Credit Risk of FX Loans in Poland. Debt Service Burden and the Effect of Neutralization of Currency Depreciation by Foreign Interest Rates

Abstract

This paper describes an analysis of the effects of both foreign exchange (FX)
risk and interest rate risk on installments of the housing FX loan using classic
comparative statics approach. By focusing on sensitivity of annuity with respect
to infinitesimal changes of parameters it presents the impact of the interest rate
and FX rate on installments in terms of their shares of the total outstanding in
foreign currency, and illustrates using values, in Polish zlotys, for three example
loans extended during the period when Poland saw its most intensive FX lending.
This analysis represents an attempt to answer a question frequently raised in
this country of late: does the issue of debt servicing housing FX loans matter
for borrowers and therefore could affect banks’ loan portfolio quality?