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FMA Foreign Currency Loans Survey, 3rd Quarter 2020: continuing reduction in outstanding volume. Repayment vehicle coverage gap at YE 2019: € 3.9 bn.

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The outstanding volume of foreign currency loans fell by 14.3% or € 1.99 billion adjusted for exchange rate effects in the 3rd quarter of 2020 compared with the corresponding quarter of the previous year. Since the ban on granting new loans was imposed in the autumn of 2008, the outstanding volume adjusted for exchange rate effects has been reduced by € 36.37 billion or 77.4 %. Compared to the previous quarter (Q2/2020) the volume fell by € 460 million or -3.7%. In absolute figures the volume of foreign currency lending to private households fell to € 11.83 billion in Q3 2020 (Q3 2019: € 13.78 billion). These were the findings of the FMA’s Survey on Foreign Currency Loans in Q3 2020.

Coverage gap for repayment vehicles

83% of foreign currency lending is in the form of bullet loans. During the term of the loan, only the interest paid on the loan is serviced, and the repayment of the principal is made in one go at the end of the term. 77% of foreign currency loans are bullet ones where the borrower simultaneously pays into an investment product serving as a repayment vehicle, in order to have accumulated the necessary capital by the time the loan matures to be able to repay the amount of the loan that was taken out. 80% of repayment vehicles involve investments in life insurance products. However, due to the Swiss Franc strengthening massively over the years, the amount to be repaid in Euro at maturity has increased massively. Furthermore, the prevailing low interest environment is also impacting returns massively: repayment vehicles are not providing the return on investment that was calculated when the loans were taken out. As a result there is a coverage gap in the final amount necessary to repay the loan, and the return that the repayment vehicle actually realises. The FMA’s current study on repayment vehicles, which has analysed their performance as of 31.12.2019, reveals a coverage gap on average of approx. 32%. This means that as of the end of 2019, the coverage gap for foreign currency loans with repayment vehicles stands at around € 3.9 billion. This works out at just over € 50,000 for every individual loan.

There will not be a stability risk for the banks that granted the loans, since taking into consideration loan collateral there is a remaining coverage gap or around € 700 million, for which provisions have already been made in their balance sheets. However, closing this coverage gap will remain a significant challenge for borrowers. The average residual maturity of loans with a repayment vehicle is around nine years, with three quarters of all outstanding loans maturing in 5 to 15 years.

To date, borrowers have been able to realise other assets in order to close their coverage gap. In 2019, 70% of all loans with repayment vehicles had a coverage gap. Around half of all borrowers were able to close this gap using other assets; 20% required follow-up financing in Euro; and for around 10% the foreign currency loan with repayment vehicle had to be extended. The remainder found another way to address the issue or used a combination of these measures.

In relation to covering the probable coverage gap, in accordance with the FMA Minimum Standards, banks are required to constantly analyse the development of the risk situation and to evaluate and implement preventive countermeasures: in one-third of cases loan collateral has been increased, in just over one-sixth of cases the risk provisioning increased, in just under one-sixth of cases the amount being paid into the repayment vehicle has been increased and for more than one third of cases a combination of these measures are being used. 

Swiss franc exchange rate risk

The proportion of loans denominated in foreign currencies as a proportion of all outstanding household loans stood at 7.2% during the third quarter of 2020 (compared to 8.7% in Q3 2019). At its highest, in 2006, foreign currency loans accounted for around one third of all loans. As of the end of September 2020, 96.3% of the volume of the amount owed for loans in foreign currencies was for loans denominated in Swiss franc (CHF), with the remaining amount almost exclusively in Japanese yen (JPY).

Since the start of 2008, the Swiss franc (CHF) has appreciated by 53% up to 30 September 2020 against the euro; in the third quarter of 2020, the exchange rate varied between 1.062 and 1.0865. A borrower who took out a foreign currency loan of € 100,000.00 at the start of 2008 would now have to repay almost € 153,000 based on the development of the exchange rate alone, regardless of the additional interest payments also to be made.

Journalists may address further enquiries to:

Klaus Grubelnik (FMA Media Spokesperson)

+43/(0)1/24959-6006

+43/(0)676/882 49 516

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