The dramatic upsurge of CHF/PLN exchange rate in mid-January 2015 triggered in Poland a wave of discussion on the situation of people with mortgages in Swiss currency and who should be deemed responsible for such a state of affairs. In Poland, more than half a million of such loans were taken. As long as the CHF exchange rate fluctuations were being compensated by lower interest rates in Switzerland most people paid less for their loans than people with similar loans in Polish zloty. Moreover, the most serious discussions evolved around financial supervisory actions which started in 2006. The financial authorities intended to reduce the availability of CHF-loans.
The situation changed dramatically after the Swiss National Bank decided to no longer defend the level of the EUR/CHF exchange rate, which led to a strong appreciation of the CHF against euro as well as Polish zloty. At the peak, after the decision of the Swiss National Bank, CHF/PLN exchange rate temporarily exceeded 5 PLN per 1 CHF. Appreciation of the Swiss currency has led to an increase in loan installments and as a consequence people began to search for those responsible for the situation and wonder who should pay for it.
After CHF/PLN fell below 4 PLN per 1 CHF once again, the discussion on CHF-loans problem seemed to have been dropped. However, as long as a sharp decline in CHF is unlikely (nevertheless, not impossible: let’s remember that exchange rates are one of the most unpredictable macroeconomic variables) we address at least some of the arguments presented during the public debate about Swiss franc loans in Poland. This is why we’ve decided to present five popular theses, which in our opinion are fundamentally wrong.
Thesis 1: Debtors taking out loans in CHF were not aware of a risk related to foreign currency loans.
It is difficult to defend the abovementioned statement for the people who took loans in CHF after 2006. Before 2006 the issue of potential credit risk in foreign currency was actually much less publicized. However, together with an increase in the number of CHF-loans financial supervision began actions to limit these loans availability.
The major action was Recommendation S document prepared in 2006, which resulted in tightening of conditions to get foreign currency loans. In hindsight, one may say that these restrictions were not sufficient. However, we have to emphasize that their introduction was accompanied by protests of consumers, banks, independent institutions and politicians.
The financial supervisory authorities were ready to introduce further restrictions if necessary. It is crucial to mention a protest action on Money.pl website: “We want to take the risk”. So we cannot say that in 2006 supervisory authorities did not take any actions or that information about the potential risk of foreign currency loans were not available.
Anyone who was interested in the topic was able to find and read the arguments for and against CHF-loans. Of course, it does not mean that all borrowers took advantage of this possibility. It should also be noted that some banks and credit intermediaries actively encouraged customers to choose foreign currency loans, which in the short term were much more profitable for the financial institutions.
Thesis 2: Those who have CHF-loans require support from the state budget.
It is difficult to justify why taxpayers should finance people who took loans in either PLN or CHF. So far, the vast majority of those who took loans in Swiss francs, paid less than debtors in PLN.
Today, as a result of fluctuations in interest rates and exchange rates, the situation has changed. The experience of other countries, such as Austria (where foreign currency loans have a much longer history than in Poland), shows that the situation may change again. For example, you can imagine that as a result of robust economic growth in Poland our currency begins to appreciate (i.e. the value of CHF-loans falls), inflation is approaching the target, and the Monetary Policy Council raises interest rates (which means growth of interest rates on loans in PLN). Moreover, the fact that someone has taken higher risk is not enough reason why the rest of taxpayers should subsidize that person’s decision.
Thesis 3: Government must force the banks to change the terms of CHF-loans.
This postulate is simply too general so we are unable to relate to it in a greater detail. Nevertheless, the proposed mechanism could prove to be very dangerous. This action may seem politically very attractive (especially before the elections) but it may eventually undermine the principle of legal certainty of contracts.
The state should not arbitrarily change the contracts in favor of borrowers but at the same time banks should be supervised to ensure that they did not abuse their powers. Therefore, the UOKiK (Office of Competition and Consumer Protection) should investigate cases of any abusive clauses in the contracts (forbidden by law).
Thesis 4: Banks do not need to do anything about CHF-loans.
A significant increase of value of CHF-loans has forced banks to undertake additional actions and would require a significant increase in their reserves. Lower quality of CHF-loan portfolio may require creating additional reserves. Banks that do not want their customers to go bankrupt (what would be extremely expensive also from the point of view of banks) will probably have to restructure some of their CHF-loans. Restructuring of risky loans is in the interest of banks because otherwise it is hard to imagine paying dividends in the foreseeable future.
Thesis 5: Borrowers’ responsibility for mortgage loans should be limited to the value of the property bought.
This idea is based on the American model. However, its implementation in Poland could paralyze the mortgage market or at least significantly increase the costs of mortgage loans.
In some US states borrower may terminate the loan contract by giving the bank the property which was financed by the mortgage loan. Even if the value of the property at a given time is lower than the value of the loan, the bank can no longer demand any more money from the borrower. This solution reduces the potential risk on the customer side (he can never lose more than the flat or house) while it increases the risk of the bank. Nevertheless, the banks in the US are still willing to offer mortgage loans at relatively low cost. It is possible because the American regulations accept much faster eviction compared to Poland.
Diankov et al. (2002)1 compared the approximate time it takes to evict an indebted tenant. In the United States it was only 49 days; in Poland – 1080 days. Since the study there were no significant legislative changes in the US and Poland in this area.
In other words:
• US banks in some states can only recover the loan up to the price of the property. At the same time, they may be certain that acquisition of a real estate (through eviction) will be fast and painless;
• In Poland, banks are aware that after the acquisition of the property, eviction process is very long and costly.
The combination of the American style limitation of liability of borrowers with the Polish law regarding evictions would significantly raise the risk of housing loans for banks. In practice, this would probably discourage some banks from that activity and may lead to a significant increase in margins in other banks. Therefore, mortgage loans would be more expensive and inaccessible to a vast majority of people in Poland.
Translated by: Liwiusz Wojciechowski
1 Djankov, S., R. La Porta, F. Lopez-de-Silanes, and A. Shleifer. “Courts.” Quarterly Journal of Economics, May 2003.