IMF Publishes Reports on 2019 Article IV Consultation with Hungary
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
Senior practitioner in asset and liability management (ALM) and liquidity risk who assists banking clients in advancing their treasury and balance sheet management objectives
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.
Previous ArticleSEC Adopts Rules and Amendments Under Regulatory Regime for Swaps
FINMA Approves Merger of Credit Suisse and UBS
The Swiss Financial Market Supervisory Authority (FINMA) has approved the takeover of Credit Suisse by UBS.
BOE Sets Out Its Thinking on Regulatory Capital and Climate Risks
The Bank of England (BOE) published a working paper that aims to understand the climate-related disclosures of UK financial institutions.
OSFI Finalizes on Climate Risk Guideline, Issues Other Updates
The Office of the Superintendent of Financial Institutions (OSFI) is seeking comments, until May 31, 2023, on the draft guideline on culture and behavior risk, with final guideline expected by the end of 2023.
APRA Assesses Macro-Prudential Policy Settings, Issues Other Updates
The Australian Prudential Regulation Authority (APRA) published an information paper that assesses its macro-prudential policy settings aimed at promoting stability at a systemic level.
BIS Paper Examines Impact of Greenhouse Gas Emissions on Lending
BIS issued a paper that investigates the effect of the greenhouse gas, or GHG, emissions of firms on bank loans using bank–firm matched data of Japanese listed firms from 2006 to 2018.
HMT Mulls Alignment of Ring-Fencing and Resolution Regimes for Banks
The HM Treasury (HMT) is seeking evidence, until May 07, 2023, on practicalities of aligning the ring-fencing and the banking resolution regimes for banks.
MFSA Sets Out Supervisory Priorities, Issues Reporting Updates
The Malta Financial Services Authority (MFSA) outlined its supervisory priorities for 2023
German Regulators Issue Multiple Reporting Updates for Banks
Deutsche Bundesbank published the nationally deactivated validation rules for the German Commercial Code (HGB) users on the taxonomy 3.2, which became valid from December 31, 2022
BCBS Report Examines Impact of Basel III Framework for Banks
The Basel Committee on Banking Supervision (BCBS) published results of the Basel III monitoring exercise based on the June 30, 2022 data.
PRA Consults on Prudential Rules for "Simpler-Regime" Firms
Among the recent regulatory updates from UK authorities, a key development is the first-phase consultation, from the Prudential Regulation Authority (PRA), on simplifications to the prudential framework that would apply to the simpler-regime firms.