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

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We study a large-scale debt-relief intervention implemented through Hungary’s 2011 Early Repayment Scheme, which allowed repayment of foreign-currency mortgages at a fixed, below-market exchange rate. High FX-exposure banks reduced household lending by 19%, while their corporate lending remained stagnant, whereas low-exposure banks expanded lending in the latter segment by 40%. Loan-level evidence suggests a strong tightening of supply: approval rates at high-exposure banks declined by 17–22 percentage points, and by an even larger 26–32 points for low-income applicants, with no corresponding change at low exposure peers. Repayment patterns display strong selection: wealthier households were more likely to repay, while heavily indebted borrowers were less likely to do so. These findings suggest that unfunded debt relief can exacerbate inequality in both participation and access to credit.