Experiences with conversion of loans denominated in Swiss francs

Is it necessary for central banks to support conversion of Swiss franc-denominated loans? Hungary, Croatia, and Romania all have different experiences in this regard. The outcomes observed in these countries show that assistance on the part of central banks isn’t always the obvious answer.
Experiences with conversion of loans denominated in Swiss francs


The conversion of Swiss franc-denominated loans into other currencies has multiple consequences for commercial banks. These are discussed, among others, in the NBP reports on the stability of the financial system. When granting foreign currency loans, commercial banks have had to – in order to finance these loans – obtain funds in a foreign currency, for example, in the form of deposits or by issuing debt securities, or have had to close their foreign exchange position with the use of off-balance sheet instruments. The conversion of loans leads to the opening of a foreign exchange position. This because the composition of bank’s asset change: the loan, the value of which depends on the exchange rate of the Swiss franc is replaced by a loan whose value depends on the exchange rate of another currency. The currency of conversion may be the domestic currency, e.g., when the conversion is made from the Swiss franc to the Polish złoty, or a different currency agreed between the borrower and the lender or set out in the national conversion programs.

If the bank is unwilling to maintain capital to cover capital requirement stemming from the open net foreign exchange position, it should pay back the liabilities used to hedge the original foreign exchange position expressed in the Swiss francs. For this purpose, a commercial bank needs to buy Swiss francs. A question therefore arises naturally: where (and at what price) could the commercial banks buy these Swiss francs in order to pay off these liabilities? The question is also important in the context of the conversion costs incurred by banks and discussed in the studies mentioned above.

The answer to this question depends on the nature of the conversion (whether voluntary or mandatory for the banks), how the conversion process is spread out over time, and the depth of the foreign exchange market. A mandatory for banks, announced in advance, universally applicable, and carried out within a short period of time in a country with a shallow foreign exchange market, may result in the emergence of a significant accumulated demand for foreign currency from the banks. This demand, consequently, may lead to the occurrence of a depreciation pressure on the domestic currency and an increase in the (considerable) costs of currency conversion for the banks. Large purchases of foreign currency carried out by banks – for example, in exchange for Hungarian forints – may also lead to a significant decrease in the banks’ forint liquidity and an increase in the forint market interest rates along with the accompanying disruptions in the forint-denominated treasury securities market. The risk of such a market reaction occurred in Hungary and Croatia during the conversions carried out in these countries.

The problem of household indebtedness due to foreign currency loans arose in several Central European countries, such as Hungary, Croatia, and Romania. In these countries, Swiss franc loans were mainly taken out by households, and most of these were loans secured by a mortgage. No matter what were the reasons for the popularity of Swiss franc-denominated loans in these countries, but there were significant differences between these countries with regard to the relation of these loans to GDP and foreign exchange reserves, as illustrated in the figures below.

This problem was solved in two different ways. In Hungary and in Croatia, the loan conversion process was regulated by the law: commercial banks were obliged to carry out the conversion, and their uniform terms and conditions were set out in acts of parliament or government regulations – it’s worth mentioning that in Hungary the conversion of the foreign currency loan portfolio took several attempts before it was completed. For borrowers, on the other hand, the conversion was mostly voluntary (in Croatia and in several stages of the conversion in Hungary), except for the 2014 conversion in Hungary, which was mandatory for households that weren’t earning incomes denominated in foreign currency. It’s worth noting that while in Hungary the conversion programs envisaged a conversion from the Swiss franc to the Hungarian forint, in Croatia the process involved the conversion from Swiss franc to the euro, which is understandable due to the significant euroization of the local economy.

In Hungary and in Croatia, the loan conversions were regulated by the law: commercial banks were obliged to carry out the conversion. In Romania, the conversion was voluntary for both banks and borrowers – the banks carried it out on their own terms.

