Austrian Banks Face Basel Capital Charge on Franc Mortgages

  • Basel committee proposes 50% risk add-on for retail FX loans
  • Austrian banks have 26 billion euros FX loans to households

Austrian and Polish banks that offered clients cheap mortgages denominated in Swiss francs may suffer a blow as global regulators ponder imposing a capital surcharge for lending foreign currencies to households.

The Basel committee suggested to apply a 50 percent risk-weight add-on to “unhedged exposures where the lending currency differs from the currency of the borrower’s main source of income” in a proposal for overhauling the measurement of credit risk released on Thursday. The committee’s proposals are for the standardized approach, which will gain in relevance in the future as a backstop for risk weights calculated according to banks’ internal models.

After Hungary converted franc mortgages to forint this year, Austria and Poland are the European countries with the biggest stock of such loans. Austrian banks have 26.1 billion euros ($28.6 billion) of domestic foreign-currency loans on their books as of end-June, according to the FMA supervisor. Polish banks’ franc loans amount to 139 billion zloty ($35 billion).

Austrian banks lent mortgages mostly in Swiss francs until the practice was outlawed at the end of 2008. While new mortgages are only made in euros, the existing stock melts away only slowly, due to the long maturity of the mortgages. The mortgages were popular for their low interest rates, but became a bigger burden for homeowners when the franc surged after Switzerland’s January decision to remove a three-year limit on its gains.

On top of the domestic exposure, Austrian banks have also lent in foreign currencies in eastern European countries including Croatia, Poland and Serbia. Austria’s biggest banks are Erste Group Bank AG, Raiffeisen Zentralbank Oesterreich AG, UniCredit Bank Austria AG and Bawag PSK Bank AG. Poland’s biggest banks are PKO Bank Polski SA, UniCredit SpA’s Bank Pekao SA and Commerzbank AG’s MBank.

Erste said an increase of the risk weight didn’t have an immediate effect because it calculates risk weights according to the internal ratings-based approach.

Before it's here, it's on the Bloomberg Terminal.