18 November 2015

The persistently high amount and institutional concentration of problem project loans pose a key financial stability risk. The MNB has decided to introduce the Systemic Risk Buffer (SRB) in order to manage that risk. Should credit institutions sweep out their problem portfolios by January 1, 2017, when the SRB will become activated, the new capital requirement will not be binding for them. The adequately long phase in period is therefore expected to encourage credit institutions to clean up their problem portfolios and to enhance financial stability by improving the banking sector’s resilience to shocks.

The persistently high amount, ratio and concentration of problem project loans pose a key financial stability risk. The total stock of such loans, at more than HUF 700 billion, may be a source of further, unexpected losses and may adversely affect the banking sector’s willingness to lend, thereby reducing its role in supporting economic growth. The stock of non-performing project loans rose sharply after the outset of the financial crisis; however, continued restructurings have also failed to manage the risks arising from such debts. Consequently, the use of macroprudential tools has become warranted.

In October 2015, the MNB’s Financial Stability Board decided to introduce the Systemic Risk Buffer in order to adequately manage risks arising from problem project loans. The rate of the SRB will be set in proportion to the individual insitutions’ contribution to systemic risk. This rate is derived from the ratio of problem project loans to the domestic Pillar 1 capital requirement. The Systemic Risk Buffer will be applied individually, between 0 and 2 per cent of total domestic risk-weighted assets, and credit institutions will be required to build it up at consolidated level, from Common Equity Tier 1 capital (CET1), in addition to other capital buffers. A ‘de minimis’ threshold has also been introduced in order to take into account systematically relevant assets: institutions with problem project exposures below HUF 5 billion are exempted from the SRB requirement.

The MNB will set Systemic Risk Buffers for institutions in the form of individual decisions in the final quarter of 2016. Institutions will be required to comply with the new capital buffer requirements from 1 January 2017. This schedule will allow adequate time for banks to accommodate, i.e. to effectively clean up their non-performing project loans. Even if the clean-up of portfolios does no take place, the additional capital requirement may strengthen the stability of the domestic financial intermediary system by improving banks’ resilience to shocks. Should credit institutions sweep out their problem portfolio by January 1, 2017 the new capital requirement will not be binding for them.  The MNB has held consultations with the European authorities and market participants on the new capital requirements.

 

Magyar Nemzeti Bank