Regulation of Foreign Currency Mortgage Loans : The Case of Transition Countries in Central and Eastern Europe

Abstract

The current financial crisis has had a
 major impact on the financial sectors of the Central and
 Eastern European (CEE) region. The impact has been
 exacerbated in many cases by the presence of foreign
 currency mortgage loans. The risk is both for the borrower,
 who has to make loan repayments in a currency different from
 that of the income he or she is generating, and for the
 banks, who need to fund themselves in a foreign currency.
 This study seeks to determine whether foreign currency
 mortgage loans really represent a major risk to all systems
 where they are present and then to assess what measures have
 been taken to deal with it. The optimal regulatory response
 will be appropriate for the macroeconomic context and also
 the consumer needs and best interests. A complete ban on the
 foreign currency product class appears appropriate for
 low-inflation economies, where consumer benefits from the
 product are low and the risk of speculation and has sent
 demand higher. Within that subset, fiscal support and other
 steps to further develop funding markets and improve
 affordability are likely to be required to help support
 local currency products. Also, these are the economies most
 likely to access the Euro in the near future, with limited
 exchange rate risk. Examples are Poland or the Czech
 Republic. For higher inflation economies facing choices of
 de-dollarization on one hand and possible imminent access to
 Eurozone on the other, foreign currency mortgages are likely
 to remain a part of the product menu for the near future.
 The challenge is to design a combined support and regulation
 strategy that creates a fair risk sharing arrangement
 between consumers and lenders and limits lender liquidity risks.