27 October 2016 - The financial crisis highlighted the need for a system-level focus in order to ensure banking sector stability. To this end, the MNB has been granted a strong mandate and appropriate tools to manage, as macroprudential authority, the risks that may arise at the banking sector level. Consistent with this mandate, in the future the central bank will publish annually a Macroprudential Report, which can be regarded novel even by international standards. The Report aims to inform the wider public about the measures taken to prevent and manage systemic risks explored and communicated by the MNB. In addition, the Report presents the impact mechanism of such measures and the process of adjustment by market participants. The measures taken so far facilitate healthy and sustainable lending and strengthen the financial system’s resilience to shocks.
Hungarian households had accumulated excessive debts prior to the crisis. In order to prevent this in the future, the MNB has been using debt cap rules. The introduction of the payment-to-income ratio and the loan-to-value ratio has not led to a meaningful restraint on lending; there was a dynamic increase in both newly disbursed housing loans and consumer loans between 2015 and the first half of 2016. Lending to households developed in a healthy and sustainable manner, well below regulatory limits. In the first half of 2016, the average payment-to-income ratio was around 28 per cent, significantly below the maximum regulatory level of 50 per cent. In addition, the MNB constantly monitors the distribution of borrowers' payment capacity with a view to providing a timely response by tightening the appropriate macroprudential instruments.
At times of financial market turbulence, the banking sector may face significant liquidity and funding problems. In order to alleviate these strains, the MNB uses four macroprudential tools. The liquidity coverage ratio, requiring banks to hold an adequate amount of liquid assets for short-term stress situations, has not required significant adjustment by the banking sector, due to the already existing high liquidity buffers. The majority of banks hold significant buffers even above the current 100 per cent requirement. Based on the sector-level values for the foreign exchange funding adequacy ratio and foreign exchange coverage ratio, the percentage of stable foreign currency liabilities and on-balance sheet currency mismatches are both at adequate levels. However, significant adjustment is needed at the sector level due to the requirement on the mortgage funding adequacy ratio on 1 April 2017, which has been introduced to reduce forint maturity mismatches. As a result of the regulation, the establishment of three new mortgage banks has been underway, and some HUF 340-380 billion of new mortgage bonds is expected to be issued by the end of 2017.
In addition, the MNB may increase the safety of banks’ operations by prescribing various macroprudential capital buffers. These are employed to moderate excessive swings of financial cycles or mitigate significant risks arising from the structure of the banking sector.
In order to manage the banking sector’s potential to aggravate financial cycles, the MNB has been operating the counter-cyclical capital buffer framework since 1 January 2016. Currently, however, there is no sign of excessive lending in the domestic banking sector, and therefore from 1 January 2016 the central bank has set the countercyclical capital buffer rate at 0 per cent. This facilitates the catch-up of lending to its long-term trend.
Potential financial difficulties faced by systemically important institutions may pose a threat to the functioning of the financial intermediary system through contagion effects and may indirectly lead to real economy problems. For this reason, the MNB closely monitors their operations and requires the eight systemically important institutions concerned to maintain an additional capital buffer of 0.5-2 per cent. These capital buffers will have to be built up from 2017 over a period of four years, gradually, in line with international regulatory practice. In addition to enhancing financial stability, the adjustment period ending in 2020 is expected to support the pick-up in lending.
The persistently high level and concentration of problem project loans represent a major financial stability risk for the domestic banking sector. In order to mitigate the resulting risks, the MNB has introduced a systemic risk buffer, which will have to be built from 1 July 2017, based on data for the end of the first quarter of 2017. Banks have undertaken significant balance sheet cleaning since the announcement of the capital buffer: the stock of problem loans fell from HUF 820 billion in the third quarter of 2014 to HUF 310 billion at the end of the second quarter of 2016. During the prolonged adjustment period following the MNB’s decision, the banks will have an opportunity to wind down their problem loans, and thus they may be exempted from the systemic risk buffer as well.