Municipal credit

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A municipal loan (or municipal loan ) is a loan to a regional authority , i.e. to the federal government , the federal states , districts or urban districts , municipalities , associations of municipalities and private businesses . In a broader sense, this also includes loans to institutions and corporations under public law . The legal definition contained in the Pfandbrief Act (old version) also included the loans to third parties guaranteed by these regional authorities under the term municipal loan.

Classification under local law

Municipal loans are regulated as a subsidiary exception (e.g. Section 77 (3) GemO NRW). It is assumed that households are balanced. Budgets are always formally balanced; however, this is often only achieved through municipal loans. Loans are used to finance investments or to reschedule debts (Section 86 (1) GemO NRW; also the following quotations) and are to be shown in the asset and loan interest in the administrative budget . Borrowing also includes municipal special assets with special accounts (proprietary businesses and hospitals / nursing homes that are managed as special assets in accordance with Section 97 GemO). Borrowing requires a special credit authorization for municipalities in the budget charter (Section 78 Paragraph 1 c GemO), for federal and state governments in the budget law . This credit authorization, which is limited in amount, does not expire at the end of the budget year, but applies at least until the end of the following year, if necessary until the budget charter for the year after next is issued (Section 85 (2) GemO). The supervisory authority must be notified in writing of the credit commitments taken at least 1 month before the legally binding commitment is entered into (Section 86 (1) and (4) GemO), in some federal states there is even an authorization requirement (e.g., Section 85 (2) GemO Brandenburg). Notification obligations are waived only in the context of ongoing administration (Section 86 (4) GemO). The overriding principle of the communal credit industry must be that the sum of all interest and repayment obligations in the present and in the future does not exceed the capacity of the commune. Borrowing must take place within the framework of an orderly budget.

Budgetary credit term

The concept of credit under budgetary law is more narrowly defined than the term loan in Section 488 (1) BGB and is regulated in Section 41 No. 19 Municipal Budget Ordinance (GemHV). According to this, it is the capital raised under the obligation of repayment by third parties or by special funds with a special account, with the exception of cash advances . Loans may a. can only be included if the allocation to the asset budget (Section 21 (1) sentence 2 GemHV) required to cover the regular repayment of loans cannot be generated in the administrative budget. Before making a decision to take out a loan, several loan offers should be regularly obtained and compared with one another with regard to the budget situation of the municipality (Section 25 a GemHV). The term rescheduling defined in Section 41 No. 27 GemHV as the replacement of a loan by another loan includes not only changing the lender and the type of loan (e.g. repayment to annuity loan) but also prolongation after the fixed interest rate has expired.

Loan collateral

It corresponds to the nature of the municipal loan that it is granted without the provision of collateral. Municipal loans are therefore unsecured loans . This is based on the consideration that the municipality is liable with all of its assets and all of its income ( tax power ) and that insolvency proceedings are excluded (Section 128 (2) GemO). Under insolvency law, insolvency proceedings according to Section 12 (1) of the Insolvency Code are expressly declared inadmissible ( insolvency inability ). Therefore it is ordered in § 86 Abs. 5 GemO that municipalities are not allowed to provide collateral for loans taken out. The municipalities are also not allowed to provide collateral for the benefit of third parties without a regulatory notification or approval obligation (Section 87 (1) GemO). If collateral is provided in violation of the prohibition, these contracts are null and void (Section 130 (1) GemO). However, when negotiating the provision of collateral, the municipalities must refer to the effectiveness requirement of the regulatory approval; the municipalities are obliged to do this due to the pre-contractual relationship of trust. Warranties in the context of the fulfillment of municipal tasks are excluded from the prohibition on the provision of collateral, whereby there is a prior notification obligation to the supervisory authority (Section 87 (2) GemO). The most common form of credit security are sureties / guarantees / other joint liability for loans to municipal companies (institutions / corporations under public law, private legal forms in public majority ownership). For these guarantees, additional instrument-specific requirements are stipulated so that regulatory recognition of the credit as "expressly publicly guaranteed" is possible.

