Opinion of the European Central Bank of 18 September 2015 on the conversion of Swiss franc loans (CON/2015/32)
Date: 2015-09-18
Institutions: European Central Bank
Subjects: Croatia, consumer credit, exchange rate, financial stability, foreign currency, loan, money, national law

EN 

ECB-PUBLIC 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 18 September 2015  

on the conversion of Swiss franc loans  

(CON/2015/32) 

Introduction and legal basis 

On  10  September  2015  the  Croatian  Government  formally  forwarded  to  the  Croatian  Parliament,  for 

adoption under urgent parliamentary procedure, amendments to the Law on Consumer Credit and to the 

Law  on  Credit  Institutions  (hereinafter  the  ‘draft  law’).  The  European  Central  Bank  (ECB)  has  not  been 

consulted by the Croatian authorities on the draft law. 

The  ECB’s  competence  to  deliver  an  opinion  is  based  on  the  last  paragraph  of  Article  127(4)  and 

Article 282(5) of the Treaty on the Functioning of the European Union, as the draft law concerns currency 

matters, and also contains 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  

1.1  The draft law facilitates the conversion of (1) loans denominated in Swiss francs (CHF) into loans 

denominated in euro and (2) loans denominated in Croatian Kuna (HRK) which contain a currency 

clause linking payments to CHF (both types of loans hereinafter referred to as the ‘CHF loans’) into 

loans denominated in HRK which contain a currency clause linking payments to euros (hereinafter 

referred  to  as  ‘converted  loans’).  The  amendments  are  the  same  in  substance;  however,  where 

amendments to the Law on Consumer Credit refer to consumers, the amendments to the Law on 

Credit  Institutions  refer  to  natural  persons  who  professionally  engage  in  freelance  activities, 

craftsmen, sole traders and owners of private family farms. The draft law is intended to come into 

effect on 30 September 2015.  

1.2  The  purpose  of  the  draft  law  is  to  place  borrowers  of  CHF  loans  in  the  same  position  that  they 

would have been in had their loans, from inception, been denominated in euros (or denominated in 

HRK with currency clauses linking payments to euros). Reflecting this basic purpose, the draft law 

sets out detailed conversion mechanics: 

(i)  

The  original  principal  amount  of  the  CHF  loans  will  be  converted  into  euros  or  loans 

denominated  in  HRK  which  contain  a  currency  clause  linking  payments  to  euros  at  the 

exchange  rate  applicable  at  the  date  the  CHF  loans  were  made  to  the  borrowers.  This 

exchange rate will be equal to the exchange rate that the lender applied at that date to loans 

denominated  in  or  linked  to  euros  of  the  same  type  and  duration.  The  relevant  original 

principal amount will be the amount registered in the accounts of the lender; 

 
 
 
 
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(ii)  

Instead  of the  interest  rate initially  agreed  upon for the  CHF loans,  the interest rate on  the 

converted loans will be equal to the interest rate that would have been charged by the lender 

in respect of a loan denominated in or linked to euros that was made at the date of entry into 

the loan agreement; 

(iii)  The  original  loan  repayment  schedule  will  be  replaced  by  a  new  repayment  schedule 

calculated in accordance with the principles set out in (i) and (ii) above. The new repayment 

schedule will be the basis for the calculation of new instalments in euros (or linked to euros), 

taking into account all necessary modifications of the terms and conditions (e.g., changes of 

interest rates) to reflect loans denominated in or linked to euros; 

(iv)  The amounts already paid by the borrower according to the old repayment schedule (except 

default interest and costs) will be converted into euros (or into HRK with a currency clause 

linking payments to euros) at the exchange rate, applicable at the date of payment of each 

instalment, that the lender applied at that date to loans denominated in or linked to euros of 

the same type and duration; 

(v) 

If the total amount already paid by the borrower and converted (i.e. the amount referred to in 

(iv) above) is higher than the total amount of converted instalments calculated according to 

the  new  repayment  schedule  referred  to  in  (iii)  above,  this  amount  will  be  considered  an 

“overpayment”. Depending on the amount of this overpayment, it will be treated as follows: 

-  

If the amount of the overpayment does not exceed the sum of converted instalments 

remaining  to  be  paid  as  at  30  September  2015  according  to  the  new  repayment 

schedule, the overpayment will be used to settle such future instalments, provided that 

only  50%  of  each  future  instalment  may  be  settled  using  the  overpayment  until  the 

overpayment is used up in full; if the amount of the overpayment exceeds 50% of the 

total sum of these future converted instalments, the lender and the borrower will agree 

how to use this amount exceeding 50%; 

