The over-collateralisation of bank loans affects both private borrowers and businesses and can have considerable financial consequences.

Let us first take a family as an example, one that wishes to finance a home by means of a loan. They approach their house bank with the object of their desire in tow, available for a defined purchase price. One would reasonably expect the bank to take the property to be purchased as security for the loan, allowing the family in return to buy the house. That would be the classic case of a bank loan that is not over-collateralised.

Frequently, however, the bank requires not only the property as security for a mortgage loan to be granted, but also further assets that significantly exceed the value of the loan. This means that in the event of payment difficulties, not only the family’s home but also additional assets are at risk in a liquidation.

For companies, over-collateralisation can be similarly problematic. Imagine a medium-sized enterprise needs capital for an expansion or the acquisition of new machinery. The bank demands as security not only the operating resources to be financed, but also additional company assets. This can considerably impair the company’s liquidity and flexibility and, in the event of insolvency, may even spell the financial end of the business.

Such cases of over-collateralisation and comparable ones can be extremely disadvantageous for borrowers. In the worst case, this could even mean the loss of property and other assets. Additional security that banks frequently demand from borrowers includes, for example:

• Third-party guarantees
• Life insurance policies
• Security transfer of vehicles or other movable goods
• Company inventory
• Real estate and other capital goods
• Land charges (Grundschuld) and mortgages
• Securities accounts, savings books & fixed-term deposits

It is therefore of decisive importance to understand the legal aspects well before taking out a loan and, where necessary, to seek professional support in the form of expert legal advice.

An over-collateralisation of bank loans occurs when the security provided by the borrower exceeds the actual loan amount. This means that the bank demands more security than is necessary to safeguard the loan.

Banks employ this practice in order to minimise their risk. By demanding additional security, they can ensure that, in the event of payment difficulties on the borrower’s part, sufficient assets are available to cover the loan. This is particularly important in order to avoid losses, especially in economically uncertain times. However, excessive over-collateralisation can be disadvantageous for borrowers, as it ties up additional assets and, in the event of payment difficulties, may result in the loss of valuable possessions.

There are two or, rather, three types of over-collateralisation in bank loans: initial over-collateralisation, subsequent over-collateralisation and over-collateralisation through repayment.

Initial over-collateralisation occurs when, from the very outset of the loan, security is agreed that exceeds the value of the credit granted. For example, a borrower taking out a mortgage loan offers not only the property itself as security, but also additional assets (e.g. cash, other real estate) that significantly exceed the loan amount.

Subsequent over-collateralisation, by contrast, arises after the loan agreement has been concluded, when the bank demands additional security. An example is a company that has already received an operating loan and now requires additional funds for an expansion. The bank now demands further security exceeding the existing loan amount.

Over-collateralisation through repayment always exists when parts of the loan have already been repaid but the security held by the bank has not been adjusted to reflect the outstanding amount.

It is crucial to understand the legal aspects in detail in order to ensure that the borrower’s interests are protected and that their financial security is not excessively impaired. In case of doubt, it is advisable to seek legal advice.

• Reviewing loan agreements: Examining loan agreements for legal validity and over-collateralisation.
• Negotiating with the bank: Negotiating with the bank to achieve a fair and balanced arrangement of security.
• Legal advice: Providing legal advice and explaining the borrower’s rights.
• Enforcing borrower rights: Assisting in enforcing the borrower’s rights, particularly in cases of subsequent over-collateralisation.
• Litigation: Where necessary, the lawyer can file a claim to represent the borrower’s interests in court.
• Mediation and conciliation: Assisting with an out-of-court settlement between borrower and bank.
• Risk assessment: Assessing the risks and opportunities associated with over-collateralisation and developing a strategy to minimise risk.
• Defending against claims: Defending against unlawful claims by the bank, particularly where the over-collateralisation is legally problematic.
• Financial advice: Assisting in developing a financial strategy to handle the situation.
• Negotiating loan terminations: Negotiating a possible termination of the loan agreement where the over-collateralisation is not appropriate.

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