Monday, 18 November, 2019

Is there any currency behind the foreign currency loans?


Attila asked me to write about whether there really is foreign currency behind foreign currency loans or just a whole bunch of trash from banks.

Once I get started with the topic, I try to collect the usual claims and mistakes in the topic. If I have written about the issue before, I will only link to the previous post, but it would be nice to see all of the statements once, as far as I can get things together.

The difference between a foreign currency loan

Let’s start with the difference between a foreign currency loan and a foreign currency loan . In the case of foreign currency loans, both disbursements and repayments are made in the currency chosen by the client. In case of a foreign currency based loan, the client receives the foreign currency by converting it into forint, and the monthly repayments are also deducted from it in forint, and the bank converts it into the given currency.

There is a simple reason for this: for a loan purpose (for example, a flat) you have to pay in forint in Hungary, and your clients repay the monthly installment from their payment in forint. Beyond that, however, there is no difference between the two products.

“There is no currency behind the loans, only the banks invented it to make money for the people. The currency is only a settlement price, not real. I got forints and I pay forints, what do I have to do with the Swiss franc ?! “

This is the most common excuse you can hear lately

bank

This is very easy to refute, quite a few things to think logically:

How could banks make loans at a 6% interest rate when the forint base rate was never below 6% or even above 10% at any given time? It is no good for a bank to pay more for a source than it does for a loan. The solution is simple: the bank borrowed a non-forint loan, which allowed it to make a profit at a much lower rate than the forint. The source of this was not Hungarian savers, but mostly foreign banks, which provided and asked for foreign currency.

Why did everyone’s repayments fall between 2006 and 2008 when they were in forint loans? Bonus Question: Why didn’t anyone despair when you had to pay less and less for monthly repayments? Somehow there were no protest marches in the streets.

At the end of 2011, the National Bank provided Hungarian banks with EUR 2.6 billion in early repayment because, if they had bought so many currencies on the free market, they would cover the forint. This amount was only 60% of the money spent on the early repayment, it was visible at the exchange rate of the forint, the forint depreciated from 294 to 314 forints, and then back again. If there were no foreign currency for the loans, why would the National Bank have to save the forint exchange rate and why would the banks buy foreign currency equivalent to nearly EUR 4 billion? The MNB’s study can be found here.

One could go on, but those who are interested in the facts can see that much, and those who are not, all the additional evidence is unnecessary.

“There are not as many currencies on banks’ balance sheets as there are foreign currency loans.”

This is a more sophisticated statement than the previous one

bank

But the answer is simple too. In the money market, almost all products can be produced synthetically, that is, in combination with some other financial product. If I want to pay the Swiss franc for its exchange rate and interest, I do not have to buy the Swiss franc necessarily, I get the same result with a swap. In the interbank market, I swap the forint and Swiss franc interest and exchange rates on my forint deposit. These swaps are so-called off-balance sheet transactions and therefore do not appear on banks’ balance sheets. According to National Bank data, in March 2009 banks had FX swaps worth at least HUF 4,400 billion. The synthetic currency created within the swap behaves exactly like its real counterpart in every respect.

“Why can’t I pay the monthly installments of my currency-denominated loan in a currency ?!”

The contract signed before the notary public contains the method of payment, and neither the bank nor the client can depart from it at their convenience, even if it may be better for both of them. When people who are not willing to pay want to get in touch with the fact that the APR includes the cost of changing money, but not the contract separately, so the whole contract should be null and void, it is important to see how important the contract is.