The mortgage time bomb ticking beneath Poland’s banks

In 2006, Polish couple Marek and Małgorzata Rzewuski bought a house on the outskirts of Warsaw because they were expecting a child and “we wanted more space and our own garden”. 

Like hundreds of thousands of other Polish homebuyers at the time, they were advised by their bank to get a mortgage in Swiss francs to benefit from lower interest rates in Switzerland than in Poland. Nobody discussed the flip side of introducing a foreign exchange risk into a 30-year mortgage of SFr200,000 ($205,000).

“This was presented as the best opportunity on the market,” Marek recalls. “The Swiss franc was very stable and very popular and we knew many people who were doing the same.”

Two years later, however, the global financial crisis struck. Investors flocked to the Swiss franc as a haven from the market turmoil, and its value surged against the Polish zloty and other currencies. The franc is now worth more than double its exchange rate of 2 zlotys before the crisis.

The lending practice in effect ended in 2008. But in the years since, it has become a time bomb for the Polish banking sector as customers like the Rzewuskis have begun winning lawsuits to force their banks to bear the cost of a currency bet that went spectacularly wrong.

If mortgage holders continue to win their court battles, officials and bankers warn that some lenders could collapse.

“It’s my obligation to raise the red flag, because pretending that everything is fine is going to have some dramatic consequences,” says Jacek Jastrzębski, chairman of the KNF, Poland’s financial watchdog.

Swiss-franc mortgages were also sold in other parts of central and eastern Europe. But once this Swiss bet proved mistaken, governments in many other countries stepped in to place limits on repayment exchange rates or convert the loans to local currency.

In Hungary, the government in 2014 forced banks to convert $12bn worth of foreign currency loans into forints. In Croatia, a similar conversion scheme the following year cost banks about $1bn.

Instead, Poland has allowed the Swiss-franc problem to fester, and many lenders still have significant exposure. The banks have 347,000 Swiss currency loans on their balance sheets, worth a combined SFr14.3bn, according to the KNF.

If courts decide that every bank must bear the full cost of their Swiss investments, Jastrzębski fears at least one or two may collapse.

One has already fallen. The country’s 10th-largest lender, Getin Noble, had to be rescued in September by the Polish state bank guarantee fund and a consortium of banks. The 10.3bn zloty ($2.2bn) bailout was Poland’s largest since the Soviet era.

Getin had already suffered several years of losses due to its aggressive sale of subprime products, but it was also heavily exposed to the Swiss franc, which accounted for one-quarter of its loan portfolio.

Polish banks have provisioned a combined 30bn zlotys to cover their Swiss-franc lending. But their final bill could rise by another 100bn zlotys if the judiciary rules that they should have received zero interest rate income on invalid Swiss-franc mortgages, according to Jastrzębski.

Polish courts have already annulled many Swiss-franc mortgages, after ruling that banks used “abusive” foreign exchange rates compared with those of the National Bank of Poland.

But the court battle has recently shifted on to the question of whether banks were entitled to charge customers for using their capital until their mortgages were annulled, an issue that was also brought last month by a Warsaw court before the European Court of Justice.

If courts in Poland and Europe side with consumers, the potential fallout would be worse. Up to five banks would be pushed to the brink of collapse in a worse-case scenario, warns Cezary Stypułkowski, mBank chief executive.

The judges could eventually force banks to stop lending, he says. “You cannot have a functioning system when people are getting their apartments for free by not paying anything for the usage of capital and not assuming any risk whatsoever.”

The court battle comes as banks are already bearing the cost of an eight-month payment holiday granted in July by the government to help mortgage holders cope with inflation, which last month climbed to a 26-year high of 17.9 per cent.

On November 8, mBank joined other Polish institutions in a downturn. It reported a third-quarter loss of 2.28bn zlotys compared with a profit of 27mn zlotys in the same period last year. Its German parent Commerzbank already announced in September a one-time charge of €490mn to provision mBank against Swiss-franc loan exposure.

