The zero interest rate for Covid-19 loans should only be fixed for one year

The National Council wants to write a guarantee of zero interest rates until 2028 for Covid 19 loans for SMEs. That upset the banks. Your criticism should be heard in the Council of States, as the latest decision of the responsible commission shows.

According to the Council of States commission, the interest rates on Covid-19 loans for SMEs should not be fixed for the entire term.

According to the Council of States commission, the interest rates on Covid-19 loans for SMEs should not be fixed for the entire term.

Karin Hofer / NZZ

The National Council violates good faith because it wants to change more than 130,000 contracts retrospectively: That was the message from Finance Minister Ueli Maurer in the National Council at the end of October when he advised the law on Covid 19 loans. Despite this criticism, the large parliamentary chamber had decided to make significant changes to the contractual provisions – above all to give the suffering small and medium-sized enterprises (SMEs) more freedom. For example, the National Council advocated an extension of the regular credit period from five to eight years; In cases of hardship, an extension of another two years would be possible.

The question of interest is particularly controversial. With a wafer-thin majority, the National Council decided to fix a zero interest rate for smaller loans of up to CHF 500,000 for the entire duration of the loan. The Federal Council wants to guarantee zero interest rates until the end of March 2021 and then set it regularly depending on market developments.

Unjust fixed interest rate?

As things stand, the Council of States is more likely to follow the Federal Council on the interest rate issue. According to the announcement on Friday, the Economic Commission of the Council of States unanimously decided to follow the Federal Council and thus only fix the zero interest rate until March 2021. In return, a narrow majority of the commission agrees with the extension of the regular credit period from five to eight years decided by the National Council. Setting a zero interest rate for eight years would be inappropriate and also unfair to those companies that have not received a Covid 19 loan, says the Obwalden CVP Council of States Erich Ettlin.

As with other transactions, the differences within the CVP between the national councils and the councils of states could be the reason for different resolutions of the two chambers of parliament. In the National Council at the end of October, the central parliamentary group, which was shaped by the CVP, almost unanimously voted in favor of setting zero interest for the entire duration of the loan. Not even a minority motion for such an approach has come from the Council of States commission. This suggests that the Council of States will vote in December for the waiver of the long fixing of the zero interest rate and that the small parliamentary chamber should then have the better cards in the march with the National Council because of the clearer majority. But the Corona crisis taught that political dynamics can change quickly.

In the event of a rise in interest rates

Potentially significant amounts are involved. Between March and the end of July, over 135,000 companies had received Covid-19 loans for a total of over CHF 16 billion to bridge liquidity bottlenecks. Around 14 billion of these related to loans of up to CHF 500,000, which the federal government guaranteed 100% and which are currently interest-free. The banks were able to refinance the granted Covid-19 loans from the National Bank – at the official key interest rate of -0.75%. With zero interest on Covid 19 loans, this basically means a gross margin for the banks of 0.75% per year.

If the central bank’s key interest rate rises significantly in the coming years, the Federal Council would, according to its model, increase the interest rate for the Covid-19 loans roughly in parallel, so that the banks’ gross margin does not change much. According to the industry, the said 0.75% should cover administrative expenses. After all, it would be possible that banks with large volumes in particular could make a small profit in the end; the two big banks announced early on that they would donate any profit from this business to a good cause.

If, however, with a fixed zero interest rate for the Covid-19 loans, the National Bank’s key rate were to rise by two percentage points in the next two years, under certain assumptions, this could cause total losses for the banks of CHF 500 million to CHF 1 billion . From today’s perspective, such a scenario is very unlikely. Measured in terms of long-term interest rates, the market is currently not expected to see a sharp rise in interest rates for a long time. But there are always surprises on the financial markets; therefore, corresponding risks are relevant, and that is why there was a proposal in the first place to set zero interest rates throughout the entire term of the loan.

Possible loss limitation

At least the banks could hedge against high losses from an interest rate hike. The price for this is provided by the market for “interest rate swaps”. With such transactions, the parties exchange fixed for variable interest payments. The eight-year fixed interest rate in this market is currently –0.4%. With a fixed zero interest rate for the Covid-19 loans, the gross margin of the banks would only be 0.4% instead of 0.75%. Measured against the total volume of Covid 19 loans, the difference of 0.35% amounts to around CHF 50 million per year; Assuming linear amortization over the term of the loan, this would result in losses totaling around CHF 200 million for the banks.

Thanks to the federal guarantee, the Covid 19 loans can have a high value even without a fixed zero interest rate. Without a federal guarantee, according to a market participant, the banks would probably charge the companies concerned a risk premium of 5 to 8% per year – provided the applicant is considered creditworthy at all. Extrapolated to the total volume of Covid-19 loans and under certain assumptions about loan repayments, the federal guarantee corresponds to a monetary value of around CHF 3 to 5 billion.

New edition with conditions

Various experts have recommended a revival of the Covid-19 loan program in view of the second wave of the virus. The Federal Council is not in favor for the time being, as the credit supply is currently working on the regular market. However, on Wednesday the government proposed a change in the law that would give the Federal Council the authority to quickly revive it by means of a regulation if the market situation worsened. In the event of a new edition, the federal guarantee would have to cover at least 85% of the loan amount according to the proposal. The Economic Commission of the Council of States has now unanimously supported this proposal without change.

According to the industry, the banks would also participate in a second edition – especially if the program is structured the same again. However, the banks would not be happy if the lenders had to bear a certain part of the risk themselves in any case, as recommended by experts. With such a risk sharing, the banks would have to carry out a credit check in each individual case; this is intended to ensure that only business models that are classified as sustainable receive a subsidized loan.

Bank officials raise several objections. On the one hand, there is the time factor: if there are only a few requests, processing within one to two weeks would be possible, but with a rush it would take much longer. In addition, it is to be expected that banks at risk would not give any Covid 19 credit at all, given the great uncertainties, particularly badly affected small businesses. Between the lines you can at least hear that with a small risk participation of the banks of up to 15%, the industry might end up being talked about after all.

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