- 

If  the  amount  of  the  overpayment  exceeds  the  sum  of  converted  instalments 

remaining  to  be  paid  as  at  30  September  2015  according  to  the  new  repayment 

schedule, the lender will return such overpayment to the borrower within 60 days from 

the date the borrower accepted the conversion; 

(vi) 

If the total amount already paid by the borrower (calculated in accordance with (iv) above) is 

below the total amount of instalments from the new repayment schedule, the difference will 

be settled as agreed by the lender and the borrower, and the borrower will continue to pay 

instalments  according  to  the  new  repayment  schedule  (although  it  is  not  clear  what  is 

intended by this provision); 

(vii)  The  new  remaining  principal  amount  will  be  the  difference  between  the  new  repayment 

schedule  and  the  amounts  already  paid  and  calculated  in  accordance  with  (iv)  above;  the 

amount of the overpayment cannot reduce the remaining unpaid principal, and the difference 

referred to in (vi) above will be settled as agreed by the lender and the borrower. 

1.3  The effects of the conversion will be the difference between the unpaid principal in CHF registered 

in  the  lender’s  accounts  as  at  30  September  2015  and  converted  into  euros  (or  into  HRK  with  a 

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currency clause linking payments to euros) at the exchange rate on that day and the amount of the 

new  remaining  principal  calculated  in  accordance  with  paragraph  1.2(vii)  above.  If  the  borrower 

accepts  the  conversion,  the  effects  of  the  conversion  will  be  borne  by  the  lender,  and  will  be 

registered as a value adjustment due to a change in the exchange rate (i.e., as an expense due to 

the return of the overpayment). The effect of the conversion resulting in expenses in the accounts 

of the creditor will be treated as a tax deductible expense. The text of the draft law further states 

that  the  difference  in  the  initial  principal  due  to  the  purchase  of  foreign  currency,  the  amount  of 

charged  statutory  interests  and  costs  referred  to  in  paragraph  1.2(iv)  above  and  the  interest  and 

currency  difference  regarding  the  overpayment  will  be  borne  by  the  borrower  (although  it  is  not 

clear what interest and currency difference of the overpayment the draft law refers to). 

1.4  Within  45  days  from  the  date  the  draft  law  enters  into  force,  lenders  are  required  to  deliver  by 

registered mail to borrowers the calculation of the loans so converted, together with a proposal for 

a new/modified loan agreement. Borrowers have the option to accept the conversion within 30 days 

of  receipt  of  such  notification.  Lenders  will  also  be  required  to  publish  on  their  websites  a  loan 

calculator,  accessible  to  each  borrower  through  their  PIN,  and  an  opinion  of  an  expert  or  auditor 

confirming  that  the  calculator  complies  with  the  requirements  of  the  draft  law.  Within  six  months 

from the date the draft law enters into force, the lenders are  required to deliver to the Ministry of 

Finance  a  report  on  the  results  of  conversion  (including  the  number  of  borrowers  who  accepted 

conversion and/or agreement, etc.). 

1.5     If  the  borrower  accepts  the  conversion,  the  lender  will  not  request  further  collateral  or  additional 

conditions. No costs pertaining to conversion may be charged to borrowers. 

1.6  The draft law also provides for a transitional period and the rights of guarantors and other persons 

from whom the lender is entitled to request payment.  

1.7    If  the  borrower  does  not  accept  the  conversion  and/or  a  proposal  for  a  new/modified  loan 

agreement, he or she will continue to pay instalments according to the loan conditions in effect and 

taking  into  account  the  CHF  exchange  rate  fixed  for  instalments  in  respect  of  the  CHF  loans  in 

accordance  with  certain  legislative  amendments  adopted  earlier  this  year  and  in  force  for  one 
year1. 

2. 

General observations 

2.1  Prior to the global financial crisis, borrowing in foreign currencies by households and non-financial 
corporations was popular in several Member States2. As previously noted by the ECB3, inter alia, 

the  lower  interest  rates  applicable  to  foreign  currency  loans  compared  to  loans  in  the  domestic 

currency increased the demand for such loans. In Croatia, CHF loans accounted for approximately 

1  

2  

3  

These  amendments  comprise  amendments  to  the  Law  on  Consumer  Credit  adopted  on  23  January  2015  and 
amendments to the Law on Credit Institutions adopted on 6 February 2015 fixing the instalments with regard to loans 
made  to  natural  persons  who  professionally  engage  in  freelance  activities,  craftsmen,  sole  traders  and  owners  of 
private family farms. 

