Romania’s main parties agree in principle on CHF loans conversion law

By bne IntelliNews October 5, 2016

The two major political parties in Romania are close to endorsing a law on converting the loans extended to households in Swiss francs (CHF) to local currency loans at the exchange rate prevailing at the date when the contract was signed. 

The central bank has warned that the bill would cost the banks around €540mn, or 0.6% of banking system’s assets. Six banks would see their capital adequacy below the recommended level, and at two it would fall below the mandatory level.

The specific details of the bill have still not been tackled, and the central bank has suggested at least some limitations could be set on the conversion, such as on the volume of the individual loans. However, lawmakers are likely to reject such provisions as they argue that all CHF loans were aimed at deluding customers.

Most of the CHF loans (90%) were extended to households in 2005-2009, before the financial crisis. The CHF’s sharp strengthening in January 2015 pushed debtors into deep problems, which had social repercussions and led to debtors blaming banks for their aggressive selling of risky financial products. However, the central bank has pointed out that a large number of bankers took out large CHF loans, indicating that they underestimated the risks.

The volume of CHF loans extended to households at the end of June was RON5.8bn (€1.3bn), 3% of total non-government loans or 5% of the loans extended to households, National Liberal Party (PNL) MP Andrea Paul, one of the supporters of the bill, said in a column published by Ziarul Financiar daily last week. She estimates a cost of €1.35bn for the conversion of all foreign currency loans at the time when the contracts were signed, out of which the cost of converting the CHF loans (which seems to be the ultimate focus of the law) is €800mn.  

Lawmakers on the parliament’s expert committee discussed the topic on October 4, but deferred discussions of the text of the bill until October 10. The following day it is due to be voted on by the Chamber of Deputies. Both major political parties have said that they agree in principle on the conversion of CHF loans into local currency loans at the exchange rate at the time of the signing of the contract, on the grounds that the loans were unfair.

The rhetoric of country’s two major parties has visibly moved from technical details to social protection.

“We agree the text of the law that rights a wrong, […] the people were deluded by the banks,” the leader of the Social Democratic Party (PSD), Liviu Dragnea, stated on October 4 according to Hotnews. He stressed that he was speaking only about CHF loan debtors, and not about the foreign currency loans in general. However, the law as it was initially drafted and approved by the Senate is about the foreign currency loans in general. The text to be discussed by the Chamber of Deputies will be significantly amended.

The PNL had already told its lawmakers to vote for the conversion of the CHF loans at the exchange rate at the time when the contract was signed.

The monetary authority estimates that the bill would cost the banks around RON2.4bn (€540mn), according to the central bank’s financial stability head Eugen Radulescu, local media reported. Capital adequacy would decrease from 19.1% at the end of June (latest data available) by 1.8pp, which seems acceptable, he added.

However, Radulescu warned that two banks’ capital adequacy would drop below the 8% mandatory level while four more would see their ratios fall below the recommended 10% level.  

Bankers’s Association head Florin Danescu told a meeting in the parliament on the issue on October 3 that the law would have the effects of “a tsunami”, but did not come up with a specific estimate of the impact. The statistics related to the CHF loans remain unclear since a large amount of the loans were “externalised”, namely were sold to entities owed by the financial groups abroad, and hence they are no longer on the balance sheets of the local banks while still posing risks to their profits. A large amount of CHF loans have already been converted by banks under individual conversion plans. The central bank’s Radulescu speaks of 50,000 CHF loans at this moment, out of 70,000 initially extended by banks.

The distribution of the CHF loans by banks was in 2015 as follows: Bancpost Romania (32%), Volksbank Romania - which has since been taken over by Banca Transilvania (24%), Piraeus Bank Romania (20%), Raiffeisen Romania (11%), Banca Romaneasca (7%), OTP Bank (2%) and other banks (4%). Of the 40 local banks, 11 have extended CHF loans.

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