Publication: Regulation of Foreign Currency Mortgage Loans : The Case of Transition Countries in Central and Eastern Europe
Date
2010-12
ISSN
Published
2010-12
Author(s)
Dübel, Hans-Joachim
Walley, Simon
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.
Citation
“Dübel, Hans-Joachim; Walley, Simon. 2010. Regulation of Foreign Currency Mortgage Loans : The Case of Transition Countries in Central and Eastern Europe. © World Bank, Washington, DC. http://openknowledge.worldbank.org/entities/publication/904d02ac-2563-5aa9-81a0-de81f5849e95 License: CC BY 3.0 IGO.”