KNF’s position on the breakthrough judgment of the CJEU in “franc” cases
On October 3, 2019, the Polish Financial Supervision Authority (KNF) published its position on the Judgment and its implications for the Polish banking sector. In the KNF’s opinion, the banking sector in Poland is well capitalized and secure. In the opinion of the Polish Financial Supervision Authority, the policy implemented in recent years has led to an effective obligation on banks with a large share of foreign currency loans to have adequate capital to balance the risk associated with these loans.
According to the Polish Financial Supervision Authority, the banking sector in Poland is ready to accept the judgment of the CJEU. The KNF included the following measures to strengthen the banking sector’s resistance to the risk associated with foreign currency loans:
- Monitoring by the KNF of whether banks correctly estimate the risks associated with exchange rate fluctuations and whether they have adequate procedures in this respect.
- A strict dividend policy forcing banks to retain over 60% of their profits in the last five years (this percentage increases according to the banks’ involvement in currency housing loans to households).
- Designation in 2015 by the KNF of the amount of the additional capital requirement for the risk related to the currency loan portfolio; as a result, the banks were fairly obliged to maintain an appropriate level of own funds and capital ratios, taking into account the risk of lending activities (indicators and methodology are updated annually). This requirement was extended in 2017 by additional capital to cover legal risk related to granting foreign currency loans.
- The KNF initiated the introduction of the „anti-adrift” act enabling borrowers to repay the loan in the currency in which it was granted, without additional charges. The Act also introduced the obligation to regulate in the loan agreement detailed rules for determining the methods and time limits for determining the currency exchange rate, on the basis of which the loan amount, tranches, principal and interest instalments are calculated, and the rules for converting the loan payment or repayment currency.
- Currency risk incurred by the client is additionally limited by the provisions of the Mortgage Loan Act and the supervision of mortgage brokers and agents of 2017, according to which the mortgage may be granted only in the currency or indexed to the currency in which the consumer obtains the majority of his income or holds the majority of financial resources or other assets valued in the currency of the mortgage loan or the currency to which the mortgage is indexed.
In addition to the activities described above, banking supervision also issued two recommendations relating to loans denominated and indexed to foreign currency.
According to the KNF, in addition to the Commission and the KNF itself, the Financial Stability Committee (KSF), which is a macro-prudential oversight authority, reacted accordingly, recommending 2017 to increase the risk weight for 150% for loans secured by a mortgage on residential property, whose instalments or interest depend on changes in exchange rates or currencies other than income currency of the debtor. KSF also recommended the imposition of the systemic risk buffer of 3% to ensure the banks’ resilience to negative and rapid external phenomena in the environment of the Polish economy.
The KNF concludes that as a result of the above-mentioned comprehensive actions, the capital base of commercial banks has been strengthened and the banking sector has increased stability, which is reflected in the external ratings of Moody’s, S&P and Fitch.
In the summary of the announcement, we read that although the KNF believes that Polish banking is well prepared for the potential effects of the CJEU ruling, central authorities constantly monitor changes in the court rulings and information policy of banks in this matter.
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