Foreign Currency Loans in Poland and Hungary – A Comparative Analysis

AbstractForeign currency loans (FCL) have been commonly used in many developing countries in Europe since 2005-2006. In particular, they were granted to retail clients to finance purchasing of real estate. As interest rates in many Central and Eastern European countries were permanently higher than in Switzerland and the Eurozone, the domestic as well as foreign owned banks had started to sell mortgages in foreign currencies, predominately in Swiss francs and euros. Due to reduced interest such loans turned out to be substantially cheaper and easier to get than loans denominated in domestic currencies. In fact within 2-3 years they gained a substantial and in some cases dominant share in domestic credit markets of CEE. Because repayment of FCL is strictly dependent on the exchange rate of foreign currencies, the considered loans had exposed a large group of domestic borrowers to fx risk which they could not effectively hedge. Such risk became very serious in countries like Poland and Hungary with a clear floating exchange rate regime and substantial share of FCL among bank assets. As far back as 2008, and then in 2011 the fx risk related to such loans strongly materialised due to an unexpected rise of the valuation of the CHF and to a lesser extent the EUR.The goal of this paper is to present the phenomenon of using foreign currency loans in Poland and Hungary for purchasing real estate where such loans concentrate a substantial share of banking assets. The authors will present the nature, conditions and premises of taking such loans and will use a comparative analysis between Poland and Hungary. The paper will also contain an analysis of the influence of such loans on borrowers, banking sectors and systemic risk in both countries. The authors will provide statistical analysis of the exchange rate of PLN and HUF to present the potential of fx risk of FCL. Finally the paper will describe legal and financial supervision solutions applied in both countries to diminish the risks related to the loans