MNB Reviews Macro-Prudential Rules on Foreign Exchange Funding Risks
The Financial Stability Council of MNB has decided to restore the requirements on the Foreign Exchange Coverage Ratio (FECR) and Foreign Exchange Funding Adequacy Ratio (FFAR) that were tightened temporarily in response to the COVID-19 pandemic. The Financial Stability Council of MNB also decided to amend the regulation on the Interbank Funding Ratio. The decision may increase the room in funding for banks providing specialized financial services, which in turn may contribute to more efficient operation of the Foreign Exchange swap market in the future. The amendments will take effect in September, on the day following the publication of the Decree in the Hungarian Gazette.
In March 2020, the Financial Stability Council of MNB had announced a package of prudential measures in response to COVID-19 pandemic. As part of this package, FECR and FFAR regulations were temporarily tightened to mitigate and/or prevent the risks posed by pandemic to bank funding. In case of the FECR, the permitted maximum currency mismatch was lowered from 15% to 10% while long-term funds from financial corporations were weighted in the FFAR so as to incentivize banks to raise longer-term funding.
MNB has considered it necessary to review these temporary measures. As the risks targeted by the preventive measures have not materialized and the pandemic situation has not led to a material change in funding structures, the restoration of FECR and FFAR requirements to their previous form and the withdrawal of the tightening measures is warranted. Consequently, the Financial Stability Council of MNB has decided to restore the FECR and FFAR requirements in effect up to March and to repeal the amendments made in relation to COVID-19 pandemic. Furthermore, Financial Stability Council of MNB decided to amend the requirements of the Interbank Funding Ratio. Therefore, on-balance sheet liabilities arising from derivative transactions with financial corporations and from the revaluation of such transactions will be exempted when determining the Interbank Funding Ratio requirement, as these show significant volatility for banks active in the foreign exchange swap market and, therefore, may limit the predictability of compliance and trigger unwanted adjustments.
Related Link: Press Release
Keywords: Europe, Hungary, Banking, COVID-19, Foreign Exchange, Foreign Exchange Coverage Ratio, Foreign Exchange Funding Adequacy Ratio, Macro-Prudential Policy, MNB
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