ECB Opines on Law Addressing Environmental Sustainability Tasks of MNB

MNB introduced a Green Preferential Capital Requirement Program in 2019. The program ensures that credit institutions receive a Pillar 2 capital requirement reduction on consumer loans serving energy efficient home purposes if consumers receive an interest rate subsidy. However, up to now banks have not incorporated the beneficial features of green mortgage loans into their lending standards and prices. According to the explanatory memorandum, as the current business models of banks do not incorporate the positive externalities relating to energy efficient mortgages, a central bank program that enables direct lending to retail clients would be needed. This could spur green residential real estate constructions and renovations, help renew the domestic residential real estate stock, and support reduction of greenhouse gas emissions. The program would also incentivize market participants to provide new green housing loans. The draft law also provides that, as instruments of its monetary policy, MNB will provide energy efficiency consumer loans and, in relation to this task, MNB will manage Hungarian forint accounts for consumers.

ECB supports the provision of energy efficiency loans, which is already a reality across EU and needs to be expanded. ECB understands the wish of the Hungarian authorities to reach an acceleration of this kind of lending in Hungary. However, the new task proposed to be conferred on MNB to provide energy efficiency loans directly to consumers to support green residential real estate developments is a task that can be more appropriately performed by private or state-owned credit institutions or development banks, rather than central banks. Given the substantial operational challenges of the mortgage lending business, this task would, in the absence of further means being granted to MNB, be disproportionate to the MNB’s financial and organizational capacity and could leave MNB vulnerable to substantial financial risks. The performance of this task would also entail reputational risks for MNB and would not fit smoothly into the institutional setup of MNB. The performance of this task would, therefore, be classified as a government, rather than a central banking, task and would have to be conducted by the State, rather than with central bank resources. In conclusion, ECB notes that central banks can independently decide on conducting operations with their monetary counterparts via regular instruments of monetary policy, which may support the government’s policy relating to environmental sustainability. However, the Hungarian authorities are strongly encouraged not to allocate to MNB the task of providing energy efficiency loans directly to consumers.

Related Link: Opinion (PDF)

Keywords: Europe, Hungary, Banking, Climate Change Risk, ESG, Regulatory Capital, Pillar 2, Credit Risk, Residential Real Estate, Opinion, Sustainable Finance, MNB, ECB