Loans in CHF: Yet another banking sector scandal?
Swiss franc denominated loans started blooming in Cyprus in 2006, when the Republic was a candidate for euro area membership. At the time, Swiss franc loans lured in consumers on the premise of a significantly reduced cost of borrowing.
Around 11,000 of borrowers will be affected parliamentary Finance committee should they decision on the CHF loans.
Currently, borrowers in Swiss francs have seen their loans inflate as a result of the Swiss currency gaining significant strength against the euro. At present, a euro trades at less than 1.1 Swiss francs, whereas some borrowers have borrowed at rates above 1.6.
On September 21, Members of Parliament asked the Central Bank of Cyprus (CBC) to investigate the cost to local banks to convert mortgages in CHF to euros at their original exchange rates. The CBC has just two weeks to communicate with the banks and provide its opinion and parliament warned that legislation regarding the case would follow even without an answer from the CBC.
The significant volume of CHF denominated loans in the Cyprus is suggestive of the banks’ foreign currency loan selling practices in previous years.
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of the damage. The billion euro question concerns the legality of these loans, particularly whether Cypriot banks were transparent in communicating risks involved. There is already a precedent set for CHF loans in Croatia, Greece and Hungary, where the banks bear the FX hit.
This is not the only case where a European court has ruled in favour of the consumer when it comes to foreign denominated loans. A recent court decision in Athens called for the banks to pay for the full extent of the foreign currency hit. The court cases stress that European consumers are protected against dubious selling practices that banks evidently engaged in.
From our perspective, some banks have handled the CHF issue more responsibly than others. Most banks are willing to share at least some of the burden of foreign currency loans and our restructuring practice has forced banks to negotiate up to 100% of the foreign exchange loss, especially in the case of mortgages or personal loans. Whereas some banks deal with each case individually, others employ universal policies of 5-12% write-offs. The Greek subsidiaries appear to be more advanced at dealing with these types of cases, settling at much higher write-offs.
In most cases, however, this will require significant negotiating and even the threat of legal action. Most consumers will be unable to resist the banks’ negotiating tactics.
Moreover, as a general rule banks are willing to write off just 5-12% of the hit, arguing that the borrowers were well aware and informed of the risks. Additionally, the borrowers are required to sign off their rights to any further claims. It should be clear that consumers are protected against mountains of non-transparent lending.
There is no arguing that banking practices regarding foreign currency loans have been dubious in the past. Although an authoritative decision on foreign currency loans should force the banks to accept responsibility, it will take a significant toll on an already fragile financial sector.