Troubles with the Chf Loans in Croatia: The Story of a Case Still Waiting to Be Closed
Abstract
:1. Introduction
2. Literature Review
2.1. Croatian Banking Market—A Look at the Severity of CHF Loans Issues
2.2. Related Studies
3. Empirical Evidence for Croatia
- What explains the supply and demand of the FX-linked loans in the Croatian banking sector?
- What were the attitudes of Croatian financial experts regarding the issues connected with the CHF case?
- How was the CHF debt crisis resolved in Croatia?
3.1. Supply-Driven Factors of FX Loans Acceptance
- Speed up and record higher credit growth (and consequently increase their market share),
- Partly reduce their credit risk (due to a more favorable credit price to borrowers when compared to domestic currency loans), and
- Improve their market risk management.
3.2. Demand-Driven Factors of FX Loans Acceptance
3.3. Financial Experts’ Opinions about FX Loans Terms
3.4. Debt Crisis Resolution
4. Lessons Learned
5. Conclusions
Funding
Data Availability Statement
Acknowledgments
Conflicts of Interest
References
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1 | It is important to point out that the administrative or discretionary interest rate is different from a variable interest rate, as a variable interest rate is linked to a transparent market benchmark (for instance LIBOR, EURIBOR etc.). Contrary to that, the administrative interest rate adjusts occasionally according to a one-sided or unilateral decision of the bank management, without clear interbank market interest rate. Changes in the administrative interest rates were not transparent, nor communicated properly to bank clients until the financial consumer protection was improved in Croatia at the beginning of 2013. After amendments to the Consumer Credit Act in January 2013, changes in those rates had to be explained with a certain financial model and legally acceptable parameters, and if their change worsens the bank clients’ position, they have the right to the earlier loan repayment, without the usual transaction costs applied in such case (Deković 2013). |
2 | (CHF mismatch index = (CHF liabilities–(CHF assets–CHF loans to resident households and nonfinancial corporations))/Total assets × 100 (Yeşin 2013, p. 225). |
3 | (for an insightful review of the CHF debt relief programs in other CEE countries see, e.g., Fischer and Yeşin (2019) and Vassileva (2020)). |
CHF/HRK Mid-Rate (Daily Data) | Mean | Standard Deviation | Minimum | Maximum |
---|---|---|---|---|
11 February 2003–31 December 2008 | 4.678464 | 0.1687972 | 4.3591 | 5.1710 |
1 January 2009–3 December 2020 | 6.311169 | 0.6729954 | 4.7451 | 7.8812 |
Overall time period | 5.808714 | 0.9435556 | 4.3591 | 7.8812 |
NPLs as of Total Loans (%) | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | June 2016 |
---|---|---|---|---|---|---|---|
Total | 11.23 | 12.43 | 13.93 | 15.70 | 17.06 | 16.65 | 14.99 |
Kuna | 15.90 | 16.81 | 16.65 | 17.91 | 19.02 | 17.58 | 15.10 |
Euro | 9.85 | 11.08 | 12.93 | 14.53 | 15.82 | 15.39 | 13.73 |
Households | 6.57 | 6.93 | 7.46 | 9.15 | 10.71 | 11.20 | 10.87 |
Mortgages | 3.01 | 3.29 | 3.67 | 4.88 | 5.58 | 6.05 | 6.74 |
Swiss franc | 8.82 | 11.16 | 13.16 | 16.19 | 18.51 | 21.78 | 66.11 |
Households | 6.05 | 8.00 | 9.98 | 13.31 | 15.50 | 18.33 | 65.48 |
Mortgages | 5.73 | 7.27 | 9.15 | 12.36 | 13.12 | 16.63 | 63.43 |
Car loans | 2.44 | 1.77 | 2.77 | 6.75 | 23.49 | 79.12 | 99.15 |
Other loans | 15.25 | 23.44 | 25.98 | 30.22 | 54.92 | 52.27 | 81.23 |
Corporates | 27.12 | 40.24 | 49.93 | 52.94 | 58.99 | 73.39 | 76.16 |
Other sectors | 25.53 | 12.41 | 14.30 | 24.60 | 29.45 | 27.56 | 30.82 |
Other currencies | 4.90 | 7.13 | 15.12 | 31.57 | 33.09 | 30.35 | 24.67 |
Supply-Driven Factors | Demand-Driven Factors |
---|---|
Risk shifting behavior of banks (avoiding currency mismatch on a bank’s balance sheet) | Carry trading behavior (interest rate differentials) |
Foreign bank ownership (low-cost FX funding from parent banks) | Low credit capacity for domestic currency loans (liquidity constraints due to insufficient disposable income or suitable collateral) |
