Economy
ECB: Hungary's new FX loan relief law could hurt financial stability
The ECB has recently published its opinion on new general measures stemming from the Hungarian Supreme Court’s decision on consumer loan contracts.
The highlights of the opinion are the following:
Hungary’s Justice Minister has submitted to Parliament a bill on 27 June on the first batch of measures aimed at providing a relief for foreign currency borrowers on Friday.
A week later lawmakers passed the bill, but not before several amendments were made to the draft law.
The ECB said that it received on 27 June a request from the Hungarian Ministry of the National Economy for an opinion on a draft law on certain measures relating to consumer loan contracts.
“Several amending proposals to the draft law were submitted to the Hungarian Parliament, none of which was sent to the ECB. Furthermore, the draft law was adopted by the Parliament on 4 July 2014. Under these circumstances, the ECB has adopted its opinion based on the adopted law," the ECB added.
The ECB underlined that the draft law was adopted on 4 July 2014, shortly after the ECB was consulted, and before it could adopt its opinion.
“As a consequence, it was not possible for the Hungarian Parliament to take the ECB’s views into account before legislating. Moreover, the law differs substantially from the draft law as a result of several amendments submitted to the Parliament in the interim, none of which was sent to the ECB in draft form. Under these circumstances, this opinion is based on the law."
“The Hungarian authorities have therefore failed to comply with their duty to consult the ECB."
“The adoption of the law in no way relieves the authorities of their duty to consider this opinion, since this duty is important for the application and interpretation of the law and any possible future amendments," the ECB said.
In this respect, the ECB emphasised that even in cases of particular urgency the national authorities are obliged consult the ECB at an appropriate stage in the legislative process that allows sufficient time for: (a) the ECB to examine the draft legislative provisions and adopt its opinion in all required language versions; and (b) the national authorities to take into account the ECB’s views.
“The ECB would therefore appreciate the consulting authority honouring its consultation obligation [...] in future."
Major burden on the banks
“Acknowledging that Directive 2014/17/EU of the European Parliament and of the Council does not apply to credit agreements existing before 21 March 2016, the retroactive effect of the law does not seem to be in line with the general aim and principle of Article 23(5) of Directive 2014/17/EU," the ECB said.
This Directive allows Member States to further regulate foreign currency loans, on the condition that such regulation is not applied with retroactive effect.
The ECB suggests that “the Hungarian authorities carry out a thorough analysis of the possible effects of the measures having retroactive effect, as such measures could put a significant strain on the banking sector, potentially adversely affecting the stability of the Hungarian financial sector as a whole, and possibly resulting in adverse spillover effects on the economy."
“Preliminary estimates by affected banks suggest that the potential one-off impact of the measures could be more significant than the losses that the banking system incurred in 2011 as a result of the early repayment scheme."
“While the banking sector’s current capital position is stronger than before the implementation of the early repayment scheme, the potentially significant costs of the new measures may in some cases require material capital injections from the owners of the financial institutions to restore regulatory capital ratios and lending capacity to levels prevailing before the law was adopted," said the ECB.
Meaningful dialogue needed!
The ECB reiterated that in this context “it is of the utmost importance that a meaningful dialogue takes place between the Hungarian authorities and all the relevant stakeholders, including authorities in other Member States."
Consultation with such stakeholders might shed light on macro-prudential issues which are not apparent at national level, it added.
“Furthermore, an exchange of views with the MNB, which is the authority responsible for macro-prudential issues, could help to coordinate effective action without impacting financial stability. In addition, the Hungarian authorities should ensure a proper and timely consultation of competent European authorities, including the European Commission, the European Banking Authority, the European Systemic Risk Board and the ECB on any further measures as anticipated in Article 3(5) of the law."
What about converting FX loans?
To this end, when laying down further measures applicable to the method of repayment or write down of the amounts to be repaid to customers as a result of the law, and the method for potentially converting FX loans, the ECB suggests that “due consideration should be given to the interests of the general public, including financial institutions and borrowers, as well as the authorities responsible for ensuring the stability of the financial system in Hungary."
“In particular, further measures to be applied to the planned conversion of FX loans should also take into account the need to preserve financial stability, ensure an appropriate burden sharing among all stakeholders and avoid moral hazard in the future."
The ECB has also warned that with regard to the high percentage of the entities operating in the Hungarian banking sector owned by foreign banking groups, and depending on the nature of the further measures applicable to the method of repayment or write down of the amounts to be repaid to customers, cross-border spillover effects on banking groups’ consolidated profits and capital positions may occur.
“In the past few years, losses stemming from other government measures, including the bank levy, the financial transaction tax and the early repayment scheme for FX loans, were offset by capital injections by foreign parent banks to ensure the stable functioning of their subsidiaries, highlighting their long-term commitment to the financial sector. Moreover, the MNB, as the competent banking supervisor, may wish to consider how it would address a capital shortfall in a Hungarian credit institution resulting from application of the law."
The whole economy could feel the impact
“In addition to the possible significant adverse financial impact on the banking system, the possibility of negative effects on the Hungarian economy and financial markets cannot be excluded. .
“This should also be taken into consideration in establishing the further measures on the conditions of the financial settlement between credit institutions and their customers and on the conversion of FX loans into forint so that these measures do not jeopardise macro-economic and financial stability in Hungary," warned the ECB.
