Austria is taking steps to protect itself and its exchange traded fund (ETF) by capping retail foreign exchange loans.
Boris Groendahl for Reuters explains that Austrian banks have stopped lending to domestic retail customers in foreign currencies, a move that will curtail their exposure to market movements, following a strong recommendation from Austrian regulators.
Now that major banks are halting forex retail lending, it’s expected that the smaller banks will follow suit.
Foreign currency loans were pushed to clients as a cheaper way to get credit by benefiting from low interest rates charged for other currencies such as the Swiss franc and, previously, the Japanese yen.
They can pose some risks for clients. If the loan currency rises against the domestic one, their debt grows. Also, the loans are due on maturity and backed by a repayment vehicle, which are invested with shares in the stock market. They will fall in value of the market drops substantially, as it has done recently.
Only time will tell if the steps Austria is taking will work. While iShares MSCI Austria (EWO) rose a strong 7.1% yesterday, it’s nearly erasing those gains today in early trading. The fund is down 51.2% year-to-date.
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