Europe Watchdog to Discuss Foreign Currency Loans, Austria Says

The European Systemic Risk Board, Europe’s new 65-member risk watchdog, will discuss ways to reduce the risks of foreign currency loans, said Andreas Ittner, the Austrian central bank’s director responsible for bank supervision.

“The ESRB will be examining this issue, potentially quite soon” to establish a “set of tools” tailored to deal with the potential risks of such loans, Ittner told reporters in Vienna yesterday at a joint dinner with the Financial Markets Authority.

Austrian regulators have warned about Swiss franc-denominated mortgages for 10 years and implemented a ban last year to households without franc revenue. The number of loans in francs to private individuals in Austria has fallen to 210,000 from 270,000 in January 2009, Ittner said.

“The advantage of the ESRB is that this will be examined from a European perspective,” said Helmut Ettl, the FMA’s co-chief executive officer. “Until now there have been possibilities of evading national regulation by offering cross-board loans using the freedom to provide services.”

Austrian banks have granted 176.9 billion euros ($255.5 billion) in foreign currency loans domestically and in central and eastern Europe, according to central bank data. Of this, 58.3 billion euros were granted in Austria, with 88 percent granted in francs. Most of these loans use so-called repayment vehicles that don’t mature before 2020, meaning there still is time to work on a solution, Ittner said.

Eastern Europe

“What for the banks is almost more important is the issue of eastern Europe,” where lenders have granted 118.6 billion euros of foreign currency loans, including 18.3 billion euros in francs, Ittner said. The main issue is the 13 billion euros of franc loans granted to private individuals, he said. Franc loans in eastern Europe typically are loans repaid with installments, which means that there have been delinquencies.

Of the overall loans volume granted by Austrian lenders to eastern Europe, franc loans make up 8.6 percent, Ittner said, adding that from today’s point of view franc loans “are a problem, but they are a manageable problem.”

Lenders including UniCredit SpA, Erste Group Bank AG, Raiffeisen Bank International AG and Bayerische Landesbank have 80 billion francs of household debt in Hungary, Poland and Croatia, Kilian Reber, an emerging-markets analyst at UBS, said on Aug. 23.

Best Performing Currency

The franc is this year’s best performing currency, even after the Swiss central bank cut interest rates on Aug. 3 and pledged to stem further appreciation. Investors consider the currency a haven as the U.S. economy slows and Europe’s debt crisis pushes toward Italy and Spain.

Eastern European borrowers sought franc-denominated loans last decade to escape high interest rates in their local currencies. More than 60 percent of Hungary’s household debt is denominated in francs, equivalent to 16 percent of gross domestic product, according to UBS Wealth Management. That figure is about 10 percent in Poland and Croatia, it said.

More than one in 10 Swiss-franc loans is non-performing in Hungary, compared with 1.5 percent in Poland and 6 percent in Croatia, according to UBS Wealth Management.

Under the wealth manager’s base case, damage to western European banks will be limited as the Swiss economy slows and the central bank works to halt the franc’s advance. It forecasts the franc, which touched a record high of 272 forint on Aug. 10, will weaken to 210 forint in 12 months.

Western European lenders, which control three quarters of eastern Europe’s banking industry, have scaled back loans to each other as the debt crisis worsens and the global economy slows.

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