MNB amended a Circular on the use of macroeconomic factors and on the application of factors indicating a significant increase in credit risk, in connection with IFRS 9. By amending the circular, MNB has set minimum requirements for the calculation of impairment levels and introduced flexibility to its prudential expectations related to impairment. From July 27 to the end of next year at the latest—that is, December 31, 2021—market participants in credit institutions will be able to use these modification measures aimed at mitigating the effects of the COVID-19 emergency. The circular applies to domestic banks and credit institution branches.
According to the MNB impact assessment, without jeopardizing the stable, safe, and prudent operation of the banking system, these recent measures could reduce the level of impairment of credit institutions by up to HUF 120 billion, improve the capital position, and increase lending capacity; this may help to reduce the economic effects of the pandemic. Although the new measures will remain in force until December 31, 2021, the central bank may, based on the current situation, decide to revoke them earlier. The following are the key highlights of the guidance, as explained by MNB in its press release:
- To preserve prudent practice, MNB has set an expected minimum level of impairment, which must always exceed the level of impairment projected on the stock data for the first quarter of 2020 multiplied by the average impairment coverage at the end of last year.
- In connection with macroeconomic forecasts, the central bank expects banks to apply macro-paths along several scenarios and to use the weights assigned to each scenario, which can be calculated in addition to the MNB macroeconomic forecasts (if duly justified) with their own complex macroeconomic models.
- The central bank reaffirmed that banks are still expected to apply a strong corporate governance system based on management responsibility.
- Banks are also expected to ensure transparency in their financial statements when applying assumptions and judgments concerning their models, impairment levels, and estimates of uncovered portfolios, when calculating losses, applying credit risk measures, and reclassifications due to increased risk.
- The unchanged expectation of MNB is that credit institutions identify their risks in relation to their exposures in a timely, consistent, and comparable manner. In line with this, in the current context of calculation uncertainties, it is good practice for banks to also set a portfolio-level lump sum expected loss value for their portfolio for which their model is likely to underestimate expected losses.
Related Links (in Hungarian)
Keywords: Europe, Hungary, Banking, Accounting, IFRS 9, Financial Instruments, SICR, Credit Risk, COVID-19, Loan Moratorium, Payment Deferrals, Impairment Calculations, MNB
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
Previous ArticleEBA Proposes Standards on Indirect Subscription of MREL Instruments
The European Commission (EC) announced plans to defer the application of 13 regulatory technical standards under the Sustainable Finance Disclosure Regulation (2019/2088) by six months, from January 01, 2022 to July 01, 2022.
The Bank of England (BoE) published a consultation paper on approach to setting minimum requirement for own funds and eligible liabilities (MREL), an operational guide on executing bail-in, and a statement from the Deputy Governor Dave Ramsden.
The European Banking Authority (EBA) is seeking preliminary input on standardization of the proportionality assessment methodology for credit institutions and investment firms.
Certain regulatory authorities in the US are extending period for completion of the review of certain residential mortgage provisions and for publication of notice disclosing the determination of this review until December 20, 2021.
The Prudential Regulation Authority (PRA) published the policy statement PS18/21, which introduces an amendment in the definition of "higher paid material risk taker" in the Remuneration Part of the PRA Rulebook.
The European Banking Authority (EBA) published its annual report on asset encumbrance in banking sector.
The European Banking Authority (EBA) published a methodological guide to mystery shopping.
The Australian Prudential Regulation Authority (APRA) released a letter to authorized deposit-taking institutions to provide an update on key policy settings for the capital framework reforms, which will come into effect from January 01, 2023.
The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) published a report that assesses the business continuity planning activities of financial market infrastructures or FMIs.
The European Securities and Markets Authority (ESMA) has responded to the IFRS consultation on targeted amendments to the IFRS Foundation constitution to accommodate an International Sustainability Standards Board (ISSB) to set IFRS Sustainability Standards.