If you look at banks today, you will see that they have extensive structures. Departments or subsidiaries for loan financing, securities or real estate. Now it can happen that these departments or subsidiaries also need a loan, for example to pre-finance projects. From a legal point of view, a bank may grant a loan to its own departments and subsidiaries, the whole thing is called a deduction loan. In the financial world, this is also referred to as deducting credit.

That’s what a deduction loan is.

A deduction loan is a special form of loan. If a bank grants a loan to a customer today, the loan amount is deducted from the bank’s assets and has no effect on the bank’s equity or balance sheet total. The situation is different with a deduction credit, because strict regulations apply here with regard to the origin of the money and the posting. Such a loan must be financed by the bank’s own capital and not by its normal assets. Customer deposits as current assets are therefore taboo. For this reason, this loan is also referred to as a deduction, as it must always be deducted from equity. The deduction from the loan amount naturally has the consequence that not only the available equity capital is reduced, but of course also the balance sheet amount. As already mentioned, these regulations apply to own departments and subsidiaries. Although that’s not conclusive. The law speaks of “related” as an essential characteristic for this special form of credit. A related party may also be a person, for example, if the bank granted a loan to a member of its own supervisory board, a shareholder or a shareholder. Here, too, only this special form of credit may be granted and no credit as in the case of normal customers.

Reporting Requirements for a Deduction Loan

If a bank now wants to grant a deduction credit for a related person, department or subsidiary, it may do so, but must report it. For example, it must report every deduction credit to the Federal Financial Supervisory Authority (BaFin). This obligation under the Banking Act is based on the origin of the money. As mentioned above, such a loan must be financed from a bank’s own resources. But depending on its size, this cannot be unproblematic for a bank. A bank must not simply have its own capital at its disposal, because every bank must have a minimum level of own capital. How high this must be depends on the respective bank and its size. However, one thing is important when it comes to providing own resources, they must not be undercut. The notification of such a loan to the Federal Financial Supervisory Authority must contain all relevant data, such as the loan amount, but also the interest rate for repayment, repayment period, the data of the parties involved and the collateral. Here is another small hint, even if a bank grants a loan to a department or to a subsidiary or to a related person, it must not forego collateral. The risk of default on such a loan must be limited. Depending on the loan amount and the remaining equity, BaFin may also intervene against the granting of the loan, especially if this has a negative effect.