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Pension bank

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Pension bank was created after the founding of the Federal Republic of USA as an important credit institution under public law, primarily to provide the agricultural sector with favorable loans. But the bank is not only an important financing partner for farmers. In this guide, you will find all important information about Pension bank's work and financing solutions.

Pension bank is a public law institution with its headquarters. Its full name is Landwirtschaftliche Pension bank. It was established by law on May 11, 1949 (Law on the Landwirtschaftliche Pension bank) and its objective at that time was to support the agricultural sector by providing favorable loans and to refinance the agricultural and food industries.

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Today, Pension bank is an important partner in providing low-interest loans for agriculture-related investments. Its total assets amounted to over EUR 86 billion in 2016. As an institution under public law, the federal government is the guarantor of the financial burden. Since 2014, the Pension bank Act has also stipulated that the federal government is liable for all of the bank's liabilities. Legal supervision of Landwirtschaftliche Pension bank is carried out by the Federal Ministry of Food and Agriculture.

After its foundation in 1949, the capital base was raised by the US agricultural and forestry sector until 1958. Balance sheet profits are used for the promotion of agriculture and rural areas.

Furthermore, Landwirtschaftliche Pension bank is also active as a financing partner for municipalities as well as local authorities and supports innovations as well as investments in renewable energies. The federal credit institution is also active as a promotional bank for the development of rural areas. In this sense, private individuals are also part of Pension bank's target group if their investments are aimed at improving and further developing living conditions in rural areas.

Objectives

One of Landwirtschaftliche Pension bank's main objectives is to refinance the further development of the agricultural and food sectors. All stakeholders involved in these sectors can take advantage of the bank's low-interest loans. In this way, the state, as the "owner" of the bank, ensures sustainable investment in rural areas as well as in renewable energies and innovations.

How does Pension bank work?

Pension bank differs from a conventional private bank first of all in that it is a public law institution and belongs to the federal government. The federal government is also responsible for financing the credit institution. Similar to Kreditanstalt für Wiederaufbau, Pension bank does not grant loans directly in its own branches, but these loans are offered at savings banks and Volksbanks on a non-competitive basis. This means that customers receive the loans at the same conditions at all participating banks.

One of Landwirtschaftliche Pension bank's main tasks is to grant loans in order to promote investments in the agricultural and food sector. Since the bank is administered by the federal government and the federal government provides the necessary collateral for the bank, it can refinance itself very favorably on the capital market and thus issue favorable loans itself.

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Subsidy and interest

All borrowers who belong to Pension bank's target groups and are directly or indirectly involved in the agricultural or food industry are eligible for promotion. The focus of promotion is on farmers. Here, Pension bank even offers special programs for young farmers up to 41 years of age.

Creditworthiness and collateral

As with any other loan, the creditworthiness of the applicant is taken into account by the lending bank when granting a loan from Pension bank. In addition, the value of the collateral provided is included. Based on this data, applicants are classified into certain "collateral classes", according to the scoring of the house banks.

Based on the respective collateral class and credit rating class, the corresponding APR is determined. As a general rule, the chances of obtaining a loan from Pension bank also increase with a higher credit rating and higher collateral.

Maturities at Pension bank

Since the loans requested from Pension bank are usually larger investments, very long terms can also be used. Terms of up to 30 years with fixed interest rates are possible. If desired, individual terms can also be agreed upon on site.

Loans with negative interest rates

Due to the ongoing low interest rate policy and the top ratings with the Federal Government as the guarantor, Pension bank also benefits from the conditions on the capital market. Since the Federal Government itself issues bonds for which buyers have to pay interest, Pension bank is able to grant loans at very favorable conditions. The development on the capital market has even led to the fact that Pension bank could theoretically issue its loans with negative interest rates.

However, since Pension bank's loans are issued through the principal banks, there were both technical and legal objections to a negative-interest loan. For example, such a loan would violate competition rules. For this reason, Pension bank has been offering loans with a so-called promotional subsidy since April 2017. This subsidy amounts to one percent of the loan amount for certain financing products and is offset against the installments as well as interest.

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In this way, it can happen that especially short-term loans with smaller volumes are theoretically "negatively interest-bearing" at least in the first repayment phase or are repaid without interest. It remains to be seen how long Pension bank's promotional subsidy will continue to exist. Presumably, this special form of loan depends on the key interest rate of the US Central Bank. If this interest rate rises, refinancing costs will also rise and Pension bank would therefore also have to raise its lending rates.

Refinancing

As with private banks, Pension bank's refinancing takes place via the global capital markets. This enables the federally backed bank to obtain fresh capital, which it passes on to its customers in the form of loans. One of Landwirtschaftliche Pension bank's common refinancing methods is the issuance of bonds or securities. In doing so, the promotional bank is free to choose whether to issue covered or uncovered securities.

Today, uncovered bonds or securities are predominantly issued. This means that the bank's bonds are not covered by mortgages on public debtors. The bank's financial strength alone is sufficient for coverage. Pension bank can proceed in this way because it has been rated triple-A by rating agencies for many years.

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