This page describes the risks arising from foreign currency loans and loans with a repayment vehicle in greater detail, and also covers the supervisory authority’s activities to date for mitigation of foreign currency loans to private households in Austria.
During the financial market crisis, the additional risks associated with foreign currency loans (FX lending) and loans with repayment vehicles (RV lending) for banks and consumers alike became increasingly apparent. For credit institutions, such risks predominantly relate to refinancing risk, reputational risk and the potential risk of a future default as a result of a potentially detrimental development in the exchange rate for the borrower. On the consumer side, the risk primarily consists of interest rate risk, exchange rate risk, repayment vehicle risk and the risk of unplanned costs.
For a long time, the volume of foreign currency loans (FX lending) and loans with repayment vehicles (RV lending) that were granted to private households in Austria was very high compared to other countries, and therefore presented various risks for the domestic financial market. This state of affairs was frequently viewed with particular criticism from the quarters of the international financial institutions (the International Monetary Fund (IMF), the World Bank, and the European Systemic Risk Board (ESRB)) and detrimentally affected Austria’s reputation as a financial centre. In the meantime, the volume of foreign currency loans has been reduced to a minimal level. At the end of the 1st quarter of 2023, the share of foreign currency loans to overall lending to private households stood at only 4.5%. A sustainable reduction can be observed in comparison with the situation in 2006, when foreign exchange loans accounted for 31.8% of lending to private households. The risks emanating from existing foreign exchange lending of Austrian credit institutions are no longer considered a threat to the stability of the Austrian financial market. However, individual credit institutions remain exposed to an increased level of risk from foreign exchange loans. The FMA therefore remains vigilant about new developments in its supervision of individual credit institutions.
Minimum Standards 2003
In October 2003 the Financial Market Authority published “FMA Minimum Standards for Granting and Managing Foreign Currency Loans (FMA-FX-MS)” and “FMA Minimum Standards for Granting and Managing Loans with Repayment Vehicles (FMA-TT-MS)”, aimed at all credit institutions that were authorised to conduct lending business (Article 1 para. 1 no. 3 BWG).
Recommendation to halt the granting of foreign currency loans 2008 / Minimum Standards 2010
Since the financial crisis had contributed to significant increases in the aforementioned risks, on 10 October 2008, the FMA explicitly recommended to the banking industry, in accordance with its legal mandate as part of its duties to take into consideration the economic interest of a banking system that was capable of functioning as well as financial market stability (Article 69 para. 1 BWG), to no longer grant foreign currency loans to private households. In order to achieve a sustainable reduction in risks related to banking transactions in relation to the total volume of foreign currency loans to private households, the respective Minimum Standards (FMA-FX-MS and FMA-TT-MS) were extended in 2010 and published as (FMA-FXTT-EMS).
FMA Minimum Standards 2013
On 2 January 2013 new FMA Minimum Standards for the Risk Management and Granting of Foreign Currency Loans and Loans with Repayment Vehicles (FMA-FXTT-MS) entered into effect in Austria. The main purpose for the revision of the three existing Minimum Standards (FMA-FX-MS, FMA-TT-MS and FMA-FXTT-EMS) was on the one hand the necessity to update and expand them in light of the ESRB Recommendations on lending in foreign currencies (ESRB/2011/1) published in September 2011, and on the other hand to also allow the experience gathered previously during supervisory activities to be reflected in the Minimum Standards. Furthermore, combining three existing Minimum Standards into a single document also helps to achieve a better overview and greater coherence in regard to the previous FMA Minimum Standards on the Foreign Currency Loans and Loans with Repayment Vehicles.
The 2013 version of the FMA-FXTT-MS also implemented the recommendation (G.2) from ESRB/2011/1, which advises supervisory authorities in home Member States (home supervisors) to publish measures regarding foreign currency loans taken in host Member States (by host supervisors) on their website.
Revised FMA Minimum Standards 2017
In the revised FMA Minimum Standards published in 2017, the information obligations of credit institutions towards borrowers have been extended significantly, and standards for improving market transparency included as well as a separate chapter about the risk provisions to be taken by credit institutions. These new Minimum Standards entered into force on 1 June 2017.
- Extended information obligations: Once the remaining time to maturity of the loan is seven years or less, the bank is required to send an annual information letter about the current amount of the loan that is still outstanding, as well as, where applicable, also the current status of the repayment vehicle.
