EN ECB-PUBLIC 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 4 November 2011 
on foreign currency mortgages and residential property loan agreements 
(CON/2011/87) 
 Introduction and legal basis
 
On 19 September 2011, the European Central Bank (ECB) received a request from the Hungarian 
Ministry for the National Economy for an opinion on a draft law amending certain laws in relation to protecting homes (hereinafter the ‘draft law’).  
The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the 
Functioning of the European Union and the sixth indent of Article 2(1) of Council Decision 98/415/EC of 
29 June 1998 on the consultation of the European Ce ntral Bank by national authorities regarding draft 
legislative provisions
1, as the draft law relates to rules applicable  to financial institutions insofar as they 
materially influence the stability of financial instit utions and markets. In accordance with the first 
sentence of Article 17.5 of the Rules of Procedur e of the European Central Bank, the Governing Council 
has adopted this opinion. 
 1.  Purpose of the draft law 
The draft law will amend the following legislation to establish a relief scheme fo r distressed borrowers in 
a foreign currency: (i) Law No XCIII of 1990 on dutie s, (ii) Law No CXVII of 1995 on personal income 
tax, (iii) Law No LXXXV of 19 96 amending Law No XCIII of 1990 on duties and on administrative 
charges for certified copies of title deeds , (iv) La w No CXII of 1996 on credit institutions and financial 
enterprises (hereinafter the ‘Law on credit instituti ons’), (v) Law No XXX of 1997 on mortgage credit 
institutions and mortgage debentures , and (vi) Law No LXXV of 2011 on the system for the forced sale 
of residential properties and fixing the exchange  rate for repayment of foreign-currency loans. 
The scheme applies to foreign currency loan agreemen ts entered into by consum ers with a State guarantee 
pursuant to Article 44 of Law No CXXXV of 2004 on the Republic of Hungary’s budget for 2005
2, or a 
mortgage on a residential property in Hungary, and specifies the conditions for early repayment of the 
total amount payable by the consumer. In such cas es, the financial instituti on which has granted the 
foreign currency loan, when defining the forint amount of the early repayment, must apply an exchange 
                                                 
1 OJ L 189, 3.7.1998, p. 42. 
2  According to this provision, the State guarantee applies to loan agreements following 31 December 2004 for residential 
real estate. 
ECB-PUBLIC  
2 rate of 180 HUF/CHF for Swiss francs, 250 HU F/EUR for euro and 200 HUF/100 JPY for yen3 where all 
of the following criteria are met: 
(a) the exchange rate used at the time the financia l institution extended the loan affected by early 
repayment was not higher than  the fixed exchange rate;  
(b) the financial institution has not terminated the loan  agreement by the date on which the draft law 
takes effect,  
(c) the borrower submits to the financial institution providing the foreign currency loan a written claim 
for early repayment by 30 December 2011,  
(d) the borrower agrees, when filing a claim, to repay early any debt arising fro m bridge or combined 
account loans directly related to the foreign currency loan4.  
If these criteria are met, the financial institution may not refuse a claim for early repayment and is obliged 
to arrange for closure directed at early repayment of the contract within 60 days of a claim5. The financial 
institution may not charge for payment of expenses  and other fees or commissions defined in Law No 
CLXII of 2009 on credit provided to consumers for early repayment6. 
Also, in case of foreign currency loan agreements with consumers, the financial institution may solely 
charge in foreign currency for costs and fees dire ctly related to the acquisition of foreign currency 
resources to fulfil and support the relevant contract, including interest-type handling costs7. The draft law 
also provides that fees and costs related to enteri ng into contracts, correspondence, statements and 
certificates, visits to customers, credit monitori ng, notice of termination, collateral valuation and 
replacement, amendments to the contract, credit repaym ent insurance services or administration of the 
credit agreement and associated closure of the credit account may not be charged to the consumer in foreign currency
8. 
 