The highlights of the opinion are the following:
- the ECB was not given sufficient time to review the draft law on certain measures relating to consumer loan contracts
- several amending proposals to the bill were never sent to the ECB
- the retroactive effect of the law is incompatible with certain EU directives
- the potential one-off impact of the measures on banks could be more significant than the losses incurred by the banking sector in 2011 as a result of the early repayment scheme;
- foreign parents may decide on capital injections to ensure the functioning of their Hungarian subsidiaries
- the whole Hungarian economy and financial markets could feel the impact of the measures
Hungary’s Justice Minister has submitted to Parliament a bill on 27 June on the first batch of measures aimed at providing a relief for foreign currency borrowers on Friday.
A week later lawmakers passed the bill, but not before several amendments were made to the draft law.
The ECB said that it received on 27 June a request from the Hungarian Ministry of the National Economy for an opinion on a draft law on certain measures relating to consumer loan contracts.
“Several amending proposals to the draft law were submitted to the Hungarian Parliament, none of which was sent to the ECB. Furthermore, the draft law was adopted by the Parliament on 4 July 2014. Under these circumstances, the ECB has adopted its opinion based on the adopted law," the ECB added.
The ECB underlined that the draft law was adopted on 4 July 2014, shortly after the ECB was consulted, and before it could adopt its opinion.
“As a consequence, it was not possible for the Hungarian Parliament to take the ECB’s views into account before legislating. Moreover, the law differs substantially from the draft law as a result of several amendments submitted to the Parliament in the interim, none of which was sent to the ECB in draft form. Under these circumstances, this opinion is based on the law."
“The Hungarian authorities have therefore failed to comply with their duty to consult the ECB."
“The adoption of the law in no way relieves the authorities of their duty to consider this opinion, since this duty is important for the application and interpretation of the law and any possible future amendments," the ECB said.
In this respect, the ECB emphasised that even in cases of particular urgency the national authorities are obliged consult the ECB at an appropriate stage in the legislative process that allows sufficient time for: (a) the ECB to examine the draft legislative provisions and adopt its opinion in all required language versions; and (b) the national authorities to take into account the ECB’s views.
“The ECB would therefore appreciate the consulting authority honouring its consultation obligation [...] in future."
Major burden on the banks
“Acknowledging that Directive 2014/17/EU of the European Parliament and of the Council does not apply to credit agreements existing before 21 March 2016, the retroactive effect of the law does not seem to be in line with the general aim and principle of Article 23(5) of Directive 2014/17/EU," the ECB said.
This Directive allows Member States to further regulate foreign currency loans, on the condition that such regulation is not applied with retroactive effect.
The ECB suggests that “the Hungarian authorities carry out a thorough analysis of the possible effects of the measures having retroactive effect, as such measures could put a significant strain on the banking sector, potentially adversely affecting the stability of the Hungarian financial sector as a whole, and possibly resulting in adverse spillover effects on the economy."
“Preliminary estimates by affected banks suggest that the potential one-off impact of the measures could be more significant than the losses that the banking system incurred in 2011 as a result of the early repayment scheme."
“While the banking sector’s current capital position is stronger than before the implementation of the early repayment scheme, the potentially significant costs of the new measures may in some cases require material capital injections from the owners of the financial institutions to restore regulatory capital ratios and lending capacity to levels prevailing before the law was adopted," said the ECB.
Meaningful dialogue needed!
The ECB reiterated that in this context “it is of the utmost importance that a meaningful dialogue takes place between the Hungarian authorities and all the relevant stakeholders, including authorities in other Member States."
Consultation with such stakeholders might shed light on macro-prudential issues which are not apparent at national level, it added.
“Furthermore, an exchange of views with the MNB, which is the authority responsible for macro-prudential issues, could help to coordinate effective action without impacting financial stability. In addition, the Hungarian authorities should ensure a proper and timely consultation of competent European authorities, including the European Commission, the European Banking Authority, the European Systemic Risk Board and the ECB on any further measures as anticipated in Article 3(5) of the law."
What about converting FX loans?
To this end, when laying down further measures applicable to the method of repayment or write down of the amounts to be repaid to customers as a result of the law, and the method for potentially converting FX loans, the ECB suggests that “due consideration should be given to the interests of the general public, including financial institutions and borrowers, as well as the authorities responsible for ensuring the stability of the financial system in Hungary."
“In particular, further measures to be applied to the planned conversion of FX loans should also take into account the need to preserve financial stability, ensure an appropriate burden sharing among all stakeholders and avoid moral hazard in the future."
The ECB has also warned that with regard to the high percentage of the entities operating in the Hungarian banking sector owned by foreign banking groups, and depending on the nature of the further measures applicable to the method of repayment or write down of the amounts to be repaid to customers, cross-border spillover effects on banking groups’ consolidated profits and capital positions may occur.
“In the past few years, losses stemming from other government measures, including the bank levy, the financial transaction tax and the early repayment scheme for FX loans, were offset by capital injections by foreign parent banks to ensure the stable functioning of their subsidiaries, highlighting their long-term commitment to the financial sector. Moreover, the MNB, as the competent banking supervisor, may wish to consider how it would address a capital shortfall in a Hungarian credit institution resulting from application of the law."
The whole economy could feel the impact
“In addition to the possible significant adverse financial impact on the banking system, the possibility of negative effects on the Hungarian economy and financial markets cannot be excluded. .
“This should also be taken into consideration in establishing the further measures on the conditions of the financial settlement between credit institutions and their customers and on the conversion of FX loans into forint so that these measures do not jeopardise macro-economic and financial stability in Hungary," warned the ECB.
