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 and loans with repayment vehicles for banks and consumers alike became increasingly apparent. In the case of banks, these risks predominant 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. The risk for the consumer mainly relates to the currency risk, interest rate risk and asset price risk in relation to the repayment vehicle.
The volume of foreign currency loans and loans with repayment vehicles issued to private households in Austria is very high compared to other countries, and therefore also carries risks for the Austrian financial market. This state of affairs is frequently viewed with particular criticism from the quarters of the international financial institutions (the International Monetary Fund, the World Bank, and the European Systemic Risk Board (ESRB)) and detrimentally affects the reputation of Austria as a financial centre.
Back 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).
Since the financial crisis had contributed to the a significant increasing of the aforementioned risks, on 10 October 2008 the Financial Market Authority 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).
On 2 January 2013 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 Recommendation 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 FMA-FXTT-MS also implements the recommendation (G.2) of 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.
In the revised FMA Minimum Standards published in 2017, the information obligations of banks 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 banks. The new Minimum Standards enter 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-offs, reserves) a forward-looking approach is to be taken that increasingly focuses on future expected losses.
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 Financial Market Authority’s perspective is not suitable or only suitable in specific circumstances for private households. The Financial Market Authority has always warned about the risks associated with foreign currency loans since it was established in 2002.
The Financial Market Authority has urged credit institutions to exercise particular care in conjunction with foreign currency loans by issuing Minimum Standards on this topic. The “Minimum Standards for the Risk Management and Granting of Foreign Currency Loans and Loans with Repayment Vehicles” are available for download: Link to the Minimum Standards
The Financial Market Authority has produced an information folder jointly in conjunction with the Oesterreichische Nationalbank and the Federal Economic Chamber, 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 folder can be downloaded (in German only) at: Link to FMA publications
In October 2008, at the height of the global financial crisis, the Financial Market Authority 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 Financial Market Authority 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 Financial Market Authority has always welcomed banks making sensible offers to customers to convert foreign currency loans into a euro-denominated repayment loan, in particular since the Financial Market Authority 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 interest rate until further notice at CHF 1.20 / EUR, the Financial Market Authority urged borrowers holding foreign currency loans to check out the possibility of conversion into a euro-denominated loan.
The Financial Market Authority was therefore successful in reducing the outstanding volume of Swiss Franc-denominated loans by around 50 per cent. Whereas 270,000 households held a foreign currency loan in 2008, there are now 110,000 households with a foreign currency loan.
However, the warnings issued by the Financial Market Authority to consumers and banks alike have not borne fruits for all borrowers with foreign currency loans, with many credits still remaining unconverted despite possibilities to convert existing.
With the removal of the cap on the Swiss Franc exchange rate, the exchange rate risk has once again become a real one, but the Financial Market Authority 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 Financial Market Authority 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.
List of national measures taken regarding foreign currency loans