Foreign currency loans and repayment vehicle loans

Foreign currency and repayment vehicle loans carry a number of systemic risks.

In the case of foreign currency loans that are linked to repayment vehicles, unfavorable exchange rate and asset price movements may simultaneously affect a majority of borrowers. This will increase credit risk for lending banks, and – due to the threat of contagion – there will also be heightened systemic risk. This danger is particularly high when borrowers default on mortgage loans, forcing the lending bank to sell a number of collateral properties located in close proximity to each other all at the same time. Furthermore, in foreign currency lending, banks are exposed to heightened refinancing risk because they may not have sufficient deposits in the equivalent currency.

In the wake of the financial crisis, many of these risks materialized. More specifically, it became obvious that in the event of a crisis, it is likely that several risk components occur simultaneously (e.g. a foreign currency appreciation and a slump in asset prices).

Supervisory measures to reduce the risks of foreign currency and repayment vehicle loans

Initial supervisory measures taken in Austria, such as the issue of the Minimum Standards for Granting and Managing Foreign Currency Loans and Loans with Repayment Vehicles by the Financial Market Authority (FMA) in 2003 (the Minimum Standards) and the publication of an information brochure for bank customers in 2006, helped stem the increase in this type of loan to some extent. But it took the lessons learned from the financial crisis and the more stringent supervisory approach that was adopted in its aftermath to achieve a sustained reduction in foreign currency lending. The FMA followed up its urgent recommendation to banks not to grant foreign currency loans to households with an extension of its Minimum Standards in March 2010. Moreover, Austria has implemented the set of seven recommendations published by the European Systemic Risk Board (ESRB) in the fall of 2011 with a view to curbing lending in foreign currency.

Integrating the three previous versions, the new Minimum Standards issued by the FMA in 2013 also take account of both the ESRB’s recommendations and supervisory experience. In particular, they address the issue of foreign currency lending by subsidiaries of Austrian banks abroad (especially in Central, Eastern and Southeastern Europe and the countries of the Commonwealth of Independent States). In addition, domestic banks’ business in the region is subject to Guiding Principles published by the OeNB and the FMA in 2010. As a result of the implementation of the Guiding Principles and several local supervisory initiatives, the share of foreign currency loans to households and nonfinancial corporations decreased somewhat, and the share of non-euro-denominated foreign currency loans, especially Swiss franc-denominated loans, also declined.

Foreign currency and repayment vehicle loans in Austria since 2008

Foreign currency and repayment vehicle loans to domestic borrowers, in particular households, have been declining continuously since fall 2008. Between late 2008 and end-2012, foreign currency loans to households (adjusted for exchange rate effects) shrank by more than one-third, and foreign currency loans to nonfinancial corporations by more than 40%. However, the real decline in foreign currency lending had been offset by the appreciation of the Swiss franc before the exchange rate ceiling established by the Swiss central bank in late summer 2011 helped stabilize the exchange rate.