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    MNB Discusses Approach to Modeling Corporate Probability of Default

    September 30, 2020

    MNB published the September issue of the Financial and Economic Review. This issue of the journal includes papers that discuss a possible supervisory benchmark model of the probability of default of corporations, the operational risk management of credit institutions, and the challenges of mortgage bank refinancing. Also included are papers on the general characteristics and impact of the COVID-19 crises in the foreign-exchange forward market of Hungary and the transformation of global supply chains in the manufacturing industry as a result of COVID-19 pandemic.

    The paper on modeling corporate probability of default shows how it is possible to estimate a probability of default for corporate portfolios, which is based on large banks’ corporate default rate data series and available corporate financial data. It uses a harmonized methodology that factors in differences between the credit quality ratings of various customers and is suitable for the supervisor’s calculation of the capital requirement for any given bank. Nonetheless, there may also be other factors in addition to individual financial data that may affect credit quality; identifying these may be one of the objectives of benchmark model development.

    The paper on principles of proportionality in operational risk management of credit institutions provides assistance in the proper application of the principle of proportionality, although it cannot undertake to resolve the dilemmas related to the principles of proportionality. In addition, it contributes to the improvement of the operational risk framework, thus reducing the range of continuously growing natural risks, based on the analysis of the data of Hungarian credit institutions, the analysis of the EU regulatory and Hungarian supervisory requirements, and an assessment of the practices of credit institutions. The author of the paper concludes that the introduction of forward-looking instruments for smaller banks and the harmonization of methodologies for large institutions may ensure that the sector might be prepared to identify and manage its operational risks.

    The paper on mortgage bank refinancing summarizes the operational models of mortgage banks and the new EU mortgage bond regulations. The authors analyze the most important challenges that refinancing mortgage banks are currently facing in Hungary, with regard to the imminent implementation of the European covered bond directive, passed in December 2019. These are basically grouped into three subjects: the characteristics of refinancing loans do not support more efficient portfolio refinancing; the refinancing loan guarantee scheme does not ensure fulfilment of the conditions laid down in other legislation in case of statutory portfolio assignment; and overcollateralization in the current purely refinancing model cannot be achieved from ordinary collateral. On this basis, the authors propose the development of an alternative regulation for “refinancing mortgage banks,” while fully maintaining the current operation. With this alternative regulation, a revised collateral system would help to solve the problems and develop a more efficient mortgage loan structure.

     

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    Keywords: Europe, Hungary, Banking, Credit Risk, Probability of Default, Operational Risk, Proportionality, Covered Bond Directive, Covered Bond, Refinancing, Mortgage Loans, MNB

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