WARSAW—Poland's banks are well capitalized and in good shape but the president's plan for a conversion of foreign-currency mortgage loans into zloty loans at below-market rates threatens the financial sector's stability, the central bank said Wednesday.

The legislative proposal presented by the president's office in January designed to reduce the debt burden on some borrowers could reduce banks' resilience to future shocks, the central bank said in a report.

Hundreds of thousands of Poles took out loans denominated in foreign currencies, mostly in the Swiss franc, during the boom years of 2006-2008 when it was significantly cheaper to borrow in those currencies than in the zloty. With the zloty now much weaker than the Alpine currency, many properties are now worth less in zloty terms than the value of the loans, a problem that featured heavily in President Andrzej Duda's election campaign last year.

The central bank also said that the Polish banking sector's profitability is likely to be affected by a recently-introduced tax on banking assets. The new tax was imposed by Poland's statist government which has promised higher welfare spending.

Poland's financial market regulator expects a combined net profit of 15 billion zlotys ($3.8 billion) for the banking sector last year. Banks began paying the new tax this month. The central bank said any shocks in the future combined with the new levy could cripple the weakest banks.

Write to Martin M. Sobczyk at martin.sobczyk@wsj.com

(END) Dow Jones Newswires

February 10, 2016 05:15 ET (10:15 GMT)