IMF published its staff report and selected issues report under the 2019 Article IV consultation with Hungary. The IMF assessment reveals that the banking system in Hungary is healthy and remains, on average, well-capitalized, profitable, and liquid. System-wide liquidity is above the prudential requirements and profits are solid. The nonperforming loan (NPL) ratio continues to decline due to improved repayment capacity, NPL sales, and credit growth. Stress tests by MNB, which is the central bank of the country, show that all banks observe the solvency test and that most banks can meet the regulatory liquidity requirement without adjustments.
In the staff report, a statement (November 27, 2019) by Szilard Benk, an IMF Alternate Executive Director, highlights that the shock-absorbing capacity of the Hungarian banking system continues to be robust. The capital adequacy ratios of banks indicate strong solvency, while the liquidity coverage ratio is also well above the regulatory requirements. Banks continued to expand their balance sheet, especially their outstanding loans vis-à-vis the private sector. To foster the mitigation of households’ interest rate risk, MNB issued a recommendation to financial institutions, advising banks to offer customers with variable-rate mortgage loans the option of transition to a fixed-rate scheme. Besides its regulatory mandate, MNB is committed to tackle the existing inefficiencies in the banking and the broader financial sector, enhance competition, and support the consolidation of the sector, while ensuring consumer protection. The launch of the frameworks for “Certified Consumer Friendly Housing Loans” and “Certified Consumer Friendly House Insurance” point into this direction.
Furthermore, the authorities have launched several initiatives to reduce the mortgage interest rate risk. While most new housing loans now have longer interest fixation periods—likely facilitated by the MNB Certified Consumer-Friendly Housing Loans and the debt service-to-income, or DSTI, requirements—there is still a high portion of existing housing loans with variable rates. However, tightening of macro-prudential measures (loan-to-value and debt service-to-income) may not be sufficient to contain house price inflation, but can reduce the likelihood of risky mortgages. MNB thus agreed with banks that they inform their clients about the interest rate risk and offer to convert to fixed-rates. Thus far, the impact of this measure has been limited. To contain potential risks from foreign exchange exposure of some of the commercial real estate companies, MNB has announced that beginning in 2020 a small risk-weight would be also assigned to foreign exchange performing project loans when calculating the systemic risk buffer.
Additionally, the assessment suggests that close monitoring of the implications of the existing and new unconventional arrangements is warranted. Two measures—the mortgage bond purchase scheme of MNB and its sales of unconditional interest rate swaps—were phased out by the end of 2018, as planned. With respect to the foreign exchange liquidity swaps, MNB has been calibrating them to achieve the intended money market rates within its interest rate corridor, thus becoming a net provider of liquidity to banks. In January 2019, a “Funding for Growth Scheme Fix” was introduced to encourage long-term fixed-rate lending to small and medium enterprises or SMEs.
The staff assessment showed that recommendations of MNB to use independent evaluators for collateral appraisals appear to have harmonized evaluation practices. The integration of the many credit cooperatives into one banking group is continuing. A final decision on the privatization of Budapest Bank is being worked out. It would be important that consolidation of the banking system continued to be market-based. Some amendments have been made to the insolvency legislation to increase the ability of creditors to enforce their interests and improve the rate of recovery of claims, but further improvements are needed. Staff thus welcomed the intention to review the legislative and institutional framework for bankruptcy and liquidation proceedings in 2020. Finally, MNB also published its fintech strategy in October, which provides a comprehensive framework for the digitalization efforts in the financial system and appears to be a positive step.
Keywords: Europe, EU, Hungary, Banking, Credit Risk, NPLs, DSTI, Capital Adequacy, Liquidity Risk, Fintech, Article IV, Stress Testing, MNB, IMF
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