A different approach was adopted in Romania, where the conversion was voluntary for both banks and borrowers – it was the banks themselves, encouraged by the authorities, that carried out the conversion on terms set out by each bank individually. In fact, in Romania an attempt was made in October 2016 to regulate the conversion of franc-denominated loans into the Romanian leu, at the exchange rate applicable on the date the loan was granted. However, in February 2017 the Supreme Court of Romania found the legal provisions regulating the conversion to be unconstitutional.

After the announcement of the terms of mandatory conversion in Hungary and Croatia commercial banks immediately started adjusting their currency positions, even though the loan conversion was spread out over many months. It was therefore obvious that the process could lead to the emergence of a depreciation pressure on the domestic currency as well as disruptions in the domestic money market, especially considering the fact that the currency markets for the Hungarian forint and the Croatian kuna weren’t very deep.

For example, according to data of the Bank for International Settlements, in April 2010 the average daily turnover in the forint spot market for the Hungarian forint was approximately USD 4 billion (for the Polish złoty it was approximately USD 7 billion), and the value of the f/x swap transactions with the Hungarian forint was USD 9.9 billion (for the Polish złoty it was USD 19 billion), while the average daily turnover for all types of transactions for the Romanian leu was USD 2.9 billion (the BIS does not provide data on the turnover for the Croatian kuna). In these circumstances, the central banks of Hungary and Croatia decided to cooperate with banks in purchasing the foreign exchange. In Romania, however, no tensions arose in the foreign exchange market, so there was no need for the National Bank of Romania to take steps in order to facilitate the purchase of foreign currency by commercial banks.

The sales of foreign exchange to commercial banks by the National Bank of Hungary (Magyar Nemzeti Bank – MNB) took place during the conversions (and the so called “Settlement”) carried out in the years 2011-2015. The MNB sold the foreign currency in spot transactions at auctions and combined the sale with an obligatory conclusion of transactions that would absorb the foreign currency provided: f/x swaps or Currency Interest Rate Swaps (CIRS). Despite the fact that the conversion involved a change of the loan currency from the Swiss franc to the Hungarian forint, the MNB was mainly selling euro to the banks. This was due to the fact that commercial banks were concluding transactions which hedged their liabilities against changes in the franc/forint exchange rate on the HUF/EUR currency pair (in the illiquid market), and then on the EUR/CHF currency pair, for which the market is liquid. The MNB only sold Swiss francs to commercial banks in 2015. The MNB established transaction quota limits for each commercial bank, which was set out on the basis of the estimated amount of converted loans as well as the term and currency structure of the banks’ liabilities in foreign currency.

Selected technical aspects of the transactions concluded by the MNB are particularly interesting.

Firstly, the tenders in the spot transactions were conducted in various modes: in 2011 these were multiple price tenders, and in the following years they were carried out as the fixed price tenders. The exchange rate at which the MNB accepted purchase offers submitted by the banks was a rate close to the official MNB rate on the transaction date (in the years 2011-2012) or the official MNB rate on the transaction date/day preceding the transaction (in the years 2012-2015). In one of the transaction models adopted in 2014, the MNB accepted offers at the exchange rate of the European Central Bank.

Secondly, the MNB entered into parallel transactions that absorbed the foreign currency sold to commercial banks – f/x swap or CIRS transactions. Pursuant to these transactions, commercial banks deposited the purchased foreign currency with the MNB in exchange for a forint deposit made by the MNB with the commercial banks. The funds from the mutual deposits were released by the MNB gradually so that commercial banks had access to the foreign currency on the dates and in the amounts corresponding to the maturity of their foreign currency liabilities. Such a structure of the transactions prevented a sudden decline in the value of Hungary’s foreign exchange reserves and provided the banks with forint liquidity, which had been reduced as a result of the foreign exchange purchase.

Thirdly, in 2011 the MNB obliged commercial banks to sell back– at the exchange rate of the purchase date – the surplus of the purchased foreign currency over the amount needed to repay the foreign currency liabilities, and in 2014 it formalized its involvement in the conversion by concluding agreements with commercial banks with large portfolios of Swiss franc-denominated loans and an agreement with the Association of Hungarian Banks.

