Causes of Foreign Currency Lending – Possibilities of Intervention – Ways of Intervention

Tamás Bánfi
University Professor, Head of Department, Corvinus University of Budapest, Department of Finance

Published in: Public Finance Quarterly 2012/3 (p. 358-370.)

Summary: The study examines foreign currency lending in Hungary. It states that: 1. The original reason behind foreign currency lending was the difference between the interest on foreign currency and Hungarian forint loans; 2. Foreign currency loans showed otherwise uncreditworthy clients as creditworthy; 3. Debtors and creditors are both at fault, therefore, responsibility and losses should be shared accordingly. The state can intervene through regulation or support. Any type of support means that the losses incurred by the debtor and creditor are spread between taxpayers who are not involved in the deal, therefore, such support can only be justified by social solidarity, whereas regulation can be unlimited. Recommendation: 1. State intervention should target the housing rights of non-performing families; 2. In the interest of intervening with the lowest social cost, a special real estate fund should be created (which can be the National Asset Management Company), which should enter into a framework agreement with the commercial banks, according to which, depending on their eventual surplus liquidity, these banks would subscribe to real estate bonds – instead of government bonds – issued by the real estate fund, which would be guaranteed by the state and earn similar yields and have the same tenor as the current two-week bonds, issued by the central bank, thereby providing funding to ensure the continued housing rights of families that have become insolvent and unable to meet their loan repayment obligations.

Keywords: foreign currency loan, mortgage, exchange risk, non-performing debtors, housing rights, special real estate fund

Journal of Economic Literature (JEL) kód: G18, G21, G24

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