For  further  information  on  lending  in  foreign  currencies  in  the  Union  see  the  Annex  to  Recommendation 
ESRB/2011/1 of 21 September 2011 on lending in foreign currencies (OJ C 342, 22.11.2011, p.1). 
See  paragraph  2.2  of  Opinion  CON/2014/59,  and  paragraph  2.1  of  Opinion  CON/2015.26.  All  ECB  opinions  are 
available on the ECB website at www.ecb.europa.eu. 

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HRK 23bn (EUR 3bn), or 9% of banks’ total loan portfolios, as at the end of March 2015, with the 

majority  of  these  loans  (95%)  residing  with  the  household  sector.  18.6%  of  total  loans  to 

households, or 35.6% of total housing loans, were denominated in, or linked to, CHF as at the end 

of  March  2015.  The  asset  quality  of  the  CHF  loan  portfolio  is  below  the  average,  with  a  non-

performing loan (NPL) ratio of 19.2% as of June 2015 as compared to the NPL ratio of 17.3% for 
the total credit portfolio.4 

2.2   The  ECB  notes  that  the  draft  law  anticipates  that  the  conversion  of  the  CHF  loans  to  loans 

denominated in, or linked to, euro will be voluntary only for borrowers. 

3. 

Specific observations 

3.1   Effects on the Croatian economy 

3.1.1  The  conversion  of  the  loans  as  envisaged  by  the  draft  law  may  result  in  a  decline  in  the 
international reserves5 of the Republic of Croatia, which may in turn have undesired consequences 

on  the  country’s  macroeconomic  stability.  Moreover,  a  lower  level  of  international  reserves  as  a 

result  of  the  conversion  might  impair  the  functional  independence  of  Hrvatska  Narodna  Banka 

(HNB), in particular the central bank’s ability to set its policy instruments with the aim of achieving 

its objectives. 

3.1.2 The draft law might also have some negative effects if it were to lead to a deterioration of foreign 

investor sentiment due to a perceived increase in legal uncertainty and country risk. Consequently, 

the ECB suggests that the Croatian authorities carry out a thorough analysis of the possible effects 

on the economy of introducing the proposed measures. 

3.2  Retroactivity 

3.2.1  Acknowledging that Directive 2014/17/EU of the European Parliament and of the Council6 does not 
apply  to  credit  agreements  existing  before  21  March  2016,  as  previously  noted  by  the  ECB7,  the 

retroactive effect of the draft law is not in line with the general aim and principle of Article 23(5) of 

Directive  2014/17/EU.  This  Directive  allows  Member  States  to  further  regulate  foreign  currency 

loans, on the condition that such regulation is not applied with retroactive effect.  

3.2.2  It  is  for  the  Croatian  authorities  to  assess  whether  the  retroactive  character  of  the  draft  law 

complies with Croatian legal and constitutional principles. However, the ECB notes that introducing 

4  
5  

6  

7  

Calculations are based on the data published on the website of Hrvatska Narodna Banka (HNB). 

As  HNB  noted  (see  http://www.hnb.hr/priopc/2015/hrv/hp15092015_CHF.pdf),  in  itself  the  conversion  of  housing 
loans from loans denominated in, or linked to, CHF into loans denominated in, or linked to, euro does not lead to an 
automatic fall in international reserves. However, the write-off of a part of the principal of the converted Swiss franc 
loans may lead to a fall in the international reserves of the Republic of Croatia. The writing off of receivables in euro 
would  indeed  lead  to  shorter  positions  of  banks  in  that  currency.  The  efforts  of  banks  to  fully  compensate  for  the 
shortening of their currency position by purchasing foreign exchange on the domestic market would in turn result in 
increased demand of banks for foreign exchange, which could lead to a weakening of the exchange rate of the kuna 
against  the  euro.  In  such  a  situation,  HNB  would  be  forced  to  intervene,  given  the  absence  of  sufficient  foreign 
exchange  on  the  domestic  market  to  meet  such  demand.  As  a  result,  HNB  would  have  to  intervene  by  using 
international reserves. 

Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for 
consumers  relating  to  residential  immovable  property  and  amending  Directives  2008/48/EC  and  2013/36/EU  and 
Regulation (EU) No 1093/2010 (OJ L 60, 28.2.2014, p. 34). 

