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Frankivichi. NBP on foreign currency loans and recommendations for banks

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The National Bank of Poland informed that the uncertainty regarding the costs related to the portfolio of housing foreign currency loans is high and the realization of some scenarios may threaten the stability of the financial system. In the opinion of the central bank, the decision of the Civil Chamber of the Supreme Court will have a significant impact on the scale of costs related to this risk.

On Wednesday, the NBP published the “Financial Stability Report – June 2021”. As emphasized, the effects of the pandemic do not threaten the stability of the domestic banking sector. “The COVID-19 pandemic, despite its significant impact on the real economy and the expected further write-offs for credit losses, does not threaten the stability of the domestic banking sector. At the same time, despite a significant decline in credit dynamics for the non-financial sector, there are no signs of excessive reduction in credit supply” – indicated.

According to the central bank, the expected improvement in the economic situation in the coming quarters should favor a gradual recovery in loan demand. The NBP stated that “the previous lack of significant financial imbalances, high levels of capital in the banking system and support measures from fiscal, monetary and macroprudential policies ensure that the financial sector as a whole retained the ability to absorb significant losses”.

According to the central bank, even in highly pessimistic macroeconomic scenarios, the vast majority of banks, including all of systemic importance, will be able to cope with possible losses and will still have sufficient capital to meet regulatory requirements.


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Foreign currency loans

At the same time, the central bank stated that “the legal risk of the foreign currency mortgage portfolio is the main threat to the stability of the financial system”.


“The legal risk of the portfolio of mortgage loans denominated in foreign currencies is high and has recently become the main threat to the stability of the financial system in Poland. The size of possible losses of the banking sector will depend on the scale of creating further write-offs for legal risk, which will be significantly influenced by the shape of the expected The verdict of the Civil Chamber of the Supreme Court (IC Supreme Court). Its wording also determines the willingness of banks and their clients to enter into voluntary settlements “- the report wrote.

As it was added, the uncertainty about the costs related to the portfolio of foreign currency loans is currently high, and if “some potential scenarios” are realized, then the losses of banks may be so high that they threaten the stability of the financial system.

According to the “Financial Stability Report – June 2021”, the write-offs related to foreign currency mortgage loans themselves may have a negative impact on the situation of banks if they accumulate with losses related to the pandemic. “Credit losses caused by the pandemic should not significantly weaken the capital position of banks. However, the possible overlap of significant charges to the legal risk of foreign currency loans could threaten the stability of some of them,” we read.

Although, as indicated in the report, the Bank Guarantee Fund has the appropriate instruments to reduce systemic risk related to the difficulties of individual entities, the use of BGF funds would, however, mean the need to supplement them by other credit institutions in the future. This, in turn, would further reduce the profitability of the banking sector in the long run.

Recommendations to banks

In its report, NBP also included recommendations for the financial sector. Among the recommendations for banks is the suggestion to maintain a prudent capital policy “until the effects of the pandemic and the effects of the Supreme Court rulings on foreign currency loans are fully recognized.”

In addition, in the central bank, “banks and borrowers should seek out-of-court dispute resolution and settlement in matters relating to foreign currency housing loans.”

In addition, the central bank recommends financial institutions to review contracts that use LIBOR as the benchmark, which will cease to be produced at the end of this year. The NBP also recommends continuing prudent credit policy for real estate purchases.

Resolution of the Supreme Court

At the end of January this year, the first president of the Supreme Court, Judge Małgorzata Manowska, asked the Civil Chamber of the Supreme Court to resolve legal issues relating to the so-called foreign currency loans.

Małgorzata Manowska’s application includes six questions, which include, inter alia, the issue of loan conversion. As emphasized, the answers to the questions presented should comprehensively “resolve the most serious controversies” that have emerged against the background of jurisprudence regarding foreign currency loans.

The Civil Chamber of the Supreme Court was scheduled to deal with these questions on May 12. The meeting started around 13.00. However, just before 7.00 p.m., the spokesman of the Supreme Court, Aleksander Stępkowski, announced that the court’s decision had been postponed. He did not say when the next meeting on this matter would be held.

Main photo source: Shutterstock

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