Municipal loans from the point of view of credit institutions

About 96% of municipal granted in Germany by banks, so that the financing through the capital market or as citizens credit is meaningless. This is why the classification of municipal loans in terms of banking and banking supervisory law is of crucial importance.

Municipal loans, including cash loans, are loans within the meaning of Section 19 (1) No. 4 KWG ( claims on customers). In Germany, municipal loans do not have to be backed by equity capital (“KSA risk weight of 0 percent”). Municipal loans are subject to permanent "partial use", ie no time limit for this "zero approach". In addition, credit institutions are exempt from certain regulatory reporting requirements ( large loans according to Section 13 KWG and corporate credit according to Section 15 KWG, disclosure requirements) for municipal loans ( Sections 20 and 21 KWG). This special treatment has the consequence that the lending rates for municipal loans are based on the lowest margins, so that municipalities can benefit from the absolutely lowest lending rates.

This legal relief for banks in the Kommunalkredit is based in particular on the insolvency of the federal government, states and municipalities, where insolvency proceedings are not permitted ( Section 12 (1) No. 2 InsO). The BVerfG has also confirmed in consistent case law that the “alliance principle” consists of “standing up for one another”. In connection with the federal principle and financial equalization, the BVerfG speaks of providing assistance, joint responsibility based on solidarity, and standing up for one another. It can therefore be assumed that the financial equalization ensures that there is no risk of insolvency in the municipal sector in the first place. According to Hannes Rehm, this regulatory practice is based on the understanding that the state - and with it the municipalities - have unrestricted creditworthiness and practically cannot fail as an address. The “standing up for one another” does not go so far that a higher hierarchical level assumes a guarantee-like liability for individual communal debts; However, there is an interfederal, constitutively secured normative compensation system that ensures the solvency of all regional authorities.

For the banking supervisory authority, this preference will only exist as long as "the creditworthiness of each individual municipality is viewed as unquestionable due to a liability obligation that is unreservedly accepted by the respective federal state - also with a view to the federal states' obligation to a municipal financial equalization (...)." If this can no longer be assumed, the individual municipalities should be advised individually on the basis of their budgets / annual accounts as part of the municipal annual accounts analysis. The functionality and solvency of the regional authorities is ultimately ensured by the annual horizontal and vertical financial equalization via the federal government. Thus communities and countries can banktechnisch an economic borrower unit form with the federal government so that public-sector loans, the same triple-A - rating as the Federal Republic of Germany have. This is why the counterparty risk for municipal loans in Germany is low.

Municipal credit market

Public-law credit institutions have by far the highest market share in municipal loans . Pfandbrief banks and major banks are also active in this market segment.

The market for municipal loans in Germany has been in upheaval since 2010. In 2011, credit institutions had a market share of 97% as providers of municipal loans. They achieved a market volume of EUR 149 billion in municipal loans, of which the most heavily represented are Landesbanken (49 billion), banks with special tasks such as KfW (almost 40 billion), savings banks (over 30 billion), mortgage banks (almost 25 billion). ) and big banks (15 billion). The municipal loan market is currently changing its market structures. While credit institutions are withdrawing from municipal loans due to the leverage ratio , increasing local creditworthiness problems and weak margins, insurance companies and foreign banks are advancing as loan providers . The reduction in the market volume will also increase the proportion of other, previously neglected financing instruments ( municipal bonds , municipal bonds or promissory note loans ) if there is demand (for extensions only ). These require certain minimum sizes (150 million euros for municipal bonds, 10 million euros for municipal bonds and promissory note loans) so that smaller municipalities can only become marketable by bundling demand. This can be done through joint municipal bonds from several cities (“NRW city bonds” since February 2014) or through a joint issuing agency (the “Municipal Finance Agency” planned since 2011).

Municipal rating

In April 2006, the German Association of Cities recommended that its members refrain from rating by rating agencies . Nevertheless, there was an external rating for the city of Düsseldorf and the district of Miesbach by Moody’s and Standard & Poor’s . As recently as March 2012, the German Savings Banks and Giro Association (DSGV) did not consider a municipal rating to be necessary because all government levels would ultimately stand for one another in clearly defined procedures.