While inflation has soared, Poland’s economy has been contracting since Russia’s invasion of Ukraine.

The current war uncertainty also contrasts with the solid growth forecast two decades ago, when politicians encouraged Swiss-franc loans because nobody wanted to “deprive borrowers from their dreams of having their own apartment”, says Jastrzębski.

He now fears a perfect storm for Poland’s wider economy. “A banking crisis coupled with an energy crisis and the geopolitical situation could be a disaster,” he says.

‘The risk was low’

After Donald Tusk became prime minister in 2007, he promised Poland would join the euro within four years.

His confidence gave lenders the green light to accelerate the Swiss-franc scheme. The year Tusk came to power, over half of Polish mortgages were issued in Swiss francs.

“Even if it wasn’t a standard approach to give a loan in a non-local currency, the thinking was also that we were going to enter the euro, so the risk was low,” recalls banker Józef Wancer, honorary chairman of the supervisory board of BNP Paribas Poland.

“But where were all the administrative and regulatory organs at that time, who were inspecting banks but didn’t raise the red flag to say that this was abusive?”

Some Polish banks were initially reluctant to join the Swiss-franc bandwagon, according to ING Bank Śląski chief executive Brunon Bartkiewicz, who says that he lobbied regulators to ban Swiss-franc mortgages.

Once that effort failed, ING joined the fray, he says, “because we were getting marginalised by not offering the main product on the market”.

ING started selling Swiss-franc mortgages in March 2008, only months before the bankruptcy of Lehman Brothers started a financial crisis that also ended Tusk’s euro ambitions.

The situation for holders of Swiss-franc mortgages worsened further after Switzerland decoupled its franc from the euro in 2015, causing it to rise 20 per cent in value. The move prompted the Polish government to draft legislation to draw a line under foreign exchange losses.

The law would have forced banks to convert all Swiss-franc mortgages to zloty mortgages and would have cost them about 9.5bn zlotys. But the banks successfully lobbied against the law’s implementation, largely because they had won the initial court cases filed by distressed customers.

Banks seriously miscalculated by rejecting a settlement, says former banker Paweł Borys, who is now president of the state-run Polish Development Fund. Instead, the issue was left in the hands of judges.

The European Court of Justice issued an initial opinion favourable to mortgage holders in 2019, after which Polish courts also started siding with homebuyers, which in turn encouraged more lawsuits.

Ironically the same banks that blocked the 2015 conversion law are now “lobbying for this government to create a legislation” to protect them against courtroom defeats, Borys says.

Still, he is hopeful judges will not create an “unfair” situation by ruling that Swiss-franc mortgage holders can recoup the cost of interest payments that zloty mortgage holders must make. “If you’re talking about justice, this would have nothing to do with justice,” he says.

Jastrzębski, the supervisor, is also urging judges to consider the broader implications for Poland’s economy of rulings that risk collapsing the banks. “Consumer protection is becoming something like the snake that is eating its own tail,” he says. “In the end it will be the customers who will pay for this mess.”

Banks under pressure

Facing a tough election next autumn, Poland’s rightwing government has recently sided with consumers, notably by offering them a mortgage payment holiday.

The banks have also become a political football in the debate over soaring inflation, with politicians threatening them with a windfall tax if they fail to give better terms to their customers.

In July, the head of the ruling Law and Justice party, Jarosław Kaczyński, told banks to “come to their senses and increase radically interest on deposits”.

Because some of Poland’s largest are also state-controlled, “I’m worried about how the government can treat this sector, especially during an election year when banks can be used to gain popularity among voters,” says economist Jakub Karnowski, who teaches at the Warsaw School of Economics.

The Swiss-franc risk casts a large shadow over Polish banks that have otherwise fared well in European stress tests, notably by maintaining higher capital ratios than many peers. But rising interest rates have also sharply reduced credit demand since the summer.

