Low Interest Rates and Building Societies — A Judgment of the Federal High Court of Justice

Abstract

At the end of February 2017 the Federal High Court of Justice rules that building societies are allowed to terminate old contracts ahead of schedule. A lot of old contracts are problematic in the viewpoint of building societies due to high deposit interest rates. High deposit interest rates are dangerous for building societies in times of low interest rates, especially if low interest rates are long-lasting. The Federal High Court of Justice follows the opinion of the building societies that during saving periods, building societies can be seen as borrowers, and borrowers have the (exceptional) right to terminate contracts after ten years, which is established in the German Civil Law. A microeconomic intertemporal consumption model calculates this as an overreaction byf the Court: Building societies should only be allowed to reduce deposit interest rate to be compensated for non existing loan contracts.