Opinion of the European Central Bank of 16 December 2014 on the conversion of foreign exchange loans (CON/2014/87)
Date: 2014-12-16
Institutions: European Central Bank
Subjects: Hungary, consumer credit, financial stability, foreign currency, interest, national law

EN  

ECB-PUBLIC 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 16 December 2014 

on the conversion of foreign exchange loans 

(CON/2014/87) 

Introduction and legal basis 

On  17  November  2014,  the  European  Central  Bank  (ECB)  received  a  request  from  the  Hungarian 

Ministry  of  the  National  Economy  (hereinafter  ‘the  consulting  authority’)  for  an  opinion  on  a  draft  law 

laying  down  the  rules  applicable  to  the  conversion  of  foreign  exchange  loan  contracts  (hereinafter  the 

‘draft law’). 

The draft law was amended subsequent to the receipt by the ECB of the request for an opinion1, but the 

ECB was not notified of these later amendments. The scope of the ECB’s opinion is limited to the draft 

law as it was submitted by the consulting authority, without the later amendments. Furthermore, the draft 

law was adopted by the Hungarian Parliament on 25 November 2014. 

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/EC2, 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 

Background and purpose of the draft law 

1.1  This draft law is one of a series of legislative measures3 introduced by the Hungarian government 

in order to deal with foreign currency consumer loans. Unlike previous legislative measures of this 

nature,  the  draft  law  should  not  be  considered  as  having  been  introduced  in  consequence  of  a 
particular ruling of the Hungarian Supreme Court4. 

1  

2  

3  

4  

See amending proposal T/2055/3. This proposal, inter alia, changes some basic elements of the draft law, such as the rules 
applicable to the interest rate premium and the loan contracts of customers participating in the exchange rate cap scheme. 

Council  Decision  98/415/EC  of  29  June  1998  on  the  consultation  of  the  European  Central  Bank  by  national  authorities 
regarding draft legislative provisions (OJ L 189, 3.7.1998, p. 42). 

Law XXXVIII  of  2014  on  measures  to  address  the  Supreme  Court’s  decision  on  consumer  loan  contracts  published  in 
Magyar Közlöny 98/2014 on 18 July 2014, see Opinion CON/2014/59; Law XL of 2014 on the rules of settlement related to 
such contracts published in Magyar Közlöny 137/2014 on 6 October 2014, see Opinion CON/2014/72; and Law LXXVIII of 
2014 concerning the general terms and conditions of consumer loan contracts published in Magyar Közlöny 168/2014 on 5. 
December 2014, see Opinion CON/2014/85. All ECB opinions are available on the ECB’s website at www.ecb.europa.eu. 

Uniform  Decision  2/2014  of  the  Supreme  Court  of  16  June  2014.  See  also  Decision  6/2013  of  the  Supreme  Court  of 
16 December 2013. 

 
 
 
 
                                                 
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1.2  Under  the  draft  law,  foreign  exchange  and  foreign  exchange-based  loan  contracts  (hereinafter 

‘FX loans’) will be converted into forint, effective as of 1 February 2015, at a specific exchange rate 

set  by  the  Magyar  Nemzeti  Bank  (MNB).  The  conversion  applies  to  all  consumer  loan  contracts, 

including  financial  lease  contracts  denominated  or  based  in  foreign  currencies,  which  were 

concluded between 1 May 2004 and 19 July 2014. 

1.3  The  interest  rate  applicable  to  the  converted  loans  will  be  linked  to  the  three-month  Budapest 

Interbank Offered Rate (BUBOR). The interest rate premium must be the same as the interest rate 
premium applied to the original FX loan, provided that this is not lower than 2 percentage points 5. 

The  draft  law  also  introduces  caps  on  the  interest  rate  premium  as  follows:  (a)  the  interest  rate 
premium  may  not  exceed  5.5  percentage  points 6  in  the  case  of  residential  mortgage  loans;  and 
(b) the interest rate premium may not exceed 7 percentage points 7 for home equity loans. 

The  interest  rate  premium  caps  are  binding  and,  if  a  bank  charges  an  administration  fee,  the 

interest  rate  premium  is  to  be  reduced  accordingly.  Furthermore,  the  final  amount  payable  in 

interest may not exceed the interest payable on the original FX loan. 

