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A brief review of macroprudential policy



The magnitude of economic losses caused by the global financial crisis demonstrated the crucial importance of the stability of the financial system in the viability of a country’s economy. The crisis underscored that microprudential interventions alone are unable to prevent the financial disturbances that inflict heavy losses on the real economy. The systemic spread of foreign currency lending and the economic and social problems arising therefrom are excellent examples of the need for prudential interventions with a systemic focus.

The ultimate objective of macroprudential policy is to mitigate excessive systemic financial risks. This means that it should strive to prevent severe financial crises and minimise their effects on the real economy if they nevertheless arise. The set of objectives of macroprudential policy are summarised in the chart below.

Set of objectives of macroprudential policy


Market failures underlying systemic risks

Systemic financial risks are traditionally divided into two types: cyclical and structural systemic risks. The presence of market imperfections in financial intermediation and softening risk perception encourage participants in financial intermediation to take on greater and greater risks, which ultimately gives rise to excessive risk-taking. Often as a result of external shocks, negative events may realise in a critical portion of these systemic risks. In a financial crisis, the excessive risk-taking of financial intermediaries is replaced by excessive risk aversion. Cyclical systemic risks refer to this co-movement of financial intermediaries’ risk appetite in a sub-optimal direction.

In times of financial crises, problems related to the network that links financial participants to one another also come to the surface. As a result, financial crisis phenomena can spread extremely fast and intensely between financial entities (“contagion effect”). Structural systemic risks refer to the crisis-amplifier effects stemming from the structure of the interconnections between financial participants and from the riskiness of certain financial participants in the network.

Intermediate objectives of macroprudential policy

It is evident from this short summary of underlying market problems behind excessive risk-taking that systemic risks are rooted in a large number of diverse factors. In order to successfully address the relevant market problems, macroprudential policy needs to rely on different instruments. It is advisable, therefore, to apply a classification of systemic risks where systemic risk phenomena classified into a certain category can be tackled efficiently by specific instruments. The MNB pursues the following five intermediate objectives during its macroprudential interventions:

• Preventing excessive credit growth: The global crisis was a good example of the economic and social problems that excessive credit growth may generate. Borrowing in excess of the repayment capacity and the build-up of asset price bubbles lead to a devastating economic downturn and debtors getting into a debt trap.

• Managing liquidity risks: Although the funding of long-term assets (e.g. loans)  with short-term liabilities (typically deposits) is a natural phenomenon in the operation of banks, excessive maturity mismatches give rise to severe liquidity risks. Risks to be addressed arise also from the banks' on-balance sheet currency mismatch, as well as from the insufficiency of short-term liquidity reserves.

• Limiting excessive concentration: Excessive concentration of exposures vis-a-vis certain sectors multiply the value of expected losses, as the risks are not diversified properly.

• Limiting the misaligned incentives that strengthen systemic risks: The failure of certain institutions may jeopardise the entire system due to their size/interconnectedness, hence when the crisis situation evolves as a result of excessive risk-taking by these institution, usually state intervention becomes necessary. Hence, systemic importance leads to moral hazard, which may give rise to severe economic damages.

• Strengthening the resilience of financial infrastructures: The proper formulation and operation of institutional and supporting systems and of settlement processes are also key to a stable financial system.



Legislative environment

The functioning of Hungarian macroprudential policy is determined by the legislative environment of both the European Union and Hungary. The prevailing EU bank regulatory framework is based on the regulation on prudential requirements for credit institutions and investment firms (Capital Requirements Regulation – CRR), and on the  directive on the prudential supervision of these institutions (Capital Requirements Directive IV – CRDIV). This is  supplemented by delegated acts and enforcement measures adopted by the Commission, as well as  by recommendations and opinions issued by different EU organisations.

The acts constituting the legal basis of Hungarian macroprudential regulation are based on these European regulatory foundations. The basis of the Hungarian legislation comprises two pillars: the Act on Credit Institutions and Financial Enterprises (Credit Institutions Act) along with the Act on Investment Firms (Investment Firms Act) laying down the prudential and supervisory requirements for the implementation of CRD IV, and the Act on the Magyar Nemzeti Bank (MNB Act) enshrining the macroprudential regulatory mandate and specifying the means of application for the macroprudential instruments. These acts establish a strong and clear mandate for the Hungarian macroprudential regulatory authority and define the institutional framework of macroprudential policy; moreover, they specify the tools available and the means of their application.

The macroprudential institutional system

Institutional framework of the European Union

As is the case with the legislative environment, the Hungarian macroprudential institutional framework can only be interpreted within the context of the European Union.  The institutions of the European Union play an important role not only with respect to the legal acts they can apply, but also in terms of external control.

  • European Systemic Risk Board (ESRB): The ESRB is responsible for coordinating the supervision of systemic risks across the EU.
  • European Central Bank (ECB): The ECB provides the analytical background for the ESRB, issues recommendations both for the national authorities and the EU, supports the expert-level development of regulatory measures and participates in the macroprudential supervisory work as the central institution of the Single Supervisory Mechanism (SSM).
  • European Banking Authority (EBA): EBA is an institution responsible for the maintenance of financial stability, focusing its activities on supervision.

Hungarian institutional framework

In Hungary, the Magyar Nemzeti Bank (MNB) has been provided with a clear and strong macroprudential mandate. The primary objective of the MNB is to achieve and maintain price stability, and it employs monetary policy instruments to achieve this goal. However, without prejudice to this primary objective, the MNB maintains the stability of the financial intermediary system, and supports the enhancement of the resilience of the financial system and  its sustainable contribution to economic growth. The macroprudential policy of the MNB, aimed at maintaining stability across the financial intermediary system, is conducted in consistency with these objectives. Within the organisation of the MNB, the Monetary Council (MC) establishes the strategic framework regarding macroprudential policy, while the body responsible for the actual definition and achievement of specific macroprudential policy objectives is the Financial Stability Board (FSB). In addition to macroprudential analytical and regulatory tasks, the FSB is responsible for tasks related to microprudential policy and consumer protection, and for decisions relating to the supervisory and resolution authority tasks. Moreover, the FSB provides, as appropriate, the tripartite forum composed of the MNB's organisational units performing the central banking and supervisory duties and the ministry in charge of the regulation of the capital and insurance markets, where preparations for and – if needed – the management of crises is conducted.

The Hungarian financial stability institutional system

The Hungarian financial stability institutional system.jpg



The management of systemic risks essentially consists of three main phases. The first step in the regulatory cycle is risk analysis, as part of which the MNB identifies existing and potential systemic risks. The analysis is followed by the identification of the potential intervention instruments and, as appropriate, regulatory steps: a response will be selected from the “preliminary”, “warning” and “intervention” types of possible policy responses. The selected policy response is evaluated in the next phase, also taking into consideration internal and external information.

A scheme of objectives is defined in each phase, based on which decisions regarding macroprudential policy are made. The whole cycle is also tracked by a communication process, focusing on institutional trust resulting from transparent operation along with the proper influencing of expectations.

Phases of the macroprudential regulatory cycle

Phases of the macroprudential regulatory cycle.jpg