Austria banks start reining in retail forex loans

By Boris Groendahl

VIENNA, Oct 14 (Reuters) - Austrian banks have stopped lending to domestic retail customers in foreign currencies in a move to curtail their exposure to market movements, following a strong recommendation from Austrian regulators.

The country's major banks -- including UniCredit's (CRDI.MI) Bank Austria, Erste Group Bank (ERST.VI) and cooperative Raiffeisen -- decided to stop forex retail lending, banks and regulators said, and smaller banks are expected to follow.

"This plea is not new, we and the central bank have warned for years about foreign currency loans," said Kurt Pribil, head of financial watchdog FMA, in an interview on Austrian radio ORF. "We have called on the banks again to rethink their policy in the face of the current crisis."

Austrian retail clients have built up 34.5 billion euros ($47.4 billion) worth of loans in foreign currencies -- almost a third of all retail loans -- since the mid-1990s, most of them mortgages held in Swiss francs EURCHF=.

Foreign currency loans were for a long time pushed to clients as a cheaper way to get credit by benefiting from low interest rates charged for other currencies like the franc and previously also the Japanese yen EURJPY=.

They pose a two-fold risk for clients. Firstly, if the loan currency rises versus the domestic currency, their debt grows. The franc hit a 4-year high against the euro last week, although it has fallen slightly since.

Secondly, those loans are typically due on maturity and backed by a repayment vehicle. Those repayment vehicles are often invested in shares along with other securities, and can fall in value if the market goes down.

"In a situation like this, where financial markets are so turbulent, this can have an impact much quicker," said Austrian central bank director Andreas Ittner, also in a radio interview.

The Austrian banks have exported foreign loans as they have moved to the emerging countries of central and eastern Europe, where they are now the biggest three lenders.

While they have not issued a blanket ban on issuing new forex loans in those countries, they have restricted lending in some, such as Hungary. In others, like Ukraine and Romania, central banks have moved to curb forex loans. [ID:nLD319437] (Additional reporting by Eva Komarek; editing by Sue Thomas)