Poland Moves to Defuse $30 Billion Swiss-Loan Risk to Banks

Poland’s central bank moved to resolve the biggest threat to the country’s financial industry, offering commercial lenders help in converting $30 billion of Swiss-franc loans into zloty.

The banks asked the monetary authority to step in after a multitude of lawsuits over the loans forced them into mounting provisions. But the stiff conditions attached to aid, which include halting dividends and shoring up capital, are already facing a pushback from the industry, meaning the deal may take time to hash out.

Swiss-franc mortgages, popular at the start of the last decade because they were cheaper than zloty loans, became an economic and political risk after the local currency lost about half its value. That left hundreds of thousands of borrowers with ballooning debt and sparked an onslaught of lawsuits that threatened to destabilize the industry.

Poland Moves to Defuse $30 Billion Swiss-Loan Risk to Banks

Shares in Polish banks that were among the biggest Swiss-franc lenders led losses, with Commerzbank AG unit mBank SA falling 3.2% on Wednesday and Bank Millennium SA losing 2.7%. The zloty eased 0.2% after briefly touching its strongest level this year against the euro.

“Potential participation of the central bank in the process should mitigate excess volatility of the zloty in case banks have to buy foreign currencies directly on the market,” PKO Bank Polski SA analysts, led by Piotr Bujak, said in a report to clients.

Bitter Pill

The announcement is the strongest indication yet that the central bank is ready to help the industry and comes after Citigroup Inc. economists warned the zloty could face a “disruptive depreciation” if lenders were to suddenly rush to the market to obtain Swiss francs.

Poland’s central bank has had a currency-swap agreement with the Swiss National Bank since 2012, but it requires the SNB’s prior approval to be activated.

The conditions put forward by the central bank are also a bitter pill to swallow for the industry. Polish lenders are already banned from paying dividends until the middle of the year and Ipopema brokerage analyst Lukasz Janczak said some may now be looking at a prolonged period without payouts to shareholders.

Polish Central Bank Sets High Bar for Its FX-Loan Aid: Analysts

The industry wants to discuss the terms put forward by the central bank, Polish Banking Association head Krzysztof Pietraszkiewicz told Bloomberg. Lenders are already facing unprecedented regulatory and tax burdens, he said.

“It’s important to see central bank readiness because its help on the currency market seems indispensable,” Pietraszkiewicz said. “We’ll want to talk about the path and conditions” for boosting capital buffers “because rebuilding them organically appears to be difficult.”

Market Terms

Despite years of efforts, Poland has been unable to resolve the Swiss-franc lending issue, largely due to fears that any settlement may destabilize the financial industry. The WIGBank gauge of Warsaw’s listed lenders has tumbled 30% over the last 12 months, compared with a 8% decline in the broad WIG20 index.

The central bank said Tuesday that it “welcomes banks’ initiatives aimed at limiting the legal risk of foreign-currency mortgages,” adding that the conversion would be carried out on market terms. Any plan would have to involve a sufficient number of lenders to cover most non-zloty home loans, according to its statement.

Finding an industry-led solution is becoming increasingly pressing after Poland’s top court unexpectedly announced it will issue on March 25 the most comprehensive guidance yet about how to deal with a flood of lawsuits regarding the Swiss loans. The move has soured industry efforts to iron out a model for out-of-court settlements that could affect more than 400,000 mortgage holders.

Banks have been trying to hammer out a blueprint for such settlements. The country’s biggest lender, PKO, reached a “pilot” out-of-court deal last month and mBank SA said Tuesday it saw a “breakthrough” moment coming.

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