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Forex lending restrictions would reduce vulnerability

The National Bank of Hungary (MNB) on Monday said restrictions it has proposed on foreign currency-denominated lending were in line with efforts by the European Commission as well as the European Central Bank, and they would reduce the vulnerability of the country and the cost of financing state debt.

The EC and the ECB recently called attention to the risks of forex lending and said necessary restrictions should be made, the MNB said in a statement on the initiative on its website on Monday.

The risks associated with foreign currency-denominated lending not only hurts households' ability to repay loans, but also increases the vulnerability of the whole country and raises the costs of financing Hungary's state debt.

Under the proposals regulations would be introduced limiting the payment-to-income ratio for low-income households to 30% for forint loans, 23% for euro-based loans and 15% for other forex loans. These limits would be set at 40%, 31% and 20% respectively for households with a net monthly income between HUF 250,000 and HUF 500,000. For households earning more than HUF 500,000, repayment would be a maximum 50% for forint loans, 38% for euro-based loans and 25% for other forex loans.

For household mortgage loans, the maximum loan-to-value limit would be 70% for forint loans, 54% for euro loans and 35% for other forex loans.

The proposal would set the maturity of vehicle loans at a maximum of five years, and the loan-to-value limit for these would be 80% for forint loans, 62% for euro loans and 40% for other forex loans.

The MNB said it had sent the proposals and an impact study to the Finance Ministry.

The impact study shows that the use of the proposed regulations could somewhat slow the economic pick-up in the short term, but will make the growth structure more healthy in the long term, reducing risks for households and lowering the current-account deficit, thus reducing the vulnerability of the country as a whole. This could allow the gap between forint and euro interest rates to narrow more rapidly and could improve growth on the long run, the MNB statement said.

The Hungarian Competition Authority (GVH) and some market players too agree that regulation would be more advantageous than self-regulation, said MNB director Péter Tabak. The MNB is proposing the regulations be made at the level of government decree, allowing the most flexibility, but requiring an amendment of the law, he added.

Tabak said the introduction of the proposed regulations would considerably increase the stability of the Hungarian financial sector and that of the Hungarian economy. It would also lessen the country's vulnerability as investors would expect a lower risk premium.

Asked by MTI why the bank had waited so long to make the proposals, Tabak said the MNB had warned banks for years about growing risk related to forex-based loans, and the financial crisis raised the risk even further. Now that everybody can see the problem, it is time to establish regulations for this type of lending in order to avoid a new build-up of this risk, he added.

Asked by MTI whether the restrictions would not hurt Hungary's ability to attract capital, MNB deputy-director Márton Nagy said Hungary does not need any capital inflow which is too risky to finance. He does not expect the inflow to drop added that banks can re-route resources to finance corporate lending anyway.

If the restrictions had been introduced in 2004, forex-based lending would be 15-20% lower, Nagy said. It would have cut the growth rate by 0.3% points on average but would have resulted in a healthier structure, less vulnerability and much lower external debt, he said.

The introduction of the restriction would not have much impact on growth on the short term, as many banks set, in fact, tighter lending conditions at present, Tabak said. (MTI-ECONEWS)