1.4  The draft law sets the length of the interest rate period in the case of loans with fixed interest rates, 

and the interest rate premium period in the case of loans with interest tied to a reference rate, as 

follows: (a) five years if the loan maturity is greater than 16 years; (b) four years if the loan maturity 

is between nine years and 16 years; and (c) three years if the loan maturity is between three years 

and  nine  years.  Changes  to  the  interest  rate  may  be  made  only  in  line  with  the  interest  rate 

premium alteration indicators approved by the MNB. Financial institutions may raise the applicable 

fees  once  a  year  only,  and  by  no  more  than  the  previous  year’s  annual  rate  of  inflation  as 

measured by the consumer price index and published by the  Hungarian Central Statistical Office. 

The earliest date from which this increase can take place is 1 April 2016. 

1.5  Financial institutions are obliged to notify their customers about the conversion at the same time as 

they  are  notified  of  the  settlement.  The  draft  law  also  sets  out  the  conditions  under  which 

consumers may, within 30 days of receiving notification that conversion of their FX loans is to take 

place,  opt  out  of  such  conversion.  The  financial  institutions  concerned  will  need  to  examine 

whether the relevant conditions are met within 30 days of receiving an opt-out request. For such a 

request  to  be  met,  one  of  the  following  conditions  must  be  fulfilled:  (a)  the  customer’s  monthly 

income  must  be  in  the  same  foreign  currency  and  must  exceed  the  amount  repayable; 

(b) monthly repayments  must  be  no  higher  than  10%  of  the  monthly  income  of  the  customer; 

(c) the mortgage loan must be due to expire on 31 December 2015 at the latest; or (d) despite the 

fixed interest rate premium, the interest rate calculated  in accordance  with the draft law  is higher 

than the interest rate applicable to the original FX loan or the rate applicable prior to 19 July 2014. 

5  
6  
7  

  Changed to 1 percentage point by amending proposal T/2055/3. 

Changed to 4.5 percentage points by amending proposal T/2055/3. 

Changed to 6.5 percentage points by amending proposal T/2055/3. 

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1.6  The  draft  law  also  provides  that  consumers  who  do  not  favour  these  conditions  may  repay  their 

loans  and  terminate  their  contracts  in  order  to  take  out  more  favourable  loans  for  refinancing 

purposes. 

1.7  On  10  November  2014,  the  MNB  offered  euro  liquidity  totalling  EUR 7.83  billion  to  commercial 

banks  through  tenders.  This  was  done  on  the  basis  that  this  conversion  would  occur  and  in 

anticipation  of  that  the  envisaged  repayment  of  foreign  currency  liabilities  would  result  in  an 

increased  demand  for  foreign  exchange  liquidity  by  financial  institutions  which,  if  settled  on  the 

foreign  exchange  market,  could  trigger  disturbances.  According  to  the  MNB,  this  measure  will 

counteract  pressures  on  the  exchange  rate  for  forint  by  providing  financial  institutions  with  euro 

liquidity  from  its  own  foreign  exchange  reserves,  thereby  facilitating  the  rapid  and  efficient 

conversion  of  FX  loans.  According  to  an  MNB  statement  issued  on  10  November  2014,  the  total 

hedging  need  of  commercial  banks  in  relation  to  the  FX  loans  conversion  would  be  around 
EUR 8 billion8.  Subsequently,  the  tenders  referred  to  above  covered  almost  the  entire  estimated 

demand for foreign exchange liquidity. 

2 

General observations 

The appropriate time to consult the ECB 

The  draft  law  was  adopted  by  the  Hungarian  Parliament  on  25  November  20149,  shortly  after  the  ECB 

was consulted and before the ECB could adopt its opinion. As a consequence, the Parliament could not 

take the ECB’s views into account before adopting the draft law. 

The consulting authority did not indicate to the ECB that the opinion was urgent or that the draft law was 

to be adopted by the Hungarian Parliament under an urgency procedure. Moreover, due to amendments 

made to the draft law between the date of the consultation request and the date of adoption, which were 

not communicated to the ECB, the law as adopted differs substantially from the draft law submitted to the 

ECB. 

