmark such as Euribor. As rates have declined, sometimes to below zero, some banks have faced the paradox of paying interest to those who have borrowed money from them.
Lenders, hoping to avoid the expense of having to pay borrowers, are turning to central banks for guidance. But what they are hearing is less than comforting.
Portugal’s central bank recently ruled that banks would have to pay interest on existing loans if Euribor plus any additional spread falls below zero. The central bank, however, said lenders are free to take “precautionary measures” in future contracts. More than 90% of the 2.3 million mortgages outstanding in Portugal have variable rates linked to Euribor.
In Spain, a spokesman for the central bank said it is studying the issue.
The vast majority of Spanish home mortgages have rates that rise and fall tied to 12-month Euribor, said Irene Peña, an economist with Spain’s mortgage association. That rate stands at 0.187%.
Bankers in Italy said they are awaiting guidance from their local banking association, because loan contracts don’t include any clause on what happens if benchmark rates go below zero. About half of the mortgages outstanding in Italy have variable rates, most of them linked to Euribor, according to mortgage broker Mutuionline. Some other countries, such as Germany, often use fixed rates.
In Spain, Bankinter has been forced to deduct some clients’ mortgage principal payments because an interest-rate benchmark tied to Switzerland’s currency has dipped into negative territory.
In January, the Swiss National Bank ended a 3½-year policy of capping the strength of the franc against the euro, sending the Swiss currency soaring against the common currency and U.S. dollar, and cut bank deposit rates into negative territory. The move to end the cap on the franc was designed to relieve pressure on Swiss exporters, many of which are reliant on the eurozone for sales.
During Spain’s home-building frenzy in the middle of the last decade, Bankinter issued mortgages tied to the one-month Swiss franc iteration of the London interbank offered rate, or Libor. At the time, clients were attracted to the offer because Swiss franc Libor was lower than Euribor, the traditional reference for Spanish mortgages.
“I’m going to frame my bank statement, which shows that Bankinter is paying me interest on my mortgage,” said a customer who lives in Madrid. “That’s financial history.”
The client in 2006 took out a roughly €500,000 ($530,000) home mortgage loan based on Swiss franc Libor, plus 0.5 percentage point. Since then, Swiss franc Libor has fallen far enough into negative territory to make his mortgage rate negative.
It is hardly a windfall for this customer, however, because, while Swiss franc Libor has fallen, the Swiss franc itself has risen in value against the euro. That means the value in euros of the total mortgage debt he owes Bankinter has also increased, because that debt is denominated in Swiss francs.
Bankinter has few such mortgages tied to a negative Libor rate, a spokesman said, declining to provide a figure.
An executive at another Spanish bank said the lender in recent months has started to put in place an interest-rate floor on thousands of short-term business loans that are tied to short-term variations of Euribor. Two-month Euribor, is at minus 0.004%. For new loans, the bank is increasing the cushion it charges customers above Euribor.
Hundreds of thousands of additional loans would be affected if medium-term Euribor rates enter negative territory, the executive said. The six-month rate is currently at 0.078%.
Meanwhile, some borrowers in Spain haven’t found relief.
A Madrid judge in November ruled against a client of Banco Santander who claimed that Spain’s largest bank inappropriately established a floor on his mortgage in 2013 and therefore owed him money. The plaintiff had taken out a mortgage in 2005 that offered a fixed rate of 2% in the first year and Euribor minus 1.1 percentage points thereafter. The plaintiff said he was now owed money from the bank.
To buttress his argument that a bank shouldn’t have to pay a borrower for a loan, the judge quoted from a June 2014 statement from the Bank of Spain that “a payment in favor of the client in these situations would never apply, but rather the application of an interest rate of zero by the entity.” The Bank of Spain spokesman said the statement cited in the case was issued by the central bank’s customer-complaints service, which typically responds to particular cases. The Bank of Spain hasn’t issued a systemwide decision on how banks should treat negative interest rates, he said.
In Portugal, interest rates on most mortgages are linked to a monthly average of three- and six-month Euribor. Both have been steadily sinking and are hovering just above zero.
João Coelho da Silva, a 53-year-old real-estate agent in Lisbon, has seen his mortgage payments fall from about €450 a month when his loan began in 2008 to €235 now, thanks to a falling three-month Euribor. “With the economy in such a bad state, these monthly savings are more than welcomed,” Mr. da Silva said.