Betting the odds - how banks gambled on the franc, knowing they couldn't lose

When we accept a social bet ‘for a beer’, betting on FC Barcelona to win the Champions League match, or on a given number of a roulette wheel, we are gambling. In fact, it is most often a game whose outcome depends on chance and whose winning or losing takes the form of material gain or loss for those involved. From a purely legal perspective, the game in question is nothing more than a contract, according to which the parties establish a certain consideration for the one of them that achieves a favourable result.

However, what if, starting a game dependent on chance, we knew we could not lose?

Banks were not betting ‘blind’

According to the District Court in Warsaw, as expressed in the oral reasons for the judgment in the case won by Tau.Legal against Bank Millennium S.A. with its registered office in Warsaw, a credit agreement indexed to the currency of the Swiss franc is not a contract. This is because it does not specify the benefits of the parties. The exchange rate table used in the agreement only seemingly indicated in which instalments the borrowers were to repay their debt. On the other hand, the bank had an unlimited possibility to create the value (exchange rate) of the currency listed in this table. After all, the amount of the loan instalment depended on this value.

‘When you don't know what you're playing, you play one two’.

At the same time, the aforementioned Court noted that a loan agreement is a fairly simple contract under banking law, which assumes that the bank gives a certain amount of money to the borrower for use, and the borrower should give the same amount back in parts together with the bank's remuneration - interest. However, the agreement in question was structured in such a way that, yes, the bank was giving a certain amount of money to the borrower for use, but there was an amount to be paid back that was unpredictable at the time the agreement was concluded. It resulted from multiplying the loan amount by the currency exchange rate determined by the bank. The Regional Court stated that even if this exchange rate was determined absolutely objectively according to market indices, in its view it was a combination of a loan agreement and a bet on the exchange rate. In a situation in which the exchange rate by which the amount of credit received is multiplied is unpredictable and can increase significantly (by 50, 100, 200%) over a period of several decades, we are dealing with nothing more than a bet on the exchange rate. The difference, however, was that the bank could not lose this bet, for however the exchange rate fluctuated over the years, this burden was borne solely by the borrower.

Time for change

Risk is an inherent companion to business. Banks should never be exempt from this companionship, let alone pass it on to consumers.

In a recent debate on housing aired on Channel Zero, Slawomir Mentzen said: ‘The Polish banking system is eminently grandfathered, it is eminently unfair to consumers’. Sitting to his right, Rafal Zaorski, during the exchange, also stated that: ‘Banks are not part of the market game’.

However, I cannot agree with the opinion of the Polish investor referred to with regard to franking credits. In the years of their greatest popularity, the banks were part of this game. However, its outcome depended solely on them, and they could not lose it. Only the borrower lost. Now that franking credits, rightly shrouded in disgrace, are no longer on offer, the banks, selling other products, are still abusing their position and once again stepping into a game that they cannot lose. This situation must change.