Hungary central bank moves to limit forex loans

October 5, 2009

ISTANBUL/BUDAPEST, Oct 4 (Reuters) – Hungary’s central bank has proposed regulations to limit foreign currency lending to cut the country’s vulnerability in a financial crisis.

Governor Andras Simor said on Sunday at the International Monetary Fund/World Bank meeting in Istanbul that the central bank, the NBH, had asked the government for extra powers to discourage Hungarians from taking on foreign currency loans in order to lessen the economic impact of any future financial crises.

An NBH press officer told Reuters that the proposals submitted to the government included a limit in loan-to-value in mortgage lending to 70 percent for forint loans, 54 percent for euro loans and 35 percent for other foreign currencies.

Monthly payments would be limited to 23 percent of the income of low-income households for all euro loans and to 15 percent for other foreign currencies.

Hungarian banks currently determine their own such lending limits.

“I consider foreign currency debt exposure as a bubble, as a threat to financial stability, as a systemic risk,” Simor told a seminar at the IMF/World Bank meeting.

“It is very important to put in place regulatory limits that would disable such a build up of foreign exchange debt again … so we are proposing certain major legislative changes.”

Hungary has been harder hit by the global crisis than some of its neighbours, forcing it to resort to a $25.1 billion IMF-led rescue package last year to avoid meltdown.

Hungary was particularly exposed because many companies and consumers had taken out foreign currency loans, which accounted for as much as 90 percent of private debt before the crisis thanks to the lower interest rates offered for borrowing in euros or Swiss francs.

“The new rules … could somewhat slow future economic recovery in the short term, but would lead to growth in a more healthy structure, and could even lift growth in the long term,” the press officer said.

The central bank has already called on banks to reduce such lending voluntarily, but Hungary’s biggest bank, OTP , said it is unlikely to do so.

Simor said at the meeting that the NBH wanted to be able to suspend activities or products which it felt were endangering stability, as well as to propose legislation and actions to the government if it sees risks building up in the economy.

“To these proposals, they will then either have to do what is proposed or explain if they don’t want to follow our recommendation,” he said, without specifying how the government had responded to the proposals.

The central bank also wants to make the foreign currency loans less attractive to consumers, by introducing stricter limits on ratios than for forint-denominated borrowing.

“The result of that will be that while the customer sees the lower interest rates in foreign exchange, he also sees transparently in the terms of the loan the higher risk that he is taking by borrowing in foreign exchange,” Simor said.

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