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Credit holidays in the fire of criticism of the European Central Bank

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Widespread credit holidays may raise concerns about financial stability and threaten the solvency of banks, the European Central Bank wrote in an opinion. The ECB encourages the Polish authorities to consider introducing targeted criteria for credit holidays in order to reduce uncertainty and risks to financial stability.

The ECB writes that granting allowances such as credit holidays to borrowers in financial difficulties may under certain circumstances promote financial stability, for example by allowing such borrowers to overcome temporary liquidity shortages while allowing lenders to maintain customer relationships and avoid selling collateral at discounted prices.

Financial stability concerns

However, widespread and untargeted credit holidays raise financial stability concerns. On the one hand, for borrowers with debt sustainability problems, credit holidays can delay the recognition and resolution of non-performing debt, increasing its economic costs. borrowers who are able to make repayments, the negative financial impact unduly reduces the profitability of banks and increases uncertainty,’ he adds.

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Limited profitability of banks, in turn, means limited ability to retain profits and thus increase the bank’s capital necessary to absorb losses and secure future lending.

“Combined with increased uncertainty, this ultimately restricts potential borrowers’ access to credit, including mortgages, and therefore may lead to a negative feedback loop between the banking sector and the real economy. In addition, large losses resulting from the suspension of repayments may threaten the solvency of banks” – evaluates the ECB.

The ECB writes that the uncertainty resulting from the impact of the act on credit institutions may potentially reduce the company’s valuation. This may then increase the difficulty of attracting investors to potentially raise equity or issue bonds to meet capital and minimum requirements for own funds and eligible liabilities.

Had banks known in advance that such a regulatory change affecting their borrower arrangements would be made, they could (and most likely would) protect themselves by introducing higher mortgage rates or, in extreme cases, by stopping lending. ECB.

Doubts about the purpose of the act

The ECB adds that the fact that the Act does not provide for any specific eligibility criteria other than that the loan must be denominated in PLN and meet the borrower’s housing needs also raises doubts as to the purpose of the Act.

The ECB encourages the Polish authorities to consider introducing targeted eligibility criteria for the future application of credit holidays for mortgage loans in order to reduce uncertainty and risks to financial stability.

According to the ECB, the impact of the suspension of loan repayments on banks’ profitability is further magnified by the rule that the loan period is extended according to the number of deferred installments. In such circumstances, the value of the loan at any given time decreases due to the lack of interest on the mortgage loan during the period of suspension of repayments.

“Several banks euro area of systemic importance has significant mortgage exposures in Poland. Therefore, the widespread and prolonged credit holidays for mortgage loans provided for in the Act raise financial stability concerns in the euro area.

Credit holidays in Poland

The provisions on credit holidays have been in force since mid-2022. Credit holidays mean the suspension of the obligation to make payments to which the borrower is obliged under the concluded mortgage loan agreement, which is not a foreign currency loan.

The borrower or borrowers (in the case of a loan with another person) can take advantage of statutory credit holidays for a maximum of 8 months in 2022 and 2023. In the periods from 1 January 2023 to 31 December 2023, they may use the suspension of monthly installments in each quarter.

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