ECB welcomes ‘fair bank’ law, agrees, with reservations, to FX loan conversion

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The European Central Bank (ECB) welcomes Hungarian legislation on fair banking and also acknowledges the merits of the law on the conversion of FX retail mortgages into forints, according to an ECB report that although expressed some reservations about the laws. 

The ECB's opinions related to Hungary were published as part of its governing council's non-rate-setting decisions on the ECB website on Friday.

The ECB stressed that its opinions concern the draft laws which were passed, with several amendments not communicated to the ECB, shortly after the ECB was consulted and before it could adopt its opinion. 

The ECB said it welcomed the fair banking law, which outlined some basic standard terms for retail loan contracts. It said it is important to preserving financial stability to make clear to consumers the commitments they undertake when take out loans in which some elements could change during the lifetime of that contract. As to legislation on the FX loan conversion, the ECB said the conversion of FX loans should greatly reduce or even eliminate currency mismatches in households' balance sheets, which is expected to contribute to reducing the credit risk of banks in the longer term.

On the other hand, the ECB criticized the interest rate premium cap on the forint loans which add "to the significant strains already faced by the banking sector. These strains have resulted, inter alia, from the measures relating to the settlement of FX loans", the ECB said noting that "the conversion will lead to a once-off increase in operational costs for banks in Hungary".

As to the longer-term effects on financial stability, the ECB spoke of the need of fair burden sharing between consumers, the financial institutions, the Hungarian government and all other affected authorities. The ECB noted here that the measures may also have significant cross-border spill-over effects on the consolidated profits and capital positions of foreign banking groups, whose entities manage around half of all banking assets in Hungary. 

The ECB wished to remind the Hungarian authorities that, "during the past few years, losses stemming from previous government measures, including the bank levy, the financial transaction tax and the early repayment scheme for FX loans, were offset by capital injections from foreign parent undertakings to ensure the stable functioning of their subsidiaries."

This behavior confirmed the parent banks’ longstanding commitment to Hungary, but "the possibility of longer-term negative effects on the Hungarian economy and financial markets, as a result of the legislative package, cannot be excluded at this stage", the ECB said, referring to summer and autumn legislation under which banks must refund retail borrowers in compensation for earlier practices the law declared unfair.

In both opinions, the ECB noted that the consulting authority — in both cases the economy ministry — did not indicate to the ECB that the opinion was urgent or that the bill goes through parliament with urgency. Neither communicated it the amendments. "The adopted laws differ substantially from the draft law submitted to the ECB", the EBC said asking the ministry to properly honor, in future, its obligation to consult the ECB.

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