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Hungarian banks to use official exchange rates for forex loan conversion

BBR Staff Writer Published 10 November 2014

The Hungarian Economy Ministry has signed an agreement with the Hungarian Bank Association to deal with issues related to forint conversion.

MNB

Under the terms of agreement, all Hungarian banks will use Magyar Nemzeti Bank's (MNB) 7 November exchange rates to convert foreign currency mortgages into the local currency.

In an e-mailed statement to Reuters, the Economy Ministry said: "Eliminating the foreign currency risk in household loans is primarily important for borrowers, but indispensable for the long term stable operation of the Hungarian banking system as well."

The agreement is expected to ease concerns of another government-imposed penalty on the country's already troubled banking sector.

Last week, MNB pledged to offer €9bn to banking sector from its reserves to neutralise the market impact of the conversion of foreign currency household loans into forints.

In addition, the bank urged every counterparty involved to sign a formal agreement, which aims to provide to credit institutions belonging to the range of its counterparties the whole amount of foreign currency required for hedging against foreign exchange risk related to conversion.

The credit institutions willing to sign individual agreements would in turn have to purchase the amount necessary for conversion from the MNB instead of the foreign exchange market.

The 7 November mid-rate is the exchange rate between the prevailing buy and sell rates on the open market at the time, at 256.60 forints a Swiss franc, 308.87 forints a euro, and 216.30 forints a Japanese yen, reported The Wall Street Journal.

Before the 2008 financial crisis, foreign currency-denominated loans, primarily franc, euro and Yen were used by the Hungarian banks to lend in foreign currencies.

However, mortgage payments rose sharply due to the rise of the Swiss franc against the forint, and also many households fell behind on payments.

Starting today, MNB is holding a series of tenders to provide euros to commercial banks that are required to satisfy their hedging needs arising from the conversion.


Image: MNB has agreed to provide €9bn to banking sector to neutralise the market impact of the conversion of foreign currency household loans into forints. Photo: Egrian.