How the usury rate encourages banks to repurpose structured loans

The current rise in interest rates is generating second-round effects that were not anticipated by either banking institutions or regulators. This could lead to a significant reduction in the supply of bank loans for local authorities.

We still talk about the TEG

Some communities have become familiar with the TEG issues when they have studied the possibilities of recourse on their structured loans. In summary, the absence of the TEG on the faxes confirming the bank loan led to the creation of the Structured Loan Support Fund for local authorities!

Today, when an institution offers a bank loan to a community, it must indicate the total effective rate of the proposed loan. This legally defined interest rate includes not only the financing rate but also all associated fixed costs.

The wear threshold

The usury rate corresponds to the maximum TEG that credit institutions are authorized to charge when granting credit. The rate is fixed at the end of each quarter for the following quarter by the Banque de France. To calculate the usury rate, the Banque de France looks at the average effective rates charged by credit institutions in the previous quarter. This average rate is increased by a third to provide the wear rate.

The usury threshold applicable to local authorities is that of “Loans to legal persons without industrial, commercial, craft, agricultural or professional non-commercial activity”. Within this category, the Banque de France provides for different usury thresholds for fixed rate and variable rate loans. Why is there no mention of the usury rate outside the communities?

For a community, the usury rate for Q2 2022 is:

  • 1.76% for a fixed rate loan,
  • 1.53% for a floating rate loan.

For the other categories of borrowers, the usury thresholds are higher. So for a 10-year mortgage the threshold is 2.51%. In the current market, considering an average bank margin of 60 bps on a 15-year loan, the fixed market rate (excluding fees and commissions) stands at 1.80%. The TEG of the contract is therefore higher than the usury threshold. Over a longer period, the difference with the wear rate is even greater. Consequently, if the bank wants to comply with the usury rate regulations and integrate a bank margin of 60 bps, it can no longer offer a fixed-rate loan to the community.

Loan alternatives

First, local authorities can take out variable rate loans. The negative level of the Euribor leads to an APR close to 0.60% for a loan at Euribor + 60 bps. This rate is therefore well below the usury threshold of 1.53% for floating rate loans. Only loans indexed to Livret A are therefore affected by the usury threshold. The current Livret A at 1%, in fact, does not allow to offer a margin higher than 53 bps, at the risk of being considered a usurer!

Large communities will be able to turn to the bond market if they want to borrow at a fixed rate without constraints on the usury rate. More complex financial engineering will make it possible to take out a floating rate loan and “swap” it for a fixed rate. This more complex strategy requires specific legal documentation and can involve significant bank listing costs depending on the characteristics of the loan.

Local authorities will also be able to study two-phase strategies, variable then fixed or fixed then variable, which will make it possible to switch the TEG below the wear threshold.

The return of structured loans

Some banks offer other solutions. It is in this context that we are witnessing the return of structured loan proposals by some banks. The products offered do not include leverage, but the sale of financial options. It is the paradox of the current situation that pushes banks to find solutions to maintain a credit offer to the local public sector, in compliance with usury regulations that are not adequate to the current market situation.
Finally, the last solution consists in borrowing from entities that choose not to apply this constraint linked to the usury threshold. However, there are fewer and fewer of these banks!

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