Liquidity coverage ratio

The liquidity coverage requirement expects banks to hold a sufficient quantity and quality of liquid assets for the eventuality of a short-term (30-day) liquidity shock.

The introduction of liquidity coverage requirements may increase the resilience of financial institutions, as a higher liquidity buffer allows them to withstand higher liquidity shocks. In the event of a crisis, the absence of sufficient liquid assets may drive institutions to fire sales in order to maintain sufficient liquidity, which may induce a downward spiral in the given asset market.

Compliance with