Regardless of this, there are efforts in Germany by individual credit institutions and banking associations to evaluate the federal states and municipalities individually on the basis of their budgets or annual financial statements . In 2006, for example, a municipal rating was developed as part of an association project of the Association of German Pfandbrief Banks in cooperation with S&P Risk Solutions and with the participation of DG HYP . In 2008, the rating agency Fitch Ratings acquired the financial data of 12,304 German municipalities (including counties and municipalities) from the Federal Statistical Office and created an individual rating consisting of six rating levels for 11,426 municipalities . These ratings are intended to open the way for municipalities to bring municipal bonds onto the bond market themselves . Fitch's municipal rating lacked important financial data such as cross-border leasing and interest rate derivatives . Fitch considers these financial instruments to be "disadvantageous" for municipalities and assumes that they would have "led to not inconsiderable contingent liabilities and an additional burden for the already desolate households". In addition, due to the shadow households and shadow debt, important debt factors are missing , because borrowing from municipal subsidiaries such as municipal utilities or waste disposal companies is not included in the core budget.

Internationally, individual ratings down to the municipal level are already common in many countries, particularly in Switzerland , Austria , Spain , Portugal and the United States . In the US, around 95% of municipal bonds are rated.

Banking regulatory aspects

Municipal loans are subject to special treatment by banking supervision . According to Art. 114 Para. 4 and Art. 115 Capital Adequacy Ordinance (CRR), they are given a risk weight of 0%, so they are not to be backed by the own funds of the issuing banks. The lack of capital adequacy enables a lower lending rate or a lower credit margin than with other unsecured loans . According to Section 1 (1) of the PfandBG , the Pfandbrief business consists, among other things, of the "issue of covered bonds on the basis of acquired claims against government agencies under the name of municipal bonds , municipal bonds or public Pfandbriefe". According to this, public Pfandbriefe represent the cover for granted municipal loans at Pfandbrief banks.

Municipal loans have a disadvantageous effect on the leverage ratio , since large-volume, low-risk transactions - such as municipal loans - lead to a less favorable leverage ratio. The inclusion of municipal loans in the leverage ratio leads to a more restrictive and more selective municipal loan policy in the banking industry, which contributes to a shrinking market for municipal loans. With regard to the leverage ratio, credit institutions will initially remove the loans with the lowest margins from their offer, which affects the municipal loan first. This and the individual rating can lead to worse credit terms in individual cases .

The Regulation (EU) no. 648/2012 (Market Infrastructure Regulation) now requires in February 2013 that local companies are considered "non-financial counterparty" because they develop economic activities on markets and therefore the obligations pursuant to Art. 4 and Art. 11 and Must fulfill the reporting obligation according to Art. 9 Market Infrastructure Ordinance. This in turn has the consequence that according to Art. 286 Para. 2a Capital Adequacy Ordinance , credit institutions have to determine the creditworthiness of a counterparty as part of a creditworthiness check ; this also implies the creation of a rating.

According to the clarification of the BaFin of June 25, 2010, municipalities, rural districts and urban districts are considered private customers within the meaning of section 67 (3) WpHG because they are not “regional governments” within the meaning of section 67 (2) sentence 2 no. 3 WpHG are.

Municipal loans from a municipal perspective

A specific credit authorization must be available for borrowing . The borrowing must be necessary for the municipality to perform its tasks and must be in line with the financial planning. In most GemOs, borrowing is limited to investments and rescheduling or only for the asset budget. Loans are included in the overall coverage so that they are not allocated to specific investments. Therefore it can only be assessed as a whole whether the duration of the debt coincides with the consumption of assets through depreciation of the investment ( overall coverage principle ; § 15 No. 2 GemHV, No. 18.5 VV GemHV).

