The state bank wants to grant loans with negative interest for the first time. Private individuals, medium-sized businesses and municipalities should benefit. It could take some time, however, before the negative interest reaches the end customer.

Construction cranes stand on a building plot next to newly built residential buildings in Cologne.

Dhe low and negative interest rates are a nuisance for many savers. On the other hand, anyone who finances a property or is otherwise in debt can look forward to hardly having to pay any interest for it. The state development bank KfW is now going one step further: From the beginning of 2020 onwards, it will initially be issuing promotional loans to banks at negative interest rates – that is, those who take out such a loan will ideally receive monthly money instead of paying it. This should apply to the entire spectrum of state funding, both for private home builders and for medium-sized companies and municipalities, as KfW CEO Günther Bräunig said at a conference in Frankfurt.

The background to this is that KfW, which is supported by the federal and state governments, has been able to refinance itself on the capital markets at negative interest rates for years. Due to its proximity to the federal government, it is considered one of the safest addresses in the world for investors. Therefore, they accept that they have to pay extra money when they subscribe to a KfW bond.

In the summer of this year, according to Bräunig, the development bank was able to refinance itself at negative interest rates of up to 0.4 percent at times. So far, according to Bräunig, it was technically not possible to pass this advantage on to the promotional customers, since the computer programs simply did not know any minus for loan interest. The money stayed with KfW as a profit. Since there is no end in sight to the current interest rate levels in the foreseeable future, the development bank is now reacting.

“The banks will hurry up”

However, it may still be some time before the negative interest rates actually reach the end customers. The KfW must not simply approach the end customers directly, but must always issue the promotional loans through their house bank. This has two consequences: On the one hand, the house bank can add a processing fee on top, in the case of house loans up to 0.75 percent.

In case of doubt, the end customer can only benefit from negative interest rates if KfW can refinance at minus 0.76 percent or less. However, since some house banks also add lower fees of their own, in many cases this can happen earlier. Municipalities should be the first to benefit, as they can also call up money directly from KfW. Recently, however, the interest rate level on the markets had risen slightly again.

For private individuals and entrepreneurs, it is now also important how quickly the banks and savings banks get their computers ready for the new world of interest rates. “But since it is about an advantage for the customer, I am confident that the banks will hurry up here,” said Bräunig in a press conference on the subject. He assumes that by autumn 2020 all banks and savings banks should be able to pass on the negative interest rate.

Banks are skeptical

In a transitional phase, KfW wants to be content with a workaround: The loans are to be given to the house banks at zero percent and the end customers then receive a subsidy. Even so, in the end, the customer has to pay back less money than he received. By the way, KfW is already doing a similar thing in promoting energy-efficient construction. Here the effective interest rate for the customer is currently 0.75 percent – including the house bank fee. Depending on how environmentally friendly the property is, the home builder receives a so-called repayment allowance of up to 15 percent.

Why doesn’t KfW just continue to work with such grants? From Bräunig’s point of view, subsidies can be controlled more finely if the interest rates can be adjusted to the current market level – in other words, in the future, to the negative. In this way, the state wants to maintain the possibility of promoting investments that it believes are desirable, even in the low interest rate environment. Since entrepreneurs and house builders are currently getting extremely favorable financing conditions in the conventional way, the demand for KfW loans has recently fallen significantly. In the first half of the year alone, the funds committed to private individuals in the “Energiewende” segment fell from 9.2 billion to 5.4 billion euros.

The banks reacted skeptically on Wednesday. “Compensating for falling funding volumes with ever lower interest rates alone does not work,” said Christian Ossig, Managing Director of the Bankers Association at the request of the FAZ. It is like the ECB’s key interest rate: “The simple equation of interest rate cuts mean more investment and demand no longer works in a negative interest rate environment . Above all, there is a lack of solid demand for loans, not attractive financing offers. “