- Improving Market Transparency: Banks, whose outstanding foreign currency loan volume is more than 10% of the total loans, or who are expected to have significant legal or operational risks resulting from foreign currency loans and/or loans with repayment vehicles, or who are expected to have a funding gap of at least 20%, shall be required to make certain disclosures toward the financial market, in order to provide a comprehensive picture of their risk profile.
- Strengthening the Risk Provisioning of Banks: For the provisioning of risk (value adjustments, write-downs, reserves) a forward-looking approach is to be taken that increasingly focuses on future expected losses.
Revised FMA Minimum Standards 2023
In the revised FMA Minimum Standards 2023 there has again been further clarification and enhancements in several aspects in relation to the principle of proportionality regarding the credit institution’s reporting and auditing obligations. This revised version entered into force on 03 August 2023.
- Frequency of the Risk Assessment: the frequency of conducting the regular reporting to the management body about observations of a risk-relevant nature may occur in accordance with the credit institution’s risk situation in relation to FX and RV lending.
- Requirements for the Stress Test: the scope of the stress test to be performed on an annual basis regarding the impact of exchange rate movements on the foreign currency loan portfolio may occur in accordance with the credit institution’s risk situation that is deduced in relation to FX and RV lending.
- Disclosure provisions: the indicators that are to be taken into account for observing disclosure provisions are to be understood dependent on the credit institution’s risk situation in relation to FX and RV lending.
- Auditing obligation of the internal audit function: The frequency of audit obligations by the internal audit function may be determined in accordance with the credit institution’s risk situation that is deduced in relation to FX and RV lending.
01/2023 FMA-Mindeststandards zum Risikomanagement und zur Vergabe von Fremdwährungskrediten und Krediten mit Tilgungsträgern – Neufassung vom August 2023 (Format: pdf, Size: 219,2 KB, Language: German)
Minimum Standards do not constitute a legal regulation, but should be viewed as the Financial Market Authority’s interpretation in its capacity as the competent supervisory authority with regard to legal due diligence obligations. In referring to Article 39 paras. 1 and 2 BWG, the FMA expects credit institutions to comply with these Minimum Standards in relation to the granting of and managing of foreign currency loans and loans with repayment vehicles. The Minimum Standards do not, however, prevent credit institutions from setting higher (internal) standards.
A foreign currency loan is a highly speculative financial product, which from the FMA’s perspective is unsuitable or only suitable in specific circumstances for private households. Since the FMA was established in 2002, it has always warned about the risks associated with foreign currency loans.
The FMA has urged credit institutions to exercise particular care in conjunction with foreign currency loans by issuing a Minimum Standards document about this topic. The “Minimum Standards for the Risk Management and Granting of Foreign Currency Loans and Loans with Repayment Vehicles” can be found on the FMA website: Minimum Standards.
The FMA has produced an information leaflet jointly in conjunction with the Oesterreichische Nationalbank and the Austrian Economic Chambers, which informs about the particular risks of foreign currency loans and explicitly warns against this kind of currency speculation, also making use of some practical example calculations. This leaflet can still be downloaded (in German only) from the FMA website.
In October 2008, at the height of the global financial crisis, the FMA imposed a de facto ban on the new issuance of foreign currency loans to private households that still applies today. At the same time, the FMA has also obliged credit institutions to constantly monitor the development of each and every foreign currency loan that it has issued, and in the event of an increased risk to hold a meeting with the customer to suggest measures to be taken.
The FMA has always welcomed banks making sensible offers to customers to convert foreign currency loans into a euro-denominated repayment loan, in particular since the FMA in this particular context does not have any specific powers to intervene. When the Swiss National Bank announced in 2011 that it would cap the exchange rate at CHF 1.20 / EUR until further notice, the FMA urged borrowers holding foreign currency loans to check out the possibility of conversion into a euro-denominated loan.
With the removal of the cap on the Swiss Franc exchange rate, the exchange rate risk has once again been realised, but the FMA does not have any way of intervening in this matter.
A foreign currency loan remains a highly speculative financial instrument, which is associated with high risks that could be realised at any time. The FMA continues to recommend that consumers contact the bank issuing the loan to talk about the situation of the loan and to analyse the financial options in detail, checking the relevant measures for limiting risk against the customer’s appetite for risk, and to draw up a individually tailored solution for every customer.
In more difficult situations the conciliation service (Schlichtungsstelle) can also provide help in finding a solution. Further information about the Schlichtungsstelle can be found on the Internet (in German) at https://verbraucherschlichtung.at.