VIENNA (Reuters) - Hungary’s central bank said on Tuesday the country should consider imposing higher capital requirements on foreign currency loans if banks fail to curb them themselves, while the country’s biggest bank said it was unlikely to do so.
Vice-Governor Ferenc Karvalits told the Reuters Central European Investment Summit on Tuesday the central bank had suggested that Hungary’s financial regulator PSZAF convince the country’s banks to rein in FX lending voluntarily.
“The central bank and the financial regulator declared that if self-regulation does not take place or will not be sufficient, we will think about direct regulation,” Karvalits told the summit.
“It is very tempting to identify FX lending as one of the major causes of the problems in the region. This is indeed the case for a large part of the financial stability risk.”
His remarks echoed those by Austrian central bank governor Ewald Nowotny at the Reuters Summit on Monday, who said such loans had no place in lending to ordinary consumers.
But Hungary’s biggest bank, OTP OTPB.BU, told the summit that as long as Hungary was on track to catch up with western Europe and join the euro currency eventually, there was nothing wrong with lending in euros, including to households.
“As long as there’s such a big difference between the euro and the (forint) base rate, it doesn’t make sense for a customer to take a (forint) loan,” OTP’s new Chief Financial Office Laszlo Bencsik said on Tuesday.
“I think if customers have a choice between (forint) and FX loans and the difference remains so big, the rational choice is to ask for FX, and we as banks have to give them what they ask for,” he said.
Borrowing in hard currencies allowed ordinary consumers in countries like Poland, Hungary or the Baltic Sea states to avoid punitive interest rates at home and remained a big driver of overall loan growth after they joined the EU in 2004.
But such lending exposes borrowers to the risk that their debt payments rise sharply if their local currency drops — especially those who have no revenues in the foreign currency. Banks then face an increased risk that such debt defaults.
It also undermines the central bank’s monetary policy because it allows customers to sidestep it.
Karvalits said that higher capital requirements were the best market-oriented way of giving banks incentives to lend responsibly.
“On the European level there were some discussions that capital requirements can act to limit large exposures,” he said. “That would be the reasonable market-oriented solution.”
However, Karvalits said the best way to rein in FX lending was to remove the incentives that lead to it in the first place — the large difference between euro and forint interest rates, which in turn was due to Hungary’s high inflation.
“If there is not more than a 1, 1.5, or 2 percent difference between euro and forint (rates), households will choose forint,” Karvalits said. “If we succeed with the primary goal of price stability, we (will) also reach a much more reasonable interest level.”
Reporting by Boris Groendahl; editing by Patrick Graham