In a very short time, the German government and the federal states have erected a protective shield worth billions, including a large number of credit programmes for companies and the self-employed. To ensure successful implementation and efficient disbursement, policymakers can rely on an efficient infrastructure with a four-tier system comprising the state, development banks, principal banks and borrowers.
Short-time allowances – the so called “Kurzarbeitergeld”, deferral of tax payments, social security contributions and rents, tax-free one-off payments for employees and liquidity assistance for the self-employed are part of the billion-euro “Protective Shield against Coronavirus for Germany,” which the federal government and the states have erected in just a few days.
However, in terms of volumes and possible applications, loans to companies and the self-employed are the first priority for securing economic activity. Considering the variety of programmes, self-employed persons in particular, as well as small and medium-sized enterprises, should compare and analyse the respective requirements and conditions in detail before making concrete use of a particular aid programme.
A decade-old concept proves its worth in the crisis
In the programmes’ fast and efficient payments, the state, development bank, principal bank and borrower play together in perfect harmony. Politicians can access an efficient infrastructure within the financial sector, which has been successfully used in Germany for decades:
- Borrowers can access the Corona loans via their existing bank, which of course already has comprehensive customer information. This eliminates the need for contacting a new institution and additional verification of authorisations, identity and creditworthiness.
- After reviewing the requirements for a loan, the principal’s bank can request funds from the responsible development bank and at the same time – depending on the type of loan – draw on an indemnity against liability, usually between 80 and 100%.
- For their part, the development banks rely on reviews by the principal’s banks. Also, they can easily refinance themselves, not only because they are owned by government entities, but because they also have a de facto “state guarantee” thanks to the specifically German legal institutions of institutional liability, so called “Anstaltslast” and “Gewährträgerhaftung”
- As the development banks’ owners, the governments, in turn, determine the conditions and requirements under which development banks can extend credit to promote and support the economy during the Corona crisis.
Germany’s pioneering role in development banks
This tetrachord also explains why the protective shield consists of many different credit options. Due to the urgency of the situation, new programmes were not developed in favour of facilitating access to existing formats. In addition, there are two federally owned development banks in Germany, KfW Bankengruppe and Landwirtschaftliche Rentenbank, as well as investment and development banks in the 16 federal states.
With this concept, Germany is one of Europe’s pioneers when it comes to cushioning difficult economic situations and providing long-term financing for example for small and medium-sized enterprises. When KfW was founded in 1948, comparable institutions existed only in France, Italy, the Netherlands and Poland. It was not until 1989, first in the countries of Central and Eastern Europe, then increasingly in other EU countries from 2008 onwards, that comparable concepts were implemented and corresponding institutions were established.
For a long time, KfW has even mentioned its objective in its name. Its name was “Kreditanstalt für Wiederaufbau” which could be translated as “Credit Institution for Reconstruction”. In 2018, it was Germany’s third-largest bank and enjoys a AAA rating. Several state-owned development banks are also among Germany’s largest banks.
KfW’s Credit Offerings
KfW’s credit offerings range from KfW instant loans, loans for young companies, to loans for companies that have been on the market for more than five years, and a special programme for syndicated financing.
Instant loans can be used for purchases and operating costs. Eligible companies have more than ten employees and have on average been profitable in the years 2017 to 2019. The maximum amount is EUR 800,000 for a term of up to ten years with a two-year grace period. Although the loan must be applied for through the principal’s bank, KfW assumes 100% of the liability based on a guarantee from the federal government.
In contrast, established enterprises can apply for a loan of up to one billion Euros. Among other things, it is restricted to meeting current financing needs in the next 18 months or 25% of the annual turnover in 2019. The term is up to five years with a one-year grace period. In the case of small and medium-sized companies, the principal’s banks are released from 90% of liability. The clients benefit from interest rates between 1.00 and 1.46% p.a. For large companies, the exemption from liability is 80% with interest rates between 2.00 and 2.12% p.a.
If a principal’s bank is not prepared to assume its share of liability, it is possible to involve a specific guarantor bank. For companies with a turnover of more than five billion Euros, support will be based on an examination of the individual case.
Note: For more details, please see the overview of helpful links at the end of this article.
Credit offerings by development banks of the federal states
The 16 federal states have set up additional credit programmes through their development banks, which differ from one another. Some loans can be taken out as a supplement, some only as an alternative to other loan programmes, for example, the KfW.
Companies and self-employed persons should consider both the federal and state programmes in the federal state they are legally domiciled and in the state in which they operate a commercial unit because the loans are often linked either to the registered office or to a permanent establishment.
The WI Bank loan offer
One concrete example of the offers made by the federal states is that of the Wirtschafts- und Infrastrukturbank Hessen (WI Bank), a legally dependent institution within Helaba.
Hessen Micro-Liquidity is the name given to loans for companies with up to 50 full-time employees and solo self-employed persons. All operating funds for the continuation of business activities are financed up to a maximum of EUR 35,000, whereby the loan bears interest at 0.75% p.a. with a term of seven years and a two-year grace period. Disbursements of the micro-liquidity loans are made without the involvement of a principal’s bank after a plausibility check; the application is made directly online.
By contrast, the programme Liquidity Assistance for small and medium-sized companies in Hesse refers to a loan up to a maximum of EUR 200,000. Normally customary collateral is not required for these loans from the development bank. However, a credit rating and co-financing by the principal’s bank of at least 20% of the WI Bank loan are foreseen. The term is two or five years with interest rates of 1.25% and 1.40% p.a.
The financial economy is an indispensable partner for the real economy
The German government will not restrict itself to the current aid package and is already planning for a sustained recovery once the corona crisis has subsided. An economic stabilisation fund is to be established. The planned volume of EUR 600 billion is to be divided with EUR 100 billion going towards capital measures, EUR 400 billion in guarantees and EUR 100 billion towards the refinancing of the KfW programmes.
With this package of measures, Germany has created the conditions to enable the real economy to bridge the officially ordered standstill and resume business activities. At the same time, a spotlight has been cast on the financial sector’s crucial role as a transmission mechanism for the real economy. This situation shows the extent the real economy and the financial sector together contribute to economic prosperity.
Further information on economic aid and stimulus programmes
- The Federal Ministry of Finance has compiled an overview of the coronavirus economic support Programmes: https://www.bundesfinanzministerium.de/Web/DE/Themen/Schlaglichter/Corona/corona.html (In German), https://www.bundesfinanzministerium.de/Web/EN/Issues/Priority-Issues/Corona/corona.html (In English)
- KfW’s credit offerings in Detail: https://www.kfw.de/KfW-Group/Newsroom/Latest-News/KfW-Corona-Hilfe-Unternehmen.html (In German only)
- The Federal Association of German Public Banks, VÖB e.V. has compiled the offers from development Banks: https://www.voeb.de/fachthemen/corona-uebersicht-der-hilfen (In German only)
- Direct access to the services of Wirtschafts- und Infrastrukturbank Hessen (WI Bank): https://www.wibank.de/wibank/corona (In German only)