Loans in CHF: Yet another bank­ing sec­tor scan­dal?

Financial Mirror (Cyprus) - - FRONT PAGE - By Ge­orge Moun­tis and Costas Ze­niou

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.

It’s not too dif­fi­cult to es­ti­mate the

by the reach a

full ex­tent

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.

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