Municipal over-indebtedness

The municipal debt has developed dramatically in Germany, especially in the case of cash advances. However, there is largely a lack of local regulations that limit or cap the local debt. There is a statutory debt brake only at the state and federal level. Most municipal ordinances make municipal borrowing dependent on the permanent financial capacity of the municipalities (e.g. § 86 GemO NRW). This is an indefinite legal term that needs to be filled in . Strictly speaking, long-term financial performance is considered to be at risk if the municipality is unable to achieve budgetary balance in the long term. "The permanent efficiency of the municipality is secured if the expenses budgeted in the budget are covered by income in the financial planning period." At least the aim is to maintain municipal equity. An operational credit debt brake would have to prohibit borrowing if the interest expenses resulting from the loans mean that the ordinary result cannot be offset. The administrative regulations become more specific in Brandenburg, for example: If the debt level of a municipality exceeds the average income of the administrative budget for the last 3 years (without allocation from the property budget) and / or the debt service accounts for more than 6% of the income of the administrative budget (again without allocation from the property budget) is no longer assumed to be permanent. Another comparison is the per capita debt. Taking into account the total debt of cities, municipalities and municipal associations, the average national debt per capita in 2008 was EUR 26,834 per inhabitant. If an individual figure is now determined for each municipality, their indebtedness can be compared with the municipal average at the federal level.

Due to the lack of or incipient double coverage, there are still incomplete surveys, in particular on "implicit" debt, for example through provisions (especially pension provisions ). In cameralistics, there are also no debts outsourced from a municipal budget, for example in municipal institutions under public law or municipal companies organized under private law. This aggregate “Group municipality” only arises through the application of the accounting regulations of the Commercial Code (HGB). The first double-ended annual financial statement of the State of Hesse as of December 31, 2009 shows that the State has a deficit of 64.9 billion euros that is not covered by equity, with pension provisions alone accounting for 34.9 billion euros. This means that Hessen is in over-indebtedness . In the course of the introduction of the new municipal budget law on the basis of the Doppik, individual countries have renamed cash loans (e.g. to "liquidity loans"). This does not mean that these debts have disappeared, but are merely carried on - with little transparency - under a different balance sheet item . Unlike investment loans , cash loans are not covered by municipal assets, but are used to pre-finance or interim financing expected income in the administrative budget .

International municipal loans

Internationally Kommunalkredit plays as part of the State Finances ( English " Public Finance " a significant role). Lenders, especially credit institutions, must take into account the particularities of local law in individual countries. In Austria and Switzerland there are similar local law requirements as in Germany. However, the municipal insolvency protection that protects creditors is neither material nor as comprehensive as in Germany with regard to the norm addressees .

Switzerland

The issuing center of the Swiss municipalities (ESG) has specialized in municipal financing, especially for the benefit of financially weak municipalities, since it was founded in October 1971 and has been in liquidation since January 2012. In Switzerland, municipal loans from national and international credit institutions are common as a form of municipal financing.

There is no “implicit state guarantee” according to which the federal government and / or the cantons would be liable for the debts of their communes - corporations under cantonal law. As part of the bankruptcy of the municipality of Leukerbad in October 1998, the Swiss Federal Supreme Court had largely ruled out state liability for its municipalities for a breach of official duty by the Canton of Valais . Creditors would have to before lending from those included in the financial statements School Think Numbers own picture of the debt do. In the event of a - constitutionally possible - bankruptcy, the creditors can only fall back on the municipal assets that do not serve any public purpose . According to the new municipal law of February 2004, the municipalities are obliged to prepare the invoice on the basis of the harmonized calculation model (Art. 75 GemG). A surplus of expenses in the current invoice is only permissible as long as, after taking account of the book-based depreciation, there is no balance sheet deficit (Art. 80 GemG). In the event of a balance sheet deficit, the municipality must draw up a financial plan with restructuring measures, which must be brought to the attention of the primary assembly and the canton. In the context of the estimate, surplus expenses may only be budgeted if this is covered by equity. If the financial equilibrium of a municipality is not guaranteed in the long term, the cantonal government, after hearing the municipality, appoints an expert who draws up a restructuring plan and proposes restructuring measures (Art. 82 GemG). "The insolvency of the municipality of Leukerbad in the Valais in 1998 showed that lending to municipalities can be associated with certain risks."

Austria

The Kommunalkredit Austria AG was founded in November 1958, is a company specializing in the financing of the public sector bank. It was nationalized in November 2008. In addition, Austrian and international credit institutions participate in municipal financing.

