Hungary early FX repayment scheme can weaken bank system stability, says ECB

MNB

The European Central Bank (ECB) on Tuesday said the Hungarian government’s early repayment scheme for borrowers with foreign currency-denominated mortgages can weaken the banking system’s stability and have adverse effects on the economy.

The ECB made the statement in an opinion on recently approved legislation that allows full early repayment of foreign-currency denominated mortgages at fixed exchange rates under market rates.

"The ECB considers that, in allowing borrowers to repay their debt at fixed exchange rates substantially below current market rates, the law creates a situation that can substantially weaken the banking system’s stability and is likely to also have adverse spillover effects on the economy," according to the opinion.

The ECB said the losses the scheme means for lenders could adversely affect banks’ capital position and result in a reallocation of resources by foreign parents to units elsewhere, causing Hungarian banks’ lending capacity to deteriorate in the long term.

In addition to the immediate adverse financial impact on the banking system, the scheme could result in depreciation pressure on the exchange rate, higher country risk premiums, upward pressure on domestic interest rates, weaker growth due to a further fall in lending activity and tighter credit conditions, and deteriorating foreign investor sentiment as a result of an increase in legal uncertainty and perceived country risk, it added.

The scheme could also have a negative impact on public finances because of an increase in Hungary’s risk premium, the ECB said.

The ECB said the scheme "may raise issues of compliance" with the EU tenet of free movement of capital and payments.

ADVERTISEMENT

Budapest Named 5th Best City in Europe for Bargain Lovers Analysis

Budapest Named 5th Best City in Europe for Bargain Lovers

Parl't approves 2023 budget Parliament

Parl't approves 2023 budget

Danubius Hotels Appoints Group Director of Development Appointments

Danubius Hotels Appoints Group Director of Development

Muni Council Organizing Meeting to Improve Air Quality City

Muni Council Organizing Meeting to Improve Air Quality

SUPPORT THE BUDAPEST BUSINESS JOURNAL

Producing journalism that is worthy of the name is a costly business. For 27 years, the publishers, editors and reporters of the Budapest Business Journal have striven to bring you business news that works, information that you can trust, that is factual, accurate and presented without fear or favor.
Newspaper organizations across the globe have struggled to find a business model that allows them to continue to excel, without compromising their ability to perform. Most recently, some have experimented with the idea of involving their most important stakeholders, their readers.
We would like to offer that same opportunity to our readers. We would like to invite you to help us deliver the quality business journalism you require. Hit our Support the BBJ button and you can choose the how much and how often you send us your contributions.