The foreign currency mortgage loans in the Polish banking sector and its possible macroeconomic and political consequences

Abstract

According to the Polish Banking Supervision (KNF) statistics , banking mortgage loans total 22.4% of the overall assets of the Polish banking credit portfolio as of January 2015 data. Around 15% of those loans might have Loan To Property Value proportion (LTV) exceeding 100%. Rapid growth of mortgage loans in Poland was the result of growth of foreign currency mortgage loans. That was the typical situation for Central and Eastern European Countries. In the Polish banking sector, collective provisions typical for retail segment including IBNR (Identified but nor Reported Loss Provisions) provision applied under current IAS 39 seems to be too low to cover credit risk. Assuming conservative credit risk parameters in determining collective provisions might affect adversely the financial situation of the Polish banks. The financial results of the Polish banks might go down considerably. In addition, borrowers having loans denominated in foreign currency have won certain legal cases in Europe and in Poland. Therefore, the presence of the foreign currency denominated mortgage loans (FCML) in the Polish banking sector represents an element of the systemic risk and has to be solved. Growth of FCML weakens the abilities of central banks to control over credit creation and to steer monetary policy. On the other hand, compulsory conversion of the mortgage loans hitherto denominated in foreign currency into mortgage loans in Polish zloty by special law, might create considerable losses in the Polish banking sector and reduction of Capital Adequacy Ratio of the Polish banks. Therefore, direct replication of the Hungarian style legal solution of the foreign currency banking (compulsory loan currency conversion into PLN) loans might create problems in the Polish banking sector. Moreover, potential state aid devoted to some borrowers in Poland that have saved significant amount of money having cheaper foreign currency mortgage loans is controversial from the social justice point of view. Law should not treat favourable one group of borrowers at the expense of the another one. Any legal solutions to sort out the problem of foreign currency loans have to take these facts into consideration. Given that background, the paper present several ways to resolve the problem of the foreign currency loans in the Polish banking sector. Complex solution how to tackle FCML problem in the Polish banking sector is needed. Any realistic solution is going to be is linked with extra provisioning after thorough investigation of real nature of FCML borrowers in Poland (households) and their financial standing. Polish Banking Supervision (KNF) should play a leading role in initiating such survey leading to more credible credit risk parameters in IAS 39.