MNB further reduces risks of real estate loansPrint
Budapest, 02 March 2018 – The recent recommendation issued by the MNB on the management of risks related to real estates provides guidance to financial institutions, among other things, on valuers, the content of valuations and the methodology for determining the market value. Two further new recommendations lay down provisions on the management of risks related to high non-performing loans and the evaluation, monitoring and certain structuring aspects of real estate based project finance transactions.
As part of its micro-prudential regulatory package consisting of several recommendations and a regulation, the Magyar Nemzeti Bank (MNB) has issued three new recommendations on the management of risks related to real estate valuation, high non-performing loans (NPLs) affecting credit institutions or other financial institutions, and to the evaluation of project credits.
The most crucial elements of the Recommendation on the management of risks related to real estates issued for financial institutions are those related to valuers, the content of valuations and the methodology for determining the market value.
The root of the risk to be addressed is to minimize in the market the chance – as early as at the time of pledging the property as collateral – of a deviation of the recorded value of the property from its fair market value.
For this purpose, the Recommendation, applicable from 1 July 2018, sets out the internal regulations (and the applicable values therein) expected from financial institutions in relation to real estate valuation. In addition to the general expectations, the central bank also laid down detailed professional and ethical requirements for valuers, thereby clarifying the criteria for being eligible to make valuations for financial institutions.
The Recommendation – prior to the issue of which the MNB carried out a collateral valuation survey involving 13 financial institutions – details the basic requirements for valuation methods and methodologies. It defines the concepts of updating and revision of assessment as well as the concept of comprehensive valuation. It also addresses the specific aspects of the market valuation of income-generating properties (where the property is not only a collateral but also the source of repayment of the loan).
One of the important aims of the MNB's recommendation is to enhance the comparability of valuations within the financial institution and between market participants. The quality and reliability of valuations can be improved, making supervisory control easier while, of course, reducing the risks related to real estates. Prior to the issuance of the regulatory document, the central bank had conducted effective discussions on its aspects with the Hungarian Banking Association, the Royal Institute of Chartered Surveyors (RICS), the Hungarian Real Estate Association (MAISZ), the Real Estate Development Roundtable (IFK), the Hungarian Association of Investment Fund and Asset Management Companies (BAMOSZ), and the Association of Hungarian CMS Companies and Business Information Providers (MAKISZ).
The central bank also issued a recommendation to credit institutions on NPLs, laying down a requirement for market participants coping with a high volume of non-performing loans or identified as being at risk as a result to develop an NPL strategy and an implementation plan.
In addition to the above two recommendations, the MNB’s new recommendation on the evaluation of real estate based project finance transactions also addressed to credit institutions initiates, among other things, the monitoring of performing real estate financing project loans on the basis of specific indicators, and with respect to the non-performing stock, the establishment of loan impairment allowances on a timely basis. These recent regulatory documents of the central bank also relate to the recommendation on managing credit risk already in force and to the provisions of the recently amended MNB Decree 39/2016.
Magyar Nemzeti Bank