Banks active in Central and Eastern Europe face an increasingly challenging regulatory environment following the decision of the Swiss National Bank to “de-peg” the Swiss Franc (CHF) from the Euro.
The reaction to the CHF de-peg in Croatia and Montenegro reaction seems to have set an example: while Poland is still considering its course of action, Romania’s parliament has already adopted legislation forcing the conversion of CHF loans into local currency at artificially low exchange rates. Following on our earlier updates, we set out a brief summary of recent events below and explain some of the remedies available to foreign financial institutions.
Croatia faces pressure from the European Union
Following Croatia’s implementation of forced CHF loan conversion, the European Commission is now reviewing the legislation. In June 2016, the Commission had already voiced concerns as to the one-sided burden placed on banks, as well as retroactive application. The Croatian government is defending its position, hoping that the Commission will drop the issue. At the same time, the Croatian National Bank lost its petition before the High Administrative Court to block disclosure of information on the banks that issued CHF loans. According to recent estimates, the conversion of CHF loans will result in losses of up to €1 billion.
Banks in Poland left in the dark as to State’s response
While banks active in Poland have already seen a number of draft proposals for a reaction to the delinking of the Swiss Franc, there is still little certainty as to the timing or content of Poland’s legislative reaction. On 12 October 2016, the Polish Prime Minister announced that it was unlikely that a law fully satisfactory to debtors would be introduced. However, the mechanism foreseen in the most recent draft – the reimbursement of exchange rate spreads deviating more than 0.5 percent from the buy or sell rate of the National Bank of Poland – would cause losses of almost €1 billion in the banking sector. The actual legislation adopted could have an even more damaging impact.
Romania’s parliament adopts a law on forced conversion
On 18 October 2016, the Romanian parliament adopted legislation providing for the forced conversion of CHF loans at the exchange rate that prevailed when loans were issued. All CHF consumer loans are eligible without limitation as to borrower, purpose or magnitude. Failure of banks to comply with the legislation will result in fines and administrative sanctions.
These measures will cover over 50,000 creditors. The law could cost banks almost US$600 million, equivalent to more than half of the sector’s 2015 income. The measures must be approved by the President Ioannis for the law to come into force. He has said that he will seek input from banks before deciding, although there would seem little opportunity politically for an overhaul of the legislation.
Potential remedies for foreign banks
Foreign banks and investors in banks in the affected region may be able to invoke the bilateral investment protection treaties between Romania, Poland, Croatia respectively and their home States and recover damages from the relevant state through international arbitration proceedings.
Croatia, Poland and Romania are party to many bilateral investment treaties, providing protection to investors and investments from countries such as Austria, Germany, France, Greece, Spain, the Netherlands and the United States, among others.
These treaties establish objective standards of state conduct and provide foreign investors access to international arbitration directly against the State, with the right to full compensation for harm suffered as a result of treaty violations. Protections accorded to qualifying investors and investments include:
- compensation for property that is expropriated directly or indirectly through
- regulatory or other government measures that deprive the investor of the economic
- benefit of its investment;
- ‘fair and equitable treatment’, including protection of the investor’s legitimate
- expectations as to future state action, and a right to a predictable legal and
- regulatory framework for investment;
- full protection and security;
- prohibition against discriminatory treatment vis-à-vis similarly-situated investors; and
- observance by the State of any obligations it may have undertaken in relation to the investment.
The measures in all three countries may well fall afoul of these international standards. For example, the retroactive effect and arguably disproportionate approach proposed for converting loans may breach the obligation to provide fair and equitable treatment.