Opinion of the European Central Bank of 4 November 2011 on foreign currency mortgages and residential property loan agreements (CON/2011/87)
Date: 2011-11-04
Institutions: European Central Bank
Subjects: Hungary, consumer protection, debt, financial stability, foreign currency, loan, national law

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  Central  Bank  by  national  authorities  regarding  draft 
legislative provisions1, as the draft law relates to rules applicable to financial institutions insofar as they 

materially  influence  the  stability  of  financial  institutions  and  markets.  In  accordance  with  the  first 

sentence of Article 17.5 of the Rules of Procedure 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 for distressed borrowers in 

a foreign currency: (i) Law No XCIII of 1990 on duties, (ii) Law No CXVII of 1995 on personal income 

tax,  (iii)  Law  No  LXXXV  of  1996  amending  Law  No  XCIII  of  1990  on  duties  and  on  administrative 

charges for certified copies of title deeds , (iv) Law No CXII of 1996 on credit institutions and financial 

enterprises  (hereinafter  the  ‘Law  on  credit  institutions’),  (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 agreements entered into by consumers with a State guarantee 
pursuant to Article 44 of Law No CXXXV of 2004 on the Republic of Hungary’s budget for 20052, 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  cases,  the  financial  institution  which  has  granted  the 

foreign currency loan, when defining the forint amount of the early repayment, must apply an exchange 

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OJ L 189, 3.7.1998, p. 42. 
According to this provision, the State guarantee applies to loan agreements following 31 December 2004 for residential 
real estate. 

 
 
 
 
                                                 
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rate of 180 HUF/CHF for Swiss francs, 250 HUF/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  financial  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 from 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  directly  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  entering  into  contracts,  correspondence,  statements  and 

certificates,  visits  to  customers,  credit  monitoring,  notice  of  termination,  collateral  valuation  and 

replacement,  amendments  to  the  contract,  credit  repayment  insurance  services  or  administration  of  the 

credit  agreement  and  associated  closure  of  the  credit  account  may  not  be  charged  to  the  consumer  in 
foreign currency8. 

2. 

General observations 

The appropriate time to consult the ECB 

2.1  The  consulting  authority  submitted  the  draft  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. 

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Article 200/B(1) to be inserted into the Law on credit institutions. 
Article 200/B(2) to be inserted into the Law on credit institutions 
Article 200/B(3) to be inserted into the Law on credit institutions. 
Article 200/B(4) to be inserted into the Law on credit institutions. 
First sentence of Article 210(5a) to be inserted into the Law on credit institutions. 
Second sentence of Article 210(5a) to be inserted into the Law on credit institutions. 

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2.2   The  ECB  reiterates  its  position  that  even  cases  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 loans9. In 

particular,  foreign  currency  loans  represent  a  major  risk  to  financial  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  promoting  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 
property10.  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  involved,  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  identified  as  one  of  the  challenges  the  potential 

problems  arising  from  foreign  currency  borrowing  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.  While  noting  the  importance  of  complying  with  the 

rule of law and ensuring legal certainty, the ECB further 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 Hungarian economy. On 20 June 2011, the Hungarian 

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ECB Financial Stability Report of June 2010. All ECB documents are available on its website at www.ecb.europa.eu.  
ECB Opinions CON/2010/62, CON/2011/58, CON/2011/67 and CON/2011/74.   
Recital 4  (COM(2011)142.final).  
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.  

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Parliament adopted Law No LXXV of 2011 without consulting the ECB13. The ECB is not aware 

of  any  evaluation  of  the  effect  of  previous  efforts  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  borrowers  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 year14. As around  60% of 

the  Hungarian  banking  sector  is  owned  by  foreign  banking  groups,  cross-border  spillover  effects 

are expected since early repayments below current 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 financial impact on the banking system, there may also 

be  a  number  of  negative  macroeconomic  externalities  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 investor 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 potential problems in the banking system and the 

negative  growth  impact  of  the  Law.  While,  at  this  stage,  it  is  difficult  to  quantify  the  overall 

macroeconomic impacts, the net short term effect for growth is likely to be negative for Hungary. 

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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. 
See paragraph 3.2 of Opinion CON/2010/62. 

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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  the  implication  that  any  such  measure  would,  for 

example, need to meet the proportionality test. Under 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 financial 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 the application and observance 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  

16  

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  extend  loan  periods,  so  that  foreign  currency 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. 
See Case C-464/98, Westdeutsche Landesbank Girozentrale v Friedrich Stefan and Republik Österreich [2001] ECR I-
173. 

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