As state supervision is about communities on controlling the legality of community self-government and the financial management audit in Germany and Switzerland ( estimate ; check local budget preparation) according to the principles of convenience, efficiency and economy limited (Article 119a federal VerfassungsG.). The situation is also very different when it comes to insolvency (in Austria: “bankruptcy”). Municipalities in Austria are set up as legal persons and independent wealth holders in accordance with Art. 116 Para. 2 BV-G; they can be debtors in their own name and are therefore formally bankrupt - but only with their bankrupt assets. Assets capable of bankruptcy are only those assets of the municipality that are not necessary for the fulfillment of their sovereign tasks according to § 15 EO ("enforcement order"). As a rule, creditors with their - normally - unsecured claims are subjected to the Austrian bankruptcy procedure and very likely have to reckon with a default, since only the relatively small, non-public part of the municipal assets serving as a bankruptcy property is available to satisfy all unsecured creditors. Therefore, the debt situation before the loan is granted, but also its development during the loan period, must be monitored permanently. In Austria and Switzerland, there is a statutory financial equalization system that originates from the federal government and is intended to strengthen the communities economically.

Other states

In the USA , “public finance” is very widespread because of the sometimes high borrowing requirements of the states and communities. The first municipal bonds were issued by the city of New York as early as 1812 . Typical is the funding not have bank loans , but on public debt ( english bonds ), which occur in various forms. The "general obligation" is not covered by dedicated tax revenues, so-called "revenue bonds", however, are dedicated ( English restricted ) tax revenues repaid . The more tax revenue is used to service the “revenue bonds”, the less is available for “general obligations” and vice versa. The creditors' risk can be that the sources of income for the “general obligations” in favor of the “revenue bonds” have been undermined to such an extent that there is insufficient free tax revenue available for the repayment of the “general obligations” and the “municipality” then files for bankruptcy could.

The US financial equalization is not a formal domestic counter-liability system that would have to justify or trigger an automatic occurrence by the state levels higher than a local debtor. The existing financial equalization system is not able - nor is it intended - to compensate for spectacular municipal undesirable developments such as New York City (October 1975), Orange County (December 1994), Jefferson County (Alabama) (November 2011), Stockton (California) ( June 2012) or Detroit (July 2013) to mitigate or even prevent. High-inflicted municipalities are subject to a bankruptcy risk of Chapter 9 of the bankruptcy code , which as addressees the communities ( English municipalities ) is below a state of providing. Here, US communities are protected during the restructuring phase and continue to exist after reorganization so that they can continue to carry out their community tasks. Compared to corporate bankruptcies, the number of bankruptcies with around 500 municipal bankruptcy proceedings since 1934 on the basis of Chapter 9 - compared to all US bankruptcies - is relatively low, but municipal bankruptcies are possible and have occurred. Here, the municipal debtor is protected from insolvency law access by his creditors and must work out a restructuring program that can also include debt relief . Usually the largest groups of creditors are affected, namely banks , suppliers and retirees . This means that municipalities and individual bonds are subject to the risk of insolvency. Today's Chapter 9 is the result of a change in law from 1978 due to the serious financial crisis in New York City in 1975, for which the application of the old Chapter 9 proved unsuitable. Another change from 1988 deals with the exclusion of "revenue bonds" and the types of taxes and charges that "secure" them. "Revenue bonds" may, according to an exception, still be served if Chapter 9 has been imposed on the municipality. Then it can generally stop its payments, but at the same time the "revenue bonds" must continue to be serviced.

Highly indebted municipalities do not receive any disproportionate state transfers through the financial equalization, but have to improve their financial situation themselves (principle of subsidiarity). If this does not succeed, the legislature has provided Chapter 9, a specific bankruptcy protection variant especially for municipal divisions. According to this, municipal creditors must, in the worst case, even expect a bad debt loss within the restructuring .

