ECJ Swiss franc loan ruling could cost Polish banks billions

A gamble on currency exchange rates turned sour for many Polish homeowners. © Kerystone / Ti-press

Polish banks face billions of additional losses after the European Court of Justice ruled on Thursday in favour of mortgage holders who are suing their lenders for encouraging them to make a Swiss franc currency bet that went spectacularly wrong.

The court said that banks were not entitled to demand that customers pay for the cost of capital on any foreign currency mortgages that have already been deemed by local judges to have contained “unfair terms.” The EU court also ruled that customers could pursue lawsuits in Poland that went beyond reclaiming the monthly payments and the additional interest demanded by banks for delayed payments. 

The EU ruling follows a lengthy courtroom battle dating to the financial crisis, when the Swiss franc surged in value against the Polish zloty and left mortgage holders bearing the cost of having to pay their mortgages at an unfavourable currency exchange rate.

Poland’s KNF financial regulator said in a statement on Thursday that the EU court ruling “has a negative dimension from the point of view of the Polish banking sector and the entire Polish economy, but also from the point of view of the certainty of law, public interest and elementary principles of social justice, granting preferential treatment to a small group of borrowers in the form of free credit.”

The KNF’s chair, Jacek Jastrzębski, had previously estimated that banks could end up paying another 100 billion zlotys if the judiciary ruled that they should have received zero interest rate income on invalid Swiss-franc mortgages.

But Polish banks have boosted their provisions in recent quarters in anticipation of an unfavourable EU ruling and the KNF also insisted on Thursday that “the Polish banking sector is currently well capitalised and liquid, which translates into safety and stability”.

The Swiss franc is now worth more than double its exchange rate of two zlotys before the 2008 crisis, when hundreds of thousands of Polish homebuyers had financed their purchases in Swiss francs, taking advantage of lower interest rates in Switzerland but ignoring the currency risk.

Homebuyers in other countries of central and eastern Europe like Hungary and Croatia also borrowed in Swiss francs, but their governments eventually stepped in to place limits on repayment exchange rates or convert the loans to local currency. No such settlement was made in Poland, however, where customers and banks instead put the issue in the hands of judges, who initially ruled in favour of the banks. 

Thursday’s ruling was expected after the European Court of Justice issued an initial opinion favourable to mortgage holders in February, after which more Polish courts also started siding with homebuyers, encouraging further lawsuits. Facing a tough election this autumn, Poland’s rightwing government has also recently sided with consumers, notably by offering them a mortgage payment holiday last year.

KNF chair Jastrzębski told an economic conference earlier this month that while banks could afford to absorb the full cost of the Swiss-franc mortgage debacle, it would reduce their ability to finance other activities. “Banks have sufficient capital for the time being but not sufficient to invest also in the green transition, our security and help companies in the reconstruction of Ukraine,” he said. 

Copyright The Financial Times Limited 2023