These recommendations reflect financial stability concerns arising from foreign
currency lending to the non-financial private sector. This phenomenon is currently
present in EU countries to different degrees and has led in some cases to a build-up
of substantial mismatches between the currencies in which the non-financial private
sector receives its income and those in which it pays back loans, thus making
it more vulnerable to unfavourable movements in the exchange rate.
High levels of foreign currency lending may have systemic consequences for the
countries concerned as well as potential for cross-border contagion.
The recommendations cover borrowers without a natural or financial hedge and
address the risks identified by the ESRB. For credit and market risk, the recommendations
are intended to limit the probability and consequences of such risks materialising
by increasing the resilience of the financial system and ensuring the creditworthiness
of new borrowers. It is also recommended that borrowers be given the appropriate
information to make well-informed decisions. Moreover, credit institutions should
properly incorporate foreign currency lending risks into their internal risk management
systems, which in turn is expected to contribute to improved risk pricing.
Regarding excessive credit growth induced by foreign currency lending and the
possibility of the emergence of asset price misalignments, national authorities
are recommended to further tighten their rules on foreign currency lending. With
respect to funding and liquidity risks, credit institutions are urged to move
towards sustainable funding structures. One of the key features of the framework
is the principle of reciprocity, which means that for financial institutions operating
through the provision of cross-border services or through branches in other Member
States, home Member States’ authorities should impose measures on foreign currency
lending at least as stringent as those in force in the host Member States.
Implementation deadlines vary between June 2012 and December 2013 depending on
the recommendation and addressee.
