Regional cross-currency basis swap

complete

Project Description This PSD relates to a historical Bank project approved some years ago, and does not represent a new approval, or allocation of new funds.  Disclosure of this PSD was deferred in accordance with the transparency framework in place at the time, but due to an administrative oversight, was not subsequently disclosed In January 2011, the EBRD approved the formulation of a framework to provide eligible partner banks in Hungary and Poland with cross currency basis swaps for foreign exchange management purposes, with a total of approximately EUR 2.5 billion in terms of notional swap amounts. Project Objectives Following the financial crisis of 2008, the extent of disruption to the currency swap market was unclear, but the average foreign exchange mismatch in both the Hungarian and Polish banking sectors was significant.  To manage ongoing currency volatility, and ongoing limited supply of foreign exchange swaps in both Hungary and Poland at the time of the transaction, the Bank anticipated that the transaction would mitigate the risks of systemic foreign currency risk exposure. Transition Impact The transaction was anticipated to stabilise the foreign exchange lending and borrowing levels in Hungary and Poland following the global financial crisis.  It also aimed to support partner banks to adapt their business models to the changing macroeconomic environment, development of additional local currency activity and instruments to address more limited access to foreign currency hedging instruments. Additionality Though the transaction did not provide any additional funding to any of the identified partner banks, it supplemented the market then not willing to provide the necessary volume or tenor of foreign exchange swaps, allowing the Bank to provide additionality in the form of being a stable provider of medium to long term foreign exchange swaps. Environmental and Social Summary As a Category FI project, the currency basis swaps were not anticipated to have any adverse environmental or social impacts.  However, each partner bank participating in the arrangement was required to perform annual reporting on labour and working conditions, and to maintain enhanced environmental, social and financial control standards. Technical Cooperation n/a - none Implementation Summary The transactions, based on swaps to both CHF and EUR, were rolled out in a series of intermediated swap transactions to avoid any disruption to the swap market.  Partner banks including Erste Bank Hungary, CIB Intesa Hungary, Unicredit Bank Hungary, Getin Noble Bank and Kredytbank participated in the framework. EBRD provided extensive market advice to all approved client banks and traded several times with a number of those banks.. In doing so, each client bank attributed great value to both the traded activity and the ability to access longer-dated swap market information and intelligence in the context of the ongoing disruption to the markets at the time. Further, the EBRD’s provision of this product permitted policy dialogue regarding improvement of standards at partner banks.  All client banks agreed to abide by the extant EBRD environmental standards and processes as part of these engagements, as well as following improved accounting processes, such as appropriate hedge accounting methodologies.