Is the granting of mortgages in foreign currency a deliberate exploitation by commercial banks of the information asymmetry present in their relations with borrowers?
Is the granting of mortgages in foreign currency a deliberate exploitation by commercial banks of the information asymmetry occurring in relations with borrowers, is the passing of currency risk by the bank to customers, and is an activity contrary to the principles of business ethics, corporate social responsibility of banking, and consequently leads to a decline in the level of public confidence of citizens in relation to banks?
In the country where I operate just before the outbreak of the global financial crisis of 2008, commercial banks were extensively issuing mortgages denominated in foreign currency, mainly in Swiss franc, i.e. CHF. Mortgage offers offered in CHF were deliberately structured very attractively for customers, which resulted in a strong increase in lending actions on this type of loans. In 2006-2007, lending actions carried out within the framework of mortgages denominated in CHF grew so strongly that they significantly exceeded lending actions carried out within the framework of mortgages granted in the domestic currency, i.e. in PLN. However, in reality, the offers of these loans were not as attractive as initially presented to customers by the banks. At that time, in the context of high stock valuations on stock exchanges, rising prices of raw materials on wholesale commodity markets, high economic growth rates, rapidly rising real estate prices, good economic conditions, Poland's plans to join the euro zone, the PLN domestic currency exchange rate was in an upward trend. The banks, based on their macroeconomic analysis, knew what was going on, they knew about the overvalued assets, the overvalued PLN against other currencies, etc. The average customer, the potential borrower, did not have this knowledge. Banks took advantage of the asymmetry of information regarding the aforementioned issues of the macroeconomic situation of the economy, the valuation of assets on the capital markets, the level of exchange rates.
Within the framework of their CHF-denominated mortgages, they passed the currency risk arising from changes in exchange rates and the risk of changes in interest rates by the central bank in Switzerland onto the borrowers. Soon after the global financial crisis erupted in mid-September 2008, the exchange rate of the currency of a relatively non-large developing economy with higher investment risk, i.e. the PLN exchange rate against other currencies, instead of continuing to rise it began to fall sharply. The CHF exchange rate, on the other hand, rose rapidly, resulting in a significant increase in the size of the amounts paid to the bank by borrowers with the aforementioned loans in CHF in installments as part of their loan repayments. Before the global financial crisis of 2008, mortgage installments denominated in CHF were significantly lower compared to the situation if the same loan had been taken on analogous terms but in the domestic currency of PLN. On the other hand, after the outbreak of the aforementioned financial crisis, the situation reversed dramatically, as the amount of money paid to the bank in installments of repaid CHF loans increased significantly, and there were later situations that it exceeded the situation if the same loan had been taken on analogous terms but in the domestic currency of PLN. In addition, the loan agreements contained provisions that were prohibited from the point of view of good standards and guidelines of regulatory and supervisory institutions, abusive clauses. The abusive clauses in question were included in these agreements as part of the asymmetry of information used by the banks, occurring in their relations with customers.
In view of the above, the granting of mortgage loans in foreign currency is a deliberate exploitation by commercial banks of the information asymmetry occurring in relations with borrowers, is the transfer of currency risk by the bank to customers, and is an activity that is contrary to the principles of business ethics, corporate social responsibility of banking and, consequently, leads to a decline in the level of public confidence of citizens in relation to banks. Thus, the issue of CHF-denominated mortgages has become one of the significant factors deteriorating the image of commercial banks from the point of view of customers. The granting of mortgage loans denominated in CHF has caused a deterioration in the reputation of commercial banks operating in Poland, a decrease in the level of social responsibility of the banking business and, consequently, also a deterioration in the image of banks as institutions of social trust.
In view of the above, I address the following question to the esteemed community of scientists and researchers:
Is the granting of mortgages in foreign currency a deliberate exploitation by commercial banks of the information asymmetry that exists in their relations with borrowers, is the transfer of currency risk by the bank to customers, and is an activity that is contrary to the principles of business ethics, social responsibility of the banking business and, consequently, leads to a decline in the level of social trust of citizens towards banks?
Is the provision of mortgages in foreign currency a deliberate exploitation by commercial banks of the information asymmetry that exists in their relations with borrowers?
What do you think about this topic?
What is your opinion on this issue?
Please answer,
I invite everyone to join the discussion,
Thank you very much,
Best regards,
Dariusz Prokopowicz
The above text is entirely my own work written by me on the basis of my research.
In writing this text, I did not use other sources or automatic text generation systems.
Copyright by Dariusz Prokopowicz
Yes, because banks have better knowledge of financial markets and may not disclose fully the associated risks with such mortgages to borrowers.
Also, lower interest rates may draw the borrower who has poor expertise and not realise the long term risks and costs.
Furthermore, currency devaluation makes the borrowers to repay more while the banks benefit as the value of the loans increase.
Consumer protection measures and some regulatory oversight can help to prevent deliberate exploitation by commercial banks.
That's an interesting and complex question. From the perspective of an informed individual in August 2023, I would say the following:
The granting of mortgages in foreign currency can be viewed as a deliberate exploitation of information asymmetry by commercial banks in certain cases. When borrowers take out mortgages denominated in a foreign currency, they may not fully understand the risks involved, such as exposure to exchange rate fluctuations. Banks, on the other hand, typically have more expertise and information regarding foreign exchange markets and the potential volatility of different currencies.
This information asymmetry can allow banks to structure mortgage products in a way that benefits them at the expense of less financially sophisticated borrowers. For example, banks may offer lower short-term interest rates on foreign currency mortgages, enticing borrowers without fully explaining the long-term risks. When the exchange rate moves against the borrower, the monthly mortgage payments can become significantly more burdensome, potentially leading to defaults.
However, it's important to note that the granting of foreign currency mortgages is not inherently exploitative in all cases. In some contexts, it may provide borrowers with access to credit that would otherwise be unavailable or offer potential benefits, such as lower interest rates. The key is whether the banks are transparently and fairly communicating the risks to borrowers, who then make an informed decision.
Ultimately, the assessment of whether the practice is a deliberate exploitation of information asymmetry would depend on the specific market conditions, regulatory environment, and the degree of transparency and fairness exhibited by the commercial banks involved. Careful monitoring and oversight by regulatory authorities is necessary to ensure that borrowers are adequately protected from potential abuses.
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