denar loans with FX clauses (the so-called FX indexed loans). The conditions are identical for both types of loans. Banks can extend these loans only if

1. the client is classified as ―A‖ or ―B‖<sup>19</sup> client by the bank and by the banking system (as reported within the NBRM’s Credit Registry<sup>20</sup> ), or

2. the claim is covered with first-rated collateral.<sup>21</sup> In addition to these requirements, the decision requires banks to have written policies and procedures for the management of the induced credit risk. These internal acts should include, inter alia:

1. criteria for assessment of the (mis)match of clients’ FX assets and liabilities,

2. FX exposure limits, and 3. regular stress testing of the FX risk (at least on annual basis).

These requirements are not intended to limit FX lending but to enhance its quality, thus reducing the induced credit risk. As a result, the deterioration of the quality of the overall credit portfolio experienced in the previous years was less apparent within the FX credit portfolio. In the past two years (end of 2010 compared to end of 2008), the share of A‖ and ―B‖ credit exposures to households and enterprises in the total credit exposure decreased by 2.9 percent,<sup>22</sup> while the share of FX credit exposures to households and enterprises classified in these risk categories decreased by 1.5 percent.

- <u>Prevention of high credit growth risk and reduction of the credit risk arising from certain credit exposures</u>

In a favorable macroeconomic climate (2004–2007), the banking system has experienced a substantial credit growth, reaching an annual growth rate of 39 percent at the end of 2007 (or an average annual growth rate for the three years of 27 percent). Even though these growth rates were mainly a result of the low starting base of the banks’ lending activities in the previous years, the intensive growth was close to crossing from a sustainable credit growth to a credit boom (Chart 4). The intensive credit growth was particularly notable in the banks’ lending to households.<sup>23</sup> The loans to this sector experienced considerably higher annual growth rates (58.8 percent at the end of the first quarter of 2008) compared to the growth of loans to enterprises, which had reached 33.5 percent at the end of the same period (Chart 6). The more dynamic growth was a compensation for the low level of lending activities typical for the period of transition, when banks generally restrained from granting loans to households. In 2004–2007, the

> 19 According to the decision on credit risk management, an ―A‖ or ―B‖ client is a client that pays its loan obligations as they fall due, or with insignificant delays, and that has solid credit history.

> 20 The NBRM Credit Registry is a public-type credit registry that collects data from the domestic banks and saving houses on credit exposures higher than:

> - For banks: denar 300,000 (almost euro 5,000) for legal entities and denar 5,000 (euro 82) for natural persons

> - For saving houses: denar 50,000 (euro 820) for legal entities and denar 5.000 (euro 82) for natural persons. 21 During the analyzed period, the first-rated collateral included cash and cash-equivalents; guaranties and securities issued by the country, the NBRM, central banks, and the governments of EU member-states, the United States, Switzerland, Japan, Canada, Australia and Norway; guaranties by first-rated banks; etc (in June 2011, there were certain amendments to this definition).

> 22 Including the small traders but excluding the financial institutions and the government.

> 23 The lending to households includes loans to small traders.

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