Poland Risks Financial Meltdown If Loan Conversion Enacted

  • Bank regulator says lenders' costs would dwarf industry profit
  • Budget losses would spiral if banks collapse from legislation

Poland’s banking regulator said a draft law aimed at converting $42 billion in loans denominated in foreign currencies risks the stability of the country’s banks and public finances.

The issue of dealing with mostly Swiss franc-denominated mortgages has become a point of contention for the ruling party, as it seeks to deliver on election promises without collapsing banks and the broader economy. President Andrzej Duda’s plan to make lenders accept repayment on such loans in zloty at a “fair” fixed-exchange rate, which drew criticism from the regulator on Tuesday, was called “pure evil” by central bank Governor Marek Belka.

“The financial impact of the project may not only hurt the stability of some lenders, but also lead to a loss of trust in the banking system and, in a worst-case scenario, fuel a financial crisis,” the country’s Financial Supervision Authority, known by its Polish acronym KNF, said in a statement on its website.

The KNF said that banks face costs of between 44.6 billion zloty ($11.5 billion) and 67.2 billion zloty from the legislation, according to estimates using base-case exchange rates. If the zloty weakens by 25 percent, costs would balloon to as much as 107.2 billion zloty, the regulator said. Warsaw-listed lenders including MBank SA and Bank Zachodni WBK SA fell to intraday lows after the report was released, only to pare losses. MBank closed 0.9 percent lower, while Zachodni declined 1.3 percent, compared with an 0.4 percent drop in Warsaw’s WIG20 index.

‘Unrealistic’ Costs

The expected costs of the bill, if implemented by parliament, dwarf the banking industry’s annual profit, which peaked at 16 billion zloty in 2014, according to KNF data. The regulator’s estimates are based on its survey of 58 Polish lenders that jointly hold 88 percent of country’s banking assets.

It’s “unrealistic” to expect such a costly bill to be introduced, according to Dariusz Gorski, an analyst at BZ WBK brokerage. “The bigger the cost estimate, the lower the chance that the law will take effect in the current form,” he said from Warsaw.

The Presidential office said in a statement that the regulator’s estimates are “a basis for further talks” and that Duda’s priority is to help borrowers, while maintaining the banking industry’s stability.

Poland is following other eastern European countries that moved to convert mortgages denominated in foreign currencies after they proliferated prior to the 2008 financial crisis. While allowing many borrowers to take advantage of lower interest payments, the loans exposed them to currency swings.

Budget Impact

The base-case scenario would mean that 15 banks with the biggest exposure to these loans would post a net loss of 58.4 billion zloty this year, compared with the industry’s expected 2016 net income of 11.1 billion zloty, the regulator said. These lenders wouldn’t pay income tax, cutting budget revenue by 2.8 billion zloty.

Additionally, operations of five banks would be “in danger,” putting an additional 137.8 billion-zloty cost on the government, which guarantees all deposits of up to 100,000 euros ($111,000). Bank clients would lose 70.7 billion zloty of deposits over this level. The law would also have a negative effect on the property market.

The government has from February levied Polish banks with a special tax on assets, seeking to siphon off about a third of their annual profit and help raise money for its flagship child benefit program.

Henryk Kowalczyk, economic adviser to Premier Beata Szydlo, said earlier today before the estimate was published that the government doesn’t want to push banks into losses, adding that the country should still help borrowers “in some way.” Cost could be spread over time, he said. According to the regulator, which cites banks themselves, spreading the cost over time is impossible under current rules.

“Even if the ruling party decides to spread the cost of the bill over 15 years, it means an annual cost similar to the new banking tax” spread between those banks with the biggest Swiss-loan portfolios, BZ WBK’s Gorski said.

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