Million-euro Loan

Credit institutions, i.e. lenders, in Germany have extensive reporting obligations to fulfill, which are set out in detail in the Kreditwesengesetz (KWG). The KWG regulates the credit market. In addition, there is the Großkredit- und Millionenkreditverordnung (GroMiKV), which credit institutions must comply with. Part of the KWG and GroMiKV is also that a borrower’s or a borrower unit’s million-euro loan from an amount of €1.5 million must be reported to the Evidenzzentrale der Deutschen Bundesbank. This is a recording center where credit institutions, financial services and financial companies must report million-euro loans and large loans on a quarterly basis. The Bundesbank, in turn, informs the credit institutions of the total utilization or the total indebtedness of these borrowers and borrower units insofar as they are million-euro loans, including their foreign subsidiaries. The total indebtedness does not include collateral nor the borrower’s account balances. Pledged collateral could, for example, be real estate or a guarantee. In this way, lenders are promptly informed about the indebtedness level of their customers with a million-euro loan. In addition, banking supervision obtains an important overview of lending overall, which becomes increasingly important in times of financial crisis.

Borrowers and borrower units must not represent a concentration risk

If several borrowers who are legally or economically connected each apply for a loan or credit, this is referred to in banking as a borrower unit. That means that, internally within the bank, the individual borrowers are treated as a single hypothetical borrower. The reason for this is the prevention of a concentration risk. This arises when default risks accumulate. The principle of risk diversification is then no longer given; it applies not only in banking but generally across the economy. A company that works exclusively for a single client takes on a high risk, even if the orders are very profitable. If that client fails, the company’s existence is immediately threatened. Diversifying risk across as many different customers as possible minimizes the concentration risk. The same applies to credit institutions or banks, which are encouraged to spread their investment and asset risks across different debtors and different credit forms with varying maturities. Part of the risk minimization strategy is, among other things, the consolidation of individual borrowers into a borrower unit in order to assess contagion effects should a borrower get into payment difficulties. In addition, this prevents borrowers who pursue a common economic goal from avoiding a report to the Evidenzzentrale as a million-euro loan — and thus evading the control of the Bundesbank and banking supervision — by taking out individual loans each below the €1.5 million threshold.

Spouses do not automatically form a borrower unit

A married couple must not be consolidated into a borrower unit solely because of their marital status according to the legal provisions. Doing so would constitute an unjustified disadvantage compared to other groups. However, if they jointly pursue an entrepreneurial activity, they are considered a borrower unit. A similar approach is taken with companies that belong to a group. Although they represent completely independent economic entities, their loans are nevertheless consolidated into a borrower unit and reported to the Evidenzzentrale as a million-euro loan once the sum reaches €1.5 million.

What does the consolidation mean for the individual borrower?

Although the formation of a borrower unit takes place internally within the bank, it also has an immediate effect on the individual borrower. He or she is no longer regarded as an individual risk but is classified and limited in the context of the overall risk. The consequence is a tightened creditworthiness assessment that would not have taken place in the same way without the consolidation into a million-euro loan. This means that ongoing monitoring of the debtor’s creditworthiness is carried out particularly thoroughly, involving substantial work and time. For a million-euro loan, this assessment is legally required of banks and is additionally supervised by banking supervision, which audits the credit institutions itself on an annual basis. The credit institution is therefore obliged to promptly obtain current information about the legal and economic circumstances of the borrower and the borrower unit in order to assess the credit risk. The Federal Court of Justice (Bundesgerichtshof) has stipulated that the borrower must present, at certain intervals, the annual financial statements, a statement of assets and supplementary information. If this is not provided, the loan must be terminated. This is recorded in writing in the loan agreements. Even for a conventional loan, these documents do not even meet the minimum requirements for a well-founded risk assessment. For a million-euro loan, extensive additional documents are required, which are of course also demanded from the individual members of a borrower unit.

Documents typically required for a million-euro loan

Attempts to establish a uniform regulation regarding risk assessment by credit institutions were abandoned by banking supervision in 2005. Remaining are a few general framework conditions. Credit institutions are urged to implement an efficient system developed to match the individual business profile. This system should ensure that default risks, particularly for a million-euro loan, can be assessed responsibly. In addition, the intensity and frequency of assessments are to be determined according to the level of risk. This gave credit institutions considerable discretion in deciding how to organize assessment procedures. Practical implementation of credit monitoring therefore varies. In principle, the following documents are usually requested when it comes to assessing the risk of a million-euro loan. In the rather rare case that the million-euro loan is applied for by a private customer, i.e. a dependent natural person, the following are expected: detailed information on income and expenses, a comprehensive statement of assets, a list of all existing debts with the respective loan amount, term, current balance, monthly principal and interest service as well as all guarantees provided and other assumed liabilities. In addition, the income tax assessments for the last five years and all personal data are required, including information about employment and employer. If the borrower is a company or a self-employed entrepreneur, the following documents usually represent the minimum requirement in practice: the balance sheets of the last five years including profit and loss accounts or the corresponding income-expenditure statements, a detailed statement of assets and liabilities, a preliminary annual result for financial years for which no balance sheet is yet available, current business performance evaluations from the accounting department, and for a corporation the shareholder agreements including all legally relevant information. For a million-euro loan, credit institutions also expect documented plans for the next three financial years, which are then monitored monthly through plan/actual comparisons as part of controlling. A million-euro loan therefore causes a considerable expenditure of work, time and costs on all sides. In recent years, credit institutions have had to set up their own departments with specially trained staff. Borrowers, especially companies or borrower units, have been forced to establish their own reporting systems, often with the help of external consultants, in order to meet their information obligations.