If the interest rate on a loan is based on the development of exchange rates, the bank has a duty to inform with respect to the foreign exchange risk. That was the verdict of the Bundesgerichtshof (BGH), Germany’s Federal Supreme Court, in a recent ruling (XI ZR 152/17).
The appreciation of the Swiss franc against the euro has caused problems for a number of borrowers. Notwithstanding this, the relevant bank must explain the exchange rate risk present. We at the law firm GRP Rainer Rechtsanwälte note that according to a judgment of the Bundesgerichtshof from December 19, 2017, this duty to inform also applies if the interest rate on a loan is based on the exchange rate.
The instant case concerned a loan in the amount of approximately 3 million euros that had been taken out by a municipality in North Rhine-Westphalia. The interest rate for the first 20 years was supposed to be 3.99 per cent p.a. assuming an exchange rate from euros to Swiss francs equal to or greater than 1.43. In the event of the euro falling below this threshold, the interest rate would then be 3.99 per cent plus half of the change in the exchange rate from 1.43. During the consultation, the bank pointed out that the Swiss National Bank, Switzerland’s central bank, would adopt a zero interest rate policy in the event of the Swiss franc appreciating and that their threshold for intervention was 1 euro to 1.45 Swiss francs. Additionally, there was a table showing the respective interest rate for exchange rates ranging from 1.39 to 1.65. From a rate of 1.42 to 1.39, the interest rate increased incrementally from 4.34 to 5.43.
In the end, the franc appreciated so strongly that the municipality was supposed to pay an interest rate of 18.99 per cent p.a. It therefore considered the loan agreement to be unjust and void. Moreover, it claimed that the foreign exchange risk had not been properly explained. Despite the municipality’s claim being unsuccessful before the first two courts of instance, the BGH reached a different conclusion.
Although the loan agreement was not found to be unjust, the bank had failed to fulfil its duty to inform. While the dependent relationship between the interest rate and the exchange rate was said to be apparent from examining the agreement, the bank had not explained with sufficient clarity the risks associated with an obligation to make interest payments based on an exchange rate, but instead downplayed these. The court of appeal must now rule on the case anew.
When it comes to problems concerning loan agreements, lawyers who are experienced in the field of banking law can serve as competent advisors.