Interestingly, in early 2007, the Baltic states experienced a cross-border supervisory intervention which meant that Swedish banks reduced their financing to their subsidiaries because Swedish home supervisors were increasingly concerned. This led to increased cross-border supervisory coordination and better information flow between home and host country supervisory authorities. Few countries addressed the demand side to reduce foreign currency borrowing by forcing banks to better inform borrowers about the risks involved in foreign currency loans or to tighten the eligibility criteria for such loans. An example is the so-called “Recommendation S” in Poland which required higher creditworthiness of borrowers taking out a foreign vs. local currency residential loan and advised banks to clearly disclose foreign currency risks to borrowers requesting foreign currency loans (see Zettelmeyer, Nagy and Jeffrey, 2010).

# **_5.2 Policy Response since the Crisis_**

When the crisis hit emerging Europe, most countries (an exception was Ukraine) relaxed or eliminated the enacted regulations in response to the slowing down or reversing of foreign capital inflows in the months after the Lehman failure (see EBRD, 2010). However, since mid2009 when recovery was felt to start off and regulators turned to concentrating on the systemic risks arising from foreign currency lending many countries have introduce a further range of macroprudential and administrative measures. Table 5.2 provides an overview hereof. Again, the most widely used measures aim at the supply side concerning higher capital or reserve requirements on foreign currency loans or limits on open foreign currency positions of banks, but several countries also introduced stricter eligibility criteria for foreign currency borrowers. While most countries relied on the introduction of a mixture of various policy measures, Hungary, Turkey and Poland made most extensively use of the available set of policy options. For instance, “Recommendation T” in Poland restricted the access to foreign currency loans for customers with lower income levels, improved the use of credit registries and required banks to provide even more information on risks of (foreign currency) loans to borrowers.

There are three countries – Hungary, Moldova and Ukraine - that totally banned certain forms of foreign currency lending. Ukraine banned foreign currency lending to households, while Hungary prohibited the registration of foreign currency mortgages. In Hungary, the mortgage market ceased as an outcome of this step because long-term local currency lending was not equally available. Attempts to foster local currency wholesale funding of banks had already been made before the crisis, e.g. with the creation of special purpose funds (see Abrams, 2008), but discussions about the development of domestic capital markets as a means to reduce foreign currency lending driven by foreign currency refinancing of banks have intensified now, especially in the course of the Vienna Initiative.

Apart from these measures, several governments introduced laws to improve the borrowers‟ situation vis-à-vis their banks and to shift the burden of the crisis to the banks. In this respect, Latvia introduced a new personal bankruptcy law considerably strengthening the position of the debtor and most likely leading to higher losses at banks (Box 5.1). Hungary introduced a guarantee for the payback of home credits for persons who have repayment difficulties because of increased debt servicing requirements (Molnar, 2010) and is currently close to concluding a mortgage relief plan including; e.g., the possibility for borrowers to extend their mortgage by up to five years without additional costs (Box 5.2). This comes on top of a bank solidarity tax for large banks which mostly affects foreign banks (see Kdrna, 2010).

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