Inefficient Debt Relief: Evidence from a Foreign Currency Loan Repayment Program

We study consequences of a large-scale debt relief program focusing on Hungary’s 2011 Early Repayment Scheme, which allowed repayment of foreign currency (FX) mortgages at a discounted exchange rate, thereby imposing losses on banks. We show that high pre-policy FX exposure banks experienced a 19 percent contraction in household lending, while their corporate lending stagnated, compared to a 40 percent expansion among low exposure banks. Using loan application data, we confirm the causal effects of the policy: high-exposure banks lowered acceptance rates by 17–22 percentage points, with even larger declines of 26–32 percentage points among low-income applicants, while no change is observed at low-exposure peers. We further show that wealthier households were significantly more likely, while borrowers with high debt-to-income ratios were less likely to repay. Our results indicate that unfunded debt relief can reinforce inequality in both participation and subsequent credit access.