Credit rationing (avoiding credit price increase and potentially credit rejection due to an inflation premium in domestic currency loans in case of low credibility of domestic monetary policy) | Low credibility of domestic monetary policy for pursuing price stability, lack of trust in domestic financial institutions, macroeconomic uncertainty |
Improving bank profitability through the net interest margin due to interest rate differentials between foreign funds and loans to domestic borrowers | Expectations of medium-term euro adoption |
Intensive competition in the banking sector | Hedging factors: remittances and household income in foreign currency |
Behavioral biases: anchoring, excessive optimism, disaster myopia, herding | Behavioral biases: overconfidence, anchoring, excessive optimism |
EUR | CHF | USD | ||
---|---|---|---|---|
EUR | Pearson correlation | 1 | ||
Sig. (2-tailed) | ||||
CHF | Pearson correlation | 0.957 ** | 1 | |
Sig. (2-tailed) | 0.000 | |||
USD | Pearson correlation | 0.637 ** | 0.671 ** | 1 |
Sig. (2-tailed) | 0.000 | 0.000 |
6-Month LIBOR (Daily Data) | EUR | CHF | USD |
---|---|---|---|
Mean | 1.3865647 | 0.3891227 | 1.8134682 |
Standard deviation | 1.61680594 | 1.04836317 | 1.54114657 |
Minimum | −0.52586 | −0.88360 | 0.23375 |
Maximum | 5.43750 | 3.20167 | 5.64000 |
6-Month ZIBOR (Monthly Average) | HRK |
---|---|
Mean | 3.82 |
Standard deviation | 2.72 |
Minimum | 0.42 |
Maximum | 9.53 |
Test Value = 0 | ||||||
---|---|---|---|---|---|---|
95% Confidence Interval of the Difference | ||||||
t | df | Sig. (2-tailed) | Mean Difference | Lower | Upper | |
EUR | 59.317 | 4783 | 0.000 | 1.38656466 | 1.3407378 | 1.4323915 |
CHF | 25.673 | 4783 | 0.000 | 0.38912270 | 0.3594078 | 0.4188376 |
FX Mid-Rate (Daily Data) | EUR/HRK | CHF/HRK | USD/HRK |
---|---|---|---|
Mean | 7.388957 | 4.678464 | 5.757688 |
Standard deviation | 0.1334565 | 0.1687972 | 0.5662856 |
Minimum | 7.0681 | 4.3591 | 4.5340 |
Maximum | 7.7671 | 5.1710 | 7.2409 |
Statement | N | Sum | Mean |
---|---|---|---|
Currency clause is justifiable due to a high level of household savings in foreign currency. | 46 | 115 | 2.50 |
Currency clause transfers foreign exchange risk from banks to borrowers. | 47 | 210 | 4.47 |
Currency clause excessively protects banks from foreign exchange risk. | 47 | 197 | 4.19 |
Currency clause is unnecessary due to a stable EUR/HRK foreign exchange rate. | 46 | 158 | 3.43 |
Currency clause disregards the possibility of foreign currency-induced credit risk. | 44 | 167 | 3.80 |
Currency clause needs to be abolished, as banks must show their risk management capabilities. | 47 | 182 | 3.87 |
Currency clause needs to be abolished, as government should protect financial consumers/borrowers and not banks. | 46 | 161 | 3.50 |
Statement | N | Sum | Mean |
---|---|---|---|
Administrative interest rates are not recognized in the public as a problem for bank customers (borrowers and depositors). | 47 | 185 | 3.94 |
Administrative interest rates are not recognized as a problem as they are presented as variable (referent-market) interest rates. | 47 | 187 | 3.98 |
Administrative interest rates are not a fair banking practice as financial consumers are usually not familiar with their presence in contracts. | 47 | 194 | 4.13 |
Administrative interest rates should be more clearly pointed towards the loan/deposit contracts. | 47 | 217 | 4.62 |
Administrative interest rates protect banks’ interests and put them in a favorable position in comparison to their customers. | 47 | 221 | 4.70 |
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Kundid Novokmet, A. Troubles with the Chf Loans in Croatia: The Story of a Case Still Waiting to Be Closed. J. Risk Financial Manag. 2021, 14, 75. https://doi.org/10.3390/jrfm14020075
Kundid Novokmet A. Troubles with the Chf Loans in Croatia: The Story of a Case Still Waiting to Be Closed. Journal of Risk and Financial Management. 2021; 14(2):75. https://doi.org/10.3390/jrfm14020075
Chicago/Turabian StyleKundid Novokmet, Ana. 2021. "Troubles with the Chf Loans in Croatia: The Story of a Case Still Waiting to Be Closed" Journal of Risk and Financial Management 14, no. 2: 75. https://doi.org/10.3390/jrfm14020075