Romania’s parliament unanimously endorsed the Swiss francs (CHF) loans conversion bill on October 18. Under the bill debtors can ask banks to convert their outstanding debt to local currency loans at the exchange rate prevailing when the loan was extended in 2006-2008.
This was the second law on bank loans drafted with a visibly populist agenda, after the parliament endorsed the debt discharge bill, which protects debtors from further claims by banks after their collateral is given to the bank. The CHF conversion bill has been strongly criticised by the banking sector and the central bank.
The parliament debate on October 18 focussed on justice and fraudulent contracts versus regulatory predictability and financial stability. MPs did not use quantitative judgments to make their case.
In the short term, the CHF loans conversion law is expected to put pressure on the exchange rate, weakening the local currency as banks adjust their balance sheets to accommodate the swap of CHF loans to local currency loans. However, the central bank has already cut the required reserve ratio for foreign currency liabilities by 2pp, removing some of the pressure in advance. The local currency stabilised below RON5.1 to the euro after the vote in parliament, possibly with help from the central bank.
The law will cost banks around €560mn, or 0.6% of banking system’s assets, the central bank claims. Speaking at a conference organised by Coface corporate rating company at the time the law was endorsed, central bank governor Mugur Isarescu slammed the bill, saying that he did not expect to live in times when “contractual discipline is irrelevant”. However, he admitted that the risks should be shared between banks and debtors and that “stability requires bankers’ benevolence, meaning that that banks ought to sit on the same table with customers and negotiate.”
Advocates of the bill argue that there is an opportunity cost rather than a loss, adding that the banks “deserved” the law because they misguided the debtors and sold them “toxic loans”.
Bursa daily, a constant critic of the central bank for its alleged favouring of foreign financial groups, published a leaflet from a commercial bank dating from before the recession, where the bank was arguing in favour of CHF loans.
On a more pragmatic note, Fitch Rating said banks can afford the loss and the bill will not harm their ratings.
“This [loss incurred by banks] is equivalent to around 50% of the sector's annualised 2016 net profit, based on 1H16 data. We understand that this estimate does not take into account any reserves already set aside by banks against the CHF portfolios. The actual figure could well come in below the estimate,” Fitch said.
The debt discharge law is going to be screened by the Constitutional Court this autumn. Most likely, the banks will also object to the CHF loans bill, since it generates significant losses, though they are not expected to be systemically relevant - as admitted by the central bank.
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.