The Polish Seim has approved the law for the conversion of loans denominated in Swiss francs

Shares of Polish banks fell significantly yesterday on the WSE (Warsaw Stock Exchange) after the Seim, the lower chamber of the Parliament has approved the law on the conversion of loans denominated in Swiss francs.

WIG-Banki, the index of banking stocks listed on the WSE, fell over 6% yesterday, and it is down 22% compared to the high reached this year of 8,350.

Shares of banks that have significant loan portfolios of CHF loans have suffered the most. Bank Millenium (MIL), Getin 2 Bank (GNB) and PKO Bank Polski (PEO), the biggest bank in the country, have seen significant intraday drops, of 25%, 17% and 8.9%.

The investors' negative reaction was caused by the approval of a version of the draft law which stipulates that 90% of the cost of the conversion will be borne by banks, while market expectations were that debtors and lenders would share the costs equally.

In order to be implemented, the law must be approved by the Senate and then signed by the president. In the circumstances of approval of the law, the costs for the banking system will significantly exceed the initial estimate, of 9 billion zlotys (2.34 billion dollars), according to Bloomberg.

Warsaw brokerage firm Trigon estimates that the new law will cause expenses of 19 billion zlotys for the banking system in the next three years.

According to the law, loans granted in Swiss francs will be converted in zlotys at the exchange rate on the day of the conversion, as a number or eligibility criteria have also been established.

Warsaw Business Journal writes that the law will apply to owners of apartments with a surface of up to 100 square meters and of households of up to 150 square meters which are used as a primary residence.

These restrictions do not apply to families that have at least three children.

In the first year of the implementation of the law, the conversion will be done with priority in cases where the ratio between the amount of the mortgage loan and the value of the collateral exceeds 120%, according to the WSJ.

The largest portion of mortgages denominated in Swiss francs was granted in 2007 and 2008, when the exchange rate was about 2.5 zlotys for a franc. Currently, the PLN/CHF exchange rate is about 3.9.

The vice-president of the Polish banking association says that the law passed by the Seim is a "farce", according to daily Gazeta Wyborcza, as it is marked by a populism that is specific to a pre-election period, as the general elections in Poland are set to take place in October 2015.

To some banks, such as Getin Noble Bank, the cost of the conversion can exceed the estimated annual profit and represents a threat to the stability of financial institutions. For that reason, the Financial Oversight Authority thinks that the Senate should carefully assess the consequences which the passing of the law would have on the stability of the banking system.

The heavy drop of bank stocks on the Warsaw Stock Exchange has resulted in a significant depreciation of the assets of private pension funds, by 2.2 billion Zlotys, according to data from the Financial Oversight Commission reproduced by Gazeta Wyborcza, to 153.7 billion Zlotys.