See paragraph 3.2 of Opinion CON/2014/59 and paragraph 2.2 of Opinion CON/2015/26. 

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measures  with retroactive effect such  as the draft law  will undermine  legal certainty and is not in 

line with the principle of legitimate expectations. 

3.3  Eligibility criteria 

The  ECB  notes  that  the  draft  law  does  not  prescribe  specific  criteria  for  borrowers  eligible  to 

participate in  the conversion, which raises some concerns with regard to the purpose of the draft 

law. In particular, the ECB notes that the application of certain targeted eligibility criteria such as, 

for  example,  linking  the  right  to  convert  to  the  borrower’s  actual  income  position  or  the  loan-to-

value (LTV) ratio may be appropriate. 

3.4  Effects on banking sector 

3.4.1  The ECB notes that the implementation of the draft law is expected to entail financial costs for the 

banking sector. This, in turn, may have a negative impact on the profitability, capitalisation and the 
future lending capacity of the affected credit institutions. The impact assessment by HNB8 suggests 

that  the  conversion  costs  for  the  banks  could  reach  around  HRK  8bn  or  EUR  1.1bn,  imposing 

losses  for  the  banking  sector  equalling  to  around  three  years  of  expected  profits.  The  envisaged 

measures  will  mostly  affect  eight  of  the  largest  banks  in  Croatia,  most  of  them  foreign-owned.  In 

fact,  foreign  banking  groups  have  a  dominant  market  position  in  Croatia,  holding  about  90%  of 

banking  sector  assets  in  Croatia,  with  Italian,  Austrian  and  French  banks  among  the  largest 

institutions.  

3.4.2  It should also be noted that the restructuring will lead to a one-off increase in operational costs for 

the affected credit institutions in Croatia, in particular, due to the unwinding of existing hedges and 

additional refinancing and hedging needs in euro, and to the costs associated with the obligation to 

notify each borrower individually, which will strain banks’ resources. 

3.5   Effects on financial stability 

3.5.1  The ECB has pointed out on several occasions the risks associated with foreign currency loans9. In 

particular,  they  represent  a  major  risk  to  financial  stability  in  several  Member  States,  where  the 

share of foreign currency loans is relatively high. The ECB points in this respect to the analysis of 

such  risks  made  by 

the  European  Systemic  Risk  Board  (ESRB)  and 

to 

the  ESRB 

recommendations  for  addressing  such  risks,  made  in  Recommendation  ESRB/2011/1  of  21 
September 2011 on lending in foreign currencies10.  

3.5.2  Indeed, in the case of Croatia, foreign exchange lending predominates, with almost 70% of banks’ 

loan  portfolio  denominated  in  or  linked  to  foreign  currencies,  in  particular  the  euro.  That  said, 

substantial  capital  buffers  underpin  the  Croatian  banking  sector’s  shock-absorbing  capacities.  In 

fact,  at  the sector  level, HNB’s impact assessment suggests a  drop  of the capital  adequacy ratio 

from  23.5%  to  19.7%  which  would  remain  well  above  the  regulatory  minimum  (even  though 

individual institutions may be affected to different degrees). 

8  
9  

10  

See http://www.hnb.hr/priopc/2015/hrv/hp15092015_CHF.pdf 

See  in particular  the ECB  Financial Stability  Review  of  June 2010 and,  in respect  of  the  foreign  currency  loans in 
Hungary, Opinions CON/2011/87, CON/2012/27, CON/2014/59, CON/2014/72 and CON/2014/76, and in respect of 
the foreign currency loans in Poland, Opinion CON/2015/26. 

Recommendation ESRB/2011/1 of 21 September 2011 on lending in foreign currencies (OJ C 342, 22.11.2011, p.1). 

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3.5.3  As regards the longer-term effects on financial stability, the ECB remains of the opinion that, when 

introducing  measures  in  relation  to  settling  and  converting  foreign  currency  loans,  due 

consideration  should  always  be  given  to  fair  burden  sharing  among  all  stakeholders,  thus  also 
avoiding moral hazard in the future11.  

ECB-PUBLIC 

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

Done at Frankfurt am Main, 18 September 2015. 

[signed] 

The President of the ECB 

Mario DRAGHI 

11  

See paragraph 3.4 of Opinion CON/2014/59, paragraph 3.3 of Opinion CON/2014/87 and paragraph 3.3.4 of Opinion 
CON/2015/26. 

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