Policy measures and failures on foreign currency household lending in central and eastern Europe

Abstract

I found that during booming years national policy makers were strongly constrained to decrease or effectively manage the risks of unhedged foreign currency lending (FCL) to households due to the economic characteristics of Central and Eastern Europe (CEE). Strong FCL growth was mainly driven by private sector consumption and investment. Foreign banking groups easily intermediated international financing into open CEE markets. International measures, which could have limited FCL, were not taken. I found an inconsistency: FCL was primarily a result of macroeconomic imbalances, but macroeconomic policies mostly proved inefficient to downsize it. Administrative measures seemed to be the most effective, however, only for a short period due to the high degree of financial liberalisation. Regulatory measures proved less efficient, while relatively frequently used supervisory actions did not have any notable effects. Financial education, moral suasion, and market development measures (with the exception of long-term, fixed rate local currency (LC) housing finance) were not efficient at all. Out of 12 investigated countries 6 had some success to limit FCL. Others did not have any efficient policy mix. Comparing the experiences of Hungary and other countries I found that the ‘we cannot do anything’ is a worse policy approach than the ‘we will try to do something’ one in spite of its deficiencies. The euro membership could not automatically eliminate FCL as the example of Slovenia shows.