According to information published by the MNB, the Hungarian central bank sold to the commercial banks 2.7 billion euro for the purposes of the 2011/2012 conversions, followed by 8 billion euro for the 2014/2015 conversions, and 0.6 billion Swiss francs for the 2015 conversion from the year 2015.

The conversion of Swiss franc-denominated loans in Croatia took place in September 2015 and involved the conversion of the loan currency into the euro or the Croatian kuna – in the latter case, the loan payments were made dependent on the euro exchange rate.

The conversion of Swiss franc-denominated loans in Croatia took place in September 2015 and involved the conversion of the loan currency into the euro or the Croatian kuna – in the latter case, the loan payments were made dependent on the euro exchange rate. Earlier, in January 2015, following a rapid appreciation of the Swiss franc against the euro, the government had frozen the exchange rate for Swiss franc-denominated loan repayments for a period of one year. This had led to an increase in the commercial banks’ demand for the euro and the emergence of a depreciation pressure on the Croatian kuna.

In response, the Croatian National Bank (Hrvatska Narodna Banka – HNB) used its primary monetary policy instrument of foreign exchange interventions – an instrument regularly used in the fixed exchange rate regimes such as the regime de facto functioning in Croatia. These interventions were carried out using multiple price tenders where the HNB was selling euros in exchange for kuna to all interested Croatian banks. In total, the HNB sold 757 million euro to commercial banks in 2015. At the same time, the HNB increased the banking sector’s liquidity by repealing the obligation for banks to hold certain HNB bills, and by redeeming some of these bills ahead of their scheduled maturity. In addition, the HNB reinstated weekly reverse repo auctions and expanded the list of acceptable collateral for these operations to also include government bonds issued in the domestic market.


As can be seen from the examples of Hungary, Croatia, and Romania, the role and extent of central banks’ involvement in the conversion of foreign currency loans varied and depended on the potential impact on the domestic economy resulting from the increased demand for foreign currencies. The central banks of Hungary and Croatia supported the conversion because it was a systemic solution, and a depreciation of the national currency detached from macroeconomic processes, or unjustified disruptions to banks’ domestic currency liquidity would not support the fulfillment of the central bank’s objectives: the maintaining of stable price levels in the economy and the stability of the financial system as a whole.

Following the mandatory 2014 conversion in Hungary the forint appreciated, and some borrowers were unhappy because of the imposed conversion. They changed their mind after 15 January 2015, when the euro/franc exchange rate was unpegged, which led to a sharp appreciation of the Swiss franc.

In the case of Hungary and Croatia it was also important that the conversion was regulated in national legislation. It was also a systemic conversion – the option was available to all borrowers and all banks were obliged to allow customers to convert their loans. Although clients could convert their liabilities at an exchange rate different from the market rate, neither the MNB nor the HNB sold the foreign currency to banks at a historical exchange rate.

In both cases there was also no legal uncertainty as to the effectiveness of the conversions in terms of relations with the clients, as these conversions were regulated by the law. Anecdotally, after the mandatory conversion of loans in Hungary in 2014, the forint strengthened, and some borrowers were unhappy because of the imposed conversion. However, the waves of social discontent quickly subsided after 15 January 2015, when the Swiss National Bank unpegged the euro/franc exchange rate, which led to a sharp appreciation of the Swiss franc against most other currencies.

It should also be emphasized that the operations of central banks were available to all banks operating within a given country – they served to stabilize the situation of the entire banking sector and were aimed at limiting macroeconomic risk for the entire economy and for all foreign currency borrowers. The lack of involvement of the Romanian central bank resulted from the voluntary nature of the currency conversion in that country – as a result of which the whole process was spread out over time – and also from the small scale of these operations, which meant that the banks were able to purchase the foreign currency on their own.


The article presents the private views of the author and not the official position of NBP.


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