Polish Central Bank Calls Franc Loans Biggest Stability Threat

Polish central bank has singled out the legal status of $31 billion in Swiss franc mortgages as the main threat for the stability of the country’s financial system.

The decade-long court battle over loans has forced banks to increase provisions for legal risks and could spell losses that some of them may not be able to handle, the National Bank of Poland said in its financial stability report on Wednesday.

“Banks and borrowers should seek out-of-court dispute resolution and settlements,” according to the report. “From the banks’ point of view, this would reduce the risks and costs associated with lengthy legal proceedings.”

The industry has been battling a flood of lawsuits over loans that were extremely popular in early 2000s, but left many borrowers under water after the zloty tumbled against the franc. Banks have already written off 6.8 billion zloty ($1.8 billion) for legal risks.

Last month, Poland’s top court yet again postponed a ruling that was expected to help speed up and unify the verdicts of clogged lower courts. It asked for additional opinions from a number of state institutions, including the central bank and the financial regulator.

In the first quarter alone, Warsaw-listed banks including Commerzbank AG’s unit MBank SA and PKO Bank Polski SA, were hit by more than 7,000 new lawsuits related to Swiss franc loans. PKO is trying to defuse the threat and has set aside some two years of profit to cover the cost of settlements with clients.

The central bank said lenders with Swiss franc mortgages on their books account for 88% of the industry’s total assets. It urged them to be cautious with paying out dividends and buying back shares until there is clarity about the legal status of those loans.

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