MNB published the financial stability report that assesses the strength of the banking system in Hungary. The report highlights that the banking system in the country is prepared to face the challenges likely to result from the COVID-19 pandemic with healthy balance sheets and adequate capital and liquidity reserves. The report also presents results of the stress testing exercise that is conducted every six months. According to the stress test, the banking sector is capable of weathering the effects of even a significant economic contraction. However, the real economic impact of the COVID-19 will have a significant negative effect on the banking system and, consequently, the financing of economic agents.
The financial stability report states that nearly one-third of the banks’ loan portfolios can be considered vulnerable due to COVID-19-related effects. The credit institutions may face challenges due to loans in sectors particularly affected by the pandemic situation. However, due to substantial bank reserves, the loan portfolios are not expected to contract permanently. Within the framework of the financial stability report, a comprehensive stress testing exercise is conducted every six months, the aim of which is to quantify the impact of a severe, but plausible, stress scenario on the liquidity and capital positions of the banking sector in Hungary. Based on the liquidity stress test, the systemic liquidity position improved somewhat in the second half of 2019 and the majority of the banking sector had a sufficient liquidity buffer at the end of 2019 to meet regulatory requirements, even in the event of severe combined liquidity shocks. The Liquidity Stress Index for the end of 2019 does not indicate significant risks to financial stability.
In the solvency stress test, in which MNB examined the effects of two stress scenarios, MNB included the effects of the payment moratorium and took into account the higher credit risk of significantly affected sectors. In the severe downturns assumed in the stress scenarios, the banking sector's two-year earnings before loan losses would be reduced by at least one-half compared to the earnings forecast before the outbreak of COVID-19, which would be accompanied by substantial loan loss provisioning needs. With this, in the more severe stress scenario three-fourth of the banking groups would suffer pre-tax losses during the examined period. By the end of the two-year time horizon, in the more severe stress scenario, the capital adequacy ratio would fall below 8%, for 9% of the credit institutions sector. To meet all the capital requirements effective at the time of writing the report, a capital injection need of HUF 106 billion would arise at the sectoral level. This amount of capital need is considered manageable from a financial stability perspective.
The report also highlights that several measures have been taken by the government and MNB to prevent procyclicality in the banking system. The main goal of these measures is to minimize the immediate pandemic-related stresses, to prevent lasting, long-term economic losses, and to facilitate the fastest possible reopening of the affected sectors. The first round of government measures was aimed to mitigate the immediate liquidity tensions. MNB will be able to flexibly manage the individual liquidity needs over the coming months by launching a collateralized lending facility with multiple maturities, extending the scope of acceptable collateral with large enterprise loans, and releasing the minimum reserve, among other things. In addition, the central bank supports banks’ lending capacity by releasing the existing capital buffers; by temporarily waving the capital conservation buffer, the systemic risk buffer requirements, and capital buffer of other systemically important institutions (O-SII); and through Pillar 2 recommendations.
Keywords: Europe, Hungary, Banking, COVID-19, Financial Stability Report, Stress Testing, Credit Risk, Liquidity Risk, Capital Adequacy, Procyclicality, MNB
Previous ArticleFCA Issues Further Prudential Guidance for Payment Firms Amid Crisis
PRA published the policy statement PS8/21, which contains the final supervisory statement SS3/21 on the PRA approach to supervision of the new and growing non-systemic banks in UK.
EBA published a report that sets out the final draft regulatory technical standards specifying the conditions according to which consolidation shall be carried out in line with Article 18 of the Capital Requirements Regulation (CRR).
EBA updated the list of other systemically important institutions (O-SIIs) in EU.
BCBS published two reports that discuss transmission channels of climate-related risks to the banking system and the measurement methodologies of climate-related financial risks.
UK Authorities (FCA and PRA) welcomed the findings of FSB peer review on the implementation of financial sector remuneration reforms in the UK.
PRA and FCA jointly issued a letter that highlights risks associated with the increasing volumes of deposits that are placed with banks and building societies via deposit aggregators and how to mitigate these risks.
MFSA announced that amendments to the Banking Act, Subsidiary Legislation, and Banking Rules will be issued in the coming months, to transpose the Capital Requirements Directive (CRD5) into the national regulatory framework.
EC finalized the Delegated Regulation 2021/598 that supplements the Capital Requirements Regulation (CRR or 575/2013) and lays out the regulatory technical standards for assigning risk-weights to specialized lending exposures.
OSFI launched a consultation to explore ways to enhance the OSFI assurance over capital, leverage, and liquidity returns for banks and insurers, given the increasing complexity arising from the evolving regulatory reporting framework due to IFRS 17 (Insurance Contracts) standard and Basel III reforms.
ECB published results of the benchmarking analysis of the recovery plan cycle for 2019.