The report continued: “We estimate that this measure, together with the losses associated with voiding the exchange rate margin, would result in compensation payments to retail borrowers of up to €2.6 bln, or 28.3% of the banking system’s total capital. […] According to our estimate, the payments would reduce the banking sector’s capital adequacy ratio to 12.5% from 17.4% year-end 2013.”

Moody’s said its estimate indicates that the potential losses from this law are significantly higher than the €1 bln losses that the banking system faced in 2011, when the government imposed the early repayment scheme for foreign-currency mortgages at below-market exchange rates. However, the banking system’s current capital position is also stronger compared with the total capital adequacy ratio of 12.7% on September 30, 2011. “The potential losses we estimate could therefore return capital adequacy to this level,” Moody’s said. 

The new law on foreign exchange is the latest in a series of efforts aimed at compensating borrowers who were saddled with expensive mortgages when the forint’s value nose-dived in 2008 and after. According to Moody’s, the measures have so far resulted in losses for the banking system and have proven unsuccessful in containing the deterioration of banks’ retail portfolios.