The  Hungarian  authorities  have  again  failed  to  comply  properly  with  their  duty  to  consult  the  ECB.  The 

adoption  of  the  draft  law,  as  amended,  does  not  relieve  the  authorities  of  their  duty  to  give  due 

consideration to this opinion, in particular with regard to the application and interpretation of the draft law 

as adopted, as well as any future amendments thereto. 

The  ECB  would  like  to  emphasise  that,  even  in  cases  of  particular  urgency,  or  where  the  legislative 

process has reached an advanced stage, the national authorities are not relieved of their duty to consult 

the  ECB. This should occur at an  appropriate stage in the  legislative  process that allows sufficient time 

for: (a) the ECB to examine the draft legislative provisions and adopt its opinion in all required language 

versions;  and  (b)  the  national  authorities  to  take  into  account  the  ECB’s  views  in  accordance  with 

8  
9  

See www.mnb.hu. 

See Law LXXVII of 2014, published in Magyar Közlöny 168/2014 on 5 December 2014. 

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Decision  98/415/EC.  The  ECB  would  therefore  appreciate  it  if,  in  future,  the  consulting  authority  would 

honour its obligation to consult the ECB in accordance with Decision 98/415/EC. 

3. 

Specific observations 

3.1  From  a  financial  stability  perspective,  the  conversion  of  FX  loans  should  greatly  reduce  or  even 

eliminate currency mismatches in households’ balance sheets,  which  is expected to contribute  to 

reducing  the  credit  risk  of  banks  in  the  longer  term.  The  ECB  appreciates  that  the  method  for 

calculating the exchange rate to be used for the conversion of the loans in question  was set with 

the  intention  of  avoiding  an  additional  significant  burden  on  the  banking  sector.  The  ECB, 

moreover, takes note of the measures taken by the MNB, in agreement with the banks, in order to 

ensure an orderly conversion of FX loans. 

3.2  On  the  other  hand,  the  interest  rate  premium  cap  could  have  a  negative  effect  on  the  future 

profitability of banks, thereby adding to the significant strains already faced by the banking sector. 
These strains have resulted, inter alia, from the measures relating to the settlement of FX loans10. 

It should also be noted that the conversion will lead to a once-off increase in operational costs for 

banks in Hungary. 

3.3  As regards the longer-term effects on financial stability, the ECB continues to be of the opinion that, 

when  introducing  measures  in  relation  to  settling  and  converting  FX  loans,  due  consideration 

should  always  be  given  to  fair  burden  sharing  between  consumers,  the  financial  institutions,  the 

Hungarian  Government  and  all  authorities  responsible  for  ensuring  the  stability  of  the  financial 

system in Hungary. This consideration should also include foreign banking groups, whose entities 

manage around half of all banking assets in Hungary. As a result, the measures affecting FX loans 

may  also  have  significant  cross-border  spill-over  effects  on  the  consolidated  profits  and  capital 

positions  of  banking  groups.  In  this  regard,  the  ECB  wishes  to  remind  the  Hungarian  authorities 

that,  during  the  past  few  years,  losses  stemming  from  previous  government  measures,  including 

the  bank  levy,  the  financial  transaction  tax  and  the  early  repayment  scheme  for  FX  loans,  were 

offset by capital injections from foreign parent undertakings to ensure the stable functioning of their 

subsidiaries.  While  this  behaviour  confirmed  the  parent  banks’  longstanding  commitment  to  the 

financial  sector  in  Hungary,  the  possibility  of  longer-term  negative  effects  on  the  Hungarian 

economy and financial markets, as a result of the legislative package referred to in paragraph 1.1 

on top of the abovementioned measures, cannot be excluded at this stage.  

10  

For more details on these measures see Opinions CON/2014/59, CON/2014/72 and CON/2014/76. 

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This would, in turn, also adversely impact the overall macroeconomic and financial stability in Hungary. 

ECB-PUBLIC 

This opinion will be published on the ECB’s website. 

Done at Frankfurt am Main, 16 December 2014. 

[signed] 

The President of the ECB 

Mario DRAGHI 

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