THE RATIONAL AND IRRATIONAL FACTORS OF FOREIGN DENOMINATED LENDING
3. Behavioural effects
When examining the decision-making situation of a credit borrower above, I have assumed that the decision-maker was perfectly informed, was aware of the possible outcomes of his decision, and was also rational. Rationality in economics means that one’s choices correspond to the maximization of his expected utility, i.e. there exists a utility function, according to which the decisions are consistent.18 Based on the above, the analysis of the foreign exchange
17 KOLOZSI et al., 2015
18 BERLINGER and VÁRADI, 2015
loans concluded that taking loan in foreign currency must have been a rational choice for a credit borrower by the given, not ultimately, high risk aversion level.
Kahneman and Tversky were among the firsts to examine and describe those decision anomalies, which were typical for most individual decision-makers and cannot be aligned with the theory of expected utility.19 In conjunction with the foreign exchange loans, two well-known behavioural effects should be highlighted: framing and the change of the risk attitude.
Framing describes the phenomena of how a decision-maker is influenced by the formulation of a scenario. The decision depends on how the given situation is presented to him/her (when choosing from various therapies, it matters whether we show the survival or the mortality rate, although both contain the same information).
Most likely, less people would have taken credit in a foreign currency if the contract included that, in addition to the HUF loan, one must make a series of forward transactions – although, basically, this is what they signed.
One manifestation of framing is that, in decision-making situations, we are inclined to adjust our future vision to an externally provided or imaginary reference point.20 In case of foreign exchange credits, the actual exchange rate appeared to be an anchor in the decisions.
Even though based on the exchange rate volatility, an unfavourable outcome would have also been probable, not only the retail credit borrowers but also the professional lenders did not realistically consider the substantial changing of the exchange rate. The overly optimistic expectations regarding credit costs were reinforced by the methodology of the Annual Percentage Rate of Charge (APRC) calculation, based on which the otherwise uncertain future conversion rate has to be replaced by the spot rate.21
The same effect appears in sensing the suffered losses. In the previous chapter, I presented that a 10-year EUR loan taken out before the crisis proved to be by an annual one percentage point more expensive, while the CHF loan was subsequently 7.74 percentage points more expensive than the HUF loan. However, the credit borrowers did not compare the actual costs to the HUF loan, but they took the 3 to 5 percentage points more favourable interest rates as a reference point.
The subjective risk-detection also played an important role in credit borrowing decisions.
Kahneman and Tversky demonstrate how the attitude toward risk, on one hand, depends on whether we talk about profit or loss and, on the other hand, on how likely these profits or losses are to occur.22 In general, risk-aversion is typical when assessing profits with high probability and losses with low probability, but the decision-maker becomes a risk-seeker when he/she has to decide about losses with high probability and profits with low probability.
The risk assessment of foreign exchange credit was distorted by the social impact, based on which decision-makers become less risk averse during group decision-making.23 The
spread of foreign exchange credits therefore strengthened the underestimation of related risks, and people took mostly unseen risks in return for the lower foreign exchange interest rates that were taken as a reference point.
4. Conclusions
The severe individual and social impacts of retail foreign exchange lending make many people believe that this form of financing is clearly damaging. However, the fact that nearly half of the corporate loans today are foreign denominated loans contradicts the abovementioned point.
The study has demonstrated that EUR denominatedloan borrowed at even the worst timing only entailed moderate extra costs as compared to the HUF loan. The sudden losses experienced in the CHF loans, however, generated substantial extra costs even compared to the cost of HUF loans. This was further worsened by the fact that credit borrowers considered the lower foreign exchange interest rates as a reference point, compared to which the sensed interest rate surcharge of foreign exchange loans corresponded to 12–13% on an annual basis.
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