“I don’t think that we need to expect something like Greece (during the euro crisis), but the situation of Polish banks is clearly not rock solid,” says former finance minister Grzegorz Kołodko.

The Getin bailout was a good illustration of that situation, though the authorities positioned it as a one-off incident with no systemic risk, given the bank’s range of troubles. “As you can see, the resolution procedure (for Getin) didn’t cause a run on the banks, it went smoothly,” said Polish finance minister Magdalena Rzeczkowska in an interview last month.

Yet some experts warn that another more powerful explosive is buried beneath Poland’s banking sector, set to be triggered by a planned overhaul of the benchmark rate for mortgages and some other consumer loans.

The reform of the Warsaw Interbank Offer Rate, or Wibor, would be in line with that undertaken in London to replace the fraud-tainted Libor rate following a financial scandal a decade ago. Libor was substituted with a rate based on market transactions after it emerged bankers had conspired to manipulate the interbank rate.

The scandal prompted financial authorities worldwide to scrutinise their own benchmarks and switch to calculations based on actual transactions rather than quotes that are more at risk of fraud.

In April, Polish prime minister Mateusz Morawiecki, who is himself a former bank chief executive, told a conference that Poland should remove Wibor by January and replace it with a “different, transparent rate”.

Unprepared for Morawiecki’s announcement, the banking sector successfully pushed back his January deadline, noting that the Libor reforms took years to craft. But after the premier’s comment about transparency, some lawyers began court proceedings to annul mortgages based on Wibor.

In September, lawyer Bartosz Czupajło sued his PKO bank, claiming he was inadequately informed about the risks of using a floating rate based on Wibor when PKO sold him a mortgage in 2012.

Czupajło says his lawsuit is “not about my money”, but instead to make Poland’s judiciary decide whether every loan that used Wibor should be annulled.

Since 2020, his law firm has separately won 60 cases for “Frankowicze” — the nickname given to Swiss-franc homebuyers — and is working on another 600 cases.

“I think that one of the reasons why the government wanted to replace Wibor as quickly as possible is that, having seen what happened with the Swiss-franc loans, they’re suddenly very afraid of a repeat and an even worse outcome with Wibor,” Czupajło says.

Although he has no evidence that Wibor was manipulated in the same way as Libor, Czupajło says he has no reason to believe it was not.

“Wibor was constructed in a similar way to Libor, so why would Wibor not have had the same problem as well?” he asks. “When you look abroad, there are many countries where people get offered a mortgage with a fixed rate, but never in Poland. Why? I think it’s because banks can earn more with a floating rate, because they’ve been able to control the level of the benchmark rate.”

If lawyers like Czupajło convince judges to annul Wibor-based contracts, bankers say the effect on Poland’s banks could be catastrophic.

Tomasz Mironczuk, former chief executive of BGK Bank, says it would send Poland “the same way as in the crisis of the early 1990s”, when the banking sector underwent a massive round of consolidation to avoid weaker institutions collapsing because of non-performing loans.

At a broader level, the judiciary risks damaging the compact between regulators, financial institutions and their customers. “The people responsible for the prudential management of Poland never considered properly the risk if consumers successfully challenged their banks,” Mironczuk says. “Once exchange rates or interest rates rise, this raises the motivation of customers to go to court as well as the remuneration of their lawyers.”

The way the Swiss franc battle has escalated makes it hard to say what will happen next, says ING’s Bartkiewicz. “We started by arguing over what is mis-selling to deciding that every mortgage in a foreign currency is abusive,” he says. “I don’t really know how we made this journey.”

But for homebuyers like the Rzewuskis, whose son is now a teenager, the courts have provided the only escape route from the unsustainable burden of a Swiss-franc mortgage.

Even after winning the first round in their legal battle, the Rzewuskis are still facing an appeal from the bank and another fight over the interest charges on their outstanding housing debt.

“We bought a house to settle down as a family, not to start a long and difficult battle with the bankers,” says Marek Rzewuski. “We can only hope this story will end before our son leaves home.”