Individual evidence

  1. ↑ Although these are considered self-financed due to their sovereignty in fees and charges, cash loans are tolerated by local authority supervisory law
  2. ↑ Text of the NRW municipal code
  3. ↑ BGH NJW 2001, 1065
  4. ↑ a b c Hannes Rehm, Kommunalfinanzen , 2010, p. 183f.
  5. ↑ Regulation (EU) No. 575/2013 (PDF) of June 26, 2013 on prudential requirements for credit institutions and investment firms, Article 115, paragraph 2 in conjunction with EU regional governments and local authorities treated as exposures to central governments in accordance with Article 115 (2) of Regulation (EU) 575/2013 (XLSX; 172 kB)
  6. ↑ BVerfGE 1, 117 (131); 72, 330 (384 ff.); 86, 148 (213 ff.)
  7. ↑ BVerfGE 72, 330 (397 f.)
  8. ↑ BVerfGE 72, 330 (398)
  9. ↑ BVerfGE 86, 148 (214)
  10. ↑ Hannes Rehm, Kommunalfinanzen , 2010, p. 178.
  11. ↑ Deutsche Bank of June 12, 2012, Municipalities in the current market environment , p. 26
  12. ↑ The pioneers here include the issuing center of Swiss municipalities (ESG), Kommuninvest of Sweden , KommuneKredit in Denmark, Kommunalbanken Norge and the Dutch NWB Bank
  13. ↑ German Association of Cities, external rating of municipalities , decision of the Presidium of April 25, 2006 and December 15, 2007
  14. ↑ PricewaterhouseCoopers, Basel II and Kommunales Rating , 2006, p. 25.
  15. ↑ Rating not required for municipalities ( Memento from March 4, 2016 in the Internet Archive ), DSGV, press release No. 35 from March 20, 2012.
  16. ^ Fitch Ratings of February 19, 2009, International Public Finance: Germany Special Report, German municipalities - important role in the federal system
  17. ↑ Werner Rügemer, Rating Agencies: Insights into the Capital Power of the Present , 2012, p. 84 f.
  18. ↑ Fitch Ratings of February 19, 2009, International Public Finance: Germany Special Report, German municipalities - an important role in the federal system , p. 5
  19. ↑ Deutsche Bundesbank, Basel III - Guide to the new capital and liquidity rules for banks , September 2011, p. 28
  20. ↑ BaFin of January 7, 2016, EMIR - Requirements for non-financial counterparties
  21. ↑ BaFin of June 25, 2010, customer classification of municipalities, rural districts and urban districts according to Section 2 (1) Securities Service Conduct and Organization Ordinance (WpDVerOV) , reference number WA 31 - Wp 2002 - 2007/0127
  22. ↑ VwV Kommunale Budgetwirtschaft-Doppik Sachsen - VwV KommHHWi-Doppik from December 20, 2010
  23. ^ Jan Stemplewski: The municipal borrowing in North Rhine-Westphalia , Verlag Kovac, 2015, pp. 207 ff.
  24. ^ Jan Stemplewski: The municipal borrowing in North Rhine-Westphalia , Verlag Kovac, 2015, pp. 208 ff.
  25. ↑ Swiss Federal Court, judgment of July 3, 2003, BGE 2C.4 / 2000
  26. ↑ Peter Bohley, Public Finance, University of Zurich, quoted from Zürcher Kantonalbank, "Gemeinde-Info 2007"
  27. ↑ According to Art. 116 Para. 2 B-VG, the municipality is an independent economic entity. It has the right to own, acquire and dispose of assets of all kinds within the limits of general federal and state laws, to carry out economic ventures and to manage its household independently within the framework of the financial constitution.
  28. ↑ Supreme Court (OGH), judgment of November 21, 1933, Az .: 4 Ob 435/1933, as well as the prevailing legal opinion: Rebhahn / Strasser, "Zwangsvollstreckung", 33 ff. With additional information
  29. ↑ § 15 of the enforcement order reads: "Against a community or against an establishment declared public and not for profit by the statement of an administrative authority, the execution ..., ..., can only be approved with regard to those assets which are to be safeguarded by the community or that establishment public interests can be used to satisfy the creditor. The state administrative authorities are responsible for submitting a declaration as to the extent to which the latter applies to certain assets. "
  30. ↑ Thomas Wolf, The assessment of communal capacity to act by rating agencies , 2006, p. 13.
  31. ↑ Book 11 ( English Title 11 ) of the United States Code