2. General observations The appropriate time to consult the ECB 
2.1 The consulting authority submitted the draf t law to the ECB on 19 September 2011 without 
(i) requesting an urgent procedure and (ii) setting an express time limit for the submission of the 
ECB’s opinion. On the same day, the Hungarian Parliament adopted the draft law which entered 
into force on the third day following its publication,  i.e. on 29 September 2011 (hereinafter ‘the 
Law’). The ECB is also aware of the fact that another draft law amending certain provisions of the 
Law was adopted by the Parliament on 10 October 2011. 
                                                 
3  Article 200/B(1) to be inserted in to the Law on credit institutions. 
4  Article 200/B(2) to be inserted into the Law on credit institutions 
5  Article 200/B(3) to be inserted into the Law on credit institutions. 
6  Article 200/B(4) to be inserted in to the Law on credit institutions. 
7  First sentence of Article 210(5a) to be inserted into the Law on credit institutions. 
8  Second sentence of Article 210(5a) to be inserted into the Law on credit institutions. 
ECB-PUBLIC  
3 2.2  The ECB reiterates its position that even case s of particular urgency do not relieve national 
authorities from their duty to consult the ECB and to  allow sufficient time to take into account its 
views in accordance with Decision 98/415/EC. Any substantive amendments to the draft law have 
to be submitted to the ECB to allow it to adopt its  opinion on the most recent text. Furthermore, the 
process of adoption of the draft law should have been suspended. The ECB’s observations on the provisions on which it was consulted do not eliminate the breach of the consultation obligation. The ECB would appreciate the Ministry for the National Economy giving due consideration to 
honouring its obligation to consult the ECB in the future. 
 3.  Specific observations 
3.1  Financial stability and risks associated with foreign currency loans  
The ECB has pointed out on several occasions the risks associated with foreign currency loans
9. In 
particular, foreign currency loans represent a major risk to financ ial stability in several Member 
States in central and eastern Europe, particularly in Hungary where the share of foreign currency 
loans - especially those denominated in Swiss francs - is among the highest in the Union. 
The ECB in principle welcomes measures promo ting responsible lending by credit institutions, 
enforcing market discipline and increasing the transparency of credit institutions’ activities to provide a higher level of consumer protection, especially in the area of loans relating to residential 
property
10. The proposal for a directive of the European Parliament and of the Council on credit 
agreements relating to residential property points to that direction by stating that foreign currency 
loans taken out by consumers to take advantage of the interest rate offered, but without having an 
adequate understanding of the currency risk invo lved, has posed problems in the EU mortgage 
markets11. The European Systemic Risk Board (ESRB) , in considering options to reinforce the 
resilience of the Union financial system, has iden tified as one of the challenges the potential 
problems arising from foreign currency borrowin g by households and small and medium-sized 
enterprises within the Union. National authorities  will need to take into consideration the ESRB 
recommendations recently adopted in this area12. 
3.2  Assessment of the Law  
The ECB notes the risks incurred by consumers when subscribing to foreign currency loans and the 
willingness of the Hungarian authorities to take policy  action in this area in view of the importance 
of these foreign currency loans in Hungary. Wh ile noting the importance of complying with the 
rule of law and ensuring legal certainty, the ECB fu rther observes in this respect that the Law is the 
latest effort of the Hungarian Government to provide relief for distressed foreign currency 
borrowers and thus ease the burden on the Hungar ian economy. On 20 June 2011, the Hungarian 
                                                 
9  ECB Financial Stability Report of June 2010. All ECB doc uments are available on its website at www.ecb.europa.eu.  
10  ECB Opinions CON/2010/62, CON/2011/ 58, CON/2011/67 and CON/2011/74.   
11  Recital 4  (COM(2011)142.final).  
12  See ESRB Recommendation ESRB/2011/1 of 21 September 2011 on lending in foreign currencies available on the 
ESRB’s website at www.esrb.europa.eu.  
ECB-PUBLIC  
4 Parliament adopted Law No LXXV of  2011 without consulting the ECB13. The ECB is not aware 
of any evaluation of the effect of previous effo rts by the Hungarian authorities to curb foreign 
currency loans.  
As regards the scheme introduced by the Law, the ECB has the following concerns. 
First, the ECB considers that, in allowing borrow ers to repay their debt at fixed exchange rates 
substantially below current market rates, the Law creates a situation that can substantially weaken 
the banking system’s stability and is likely to also have adverse spillover effects on the economy.  
Second, depending on take-up rates by debtors, the one-off losses for the Hungarian banking 
system from the repayment of foreign currency mortgages under the Law could adversely affect banks’ capital position at a time when their ability to accumulate capital by retaining earnings 
remains constrained, in part, by the financial sector tax introduced last year
14. As around 60% of 
the Hungarian banking sector is owned by fore ign banking groups, cross- border spillover effects 
are expected since early repayments below curren t market rates could impact these banking groups’ 
consolidated profits. While parent undertakings of Hungarian banks established in other countries 
(hereinafter the ‘parent banks’) should be able to absorb the immediate financial impact, the Law, 
together with the financial sector tax, could increase the risk that parent banks reallocate some of the funds from their Hungarian subsidiaries to other subsidiaries which could deteriorate Hungarian banks’ lending capacity in the longer term.  
Third, in addition to the immediate adverse financ ial impact on the banking system, there may also 
be a number of negative macroeconomic extern alities for the Hungarian economy including: 
(i) depreciation pressure on the exchange rate, (ii)  higher country risk premia, (iii) upward pressure 
on domestic interest rates, (iv) weaker growth due  to a further fall in lending activity and tighter 
credit conditions, and (v) deteriorating foreign invest or sentiment as a result of an increase in legal 
uncertainty and perceived country risk. 
Fourth, the Law may also have a negative impact on public finances, among other factors due to an 
increase in the country risk premium reflecting pot ential problems in the banking system and the 
negative growth impact of the Law. While, at th is stage, it is difficult to quantify the overall 
macroeconomic impacts, the net short term effect fo r growth is likely to be negative for Hungary. 
                                                 
13  According to Law No LXXV of 2011, debtors may opt for a 36 month application of a fixed exchange rate of forint 
180/1 Swiss francs, forint 250/1 euro and forint 200/100 yen.  During that period, they will receive a credit line to 
accumulate the difference between the fixed and the actual exchange rates. After the period of application of the fixed 
exchange rates, debtors must repay the accumulated difference on a monthly basis. Law No LXXV of 2011 also 
introduces a quota for the forced sale of properties. 
14  See paragraph 3.2 of Opinion CON/2010/62. 
ECB-PUBLIC  
5 Fifth, in a previous opinion on the ban on individuals taking foreign currency mortgages15, the ECB 
pointed out that, if the proposed draft law has a cross-border effect, it may raise issues of 
compliance with Article 63 of the Treaty on free movement of capital and payments16. The ECB 
also noted on this occasion that the free movement of capital and payments is without prejudice to, 
inter alia , ‘measures which are justified on grounds of public policy or public security’, as laid 
down in Article 65(1)(b) of the Treaty. However, as  in the case of exceptions based on the principle 
of general good, the exemption in Article 65(1)(b ) of the Treaty is narrowly interpreted by the 
Court of Justice of the European Union, with th e implication that any such measure would, for 
example, need to meet the proportionality test. Unde r this test, restrictions are justified only if no 
less restrictive measure would suffice to reach the desired end. The ECB considers that the 
assessment of whether the measures imposed on fi nancial institutions under the Law are in breach 
of the free movement of capital and payments, the freedom of establishment or other Union rules is 
entrusted to the Union institutions ensuring th e application and observ ance of the Treaties. 
 This opinion will be published on the ECB’s website.  
 
 Done at Frankfurt am Main, 4 November 2011. 
 
[signed] 
 
The Vice-President of the ECB 
Vítor CONSTÂNCIO 
                                                 
15  See paragraph 3.1.4 of Opinion CON/2010/62. In 2005, interest rates on mortgages denominated in foreign currencies 
such as Swiss francs and euro were around 4%, while rates on forint loans could be twice as much. Applying the lower monthly payments, a buyer could qualify for a loan in foreign currencies which exceeded the amount for which he could receive a loan in forint. As a result, Hungarian consumers had borrowed large amounts in Swiss francs before the start of 
the global crisis in 2008. When the exchange rate between forint and other currencies began to widen as a result of the 
crisis, credit institutions offered to ex tend loan periods, so that foreign cu rrency borrowers could make lower monthly 
payments. The Government prohibited individuals from taking foreign currency mortgages. The ECB understands that the Law was subsequently amended on 1 January 2011 to take into account the ECB’s concerns. 
16  See Case C-464/98, Westdeutsche Landesbank Girozentrale v Friedrich Stefan and Republik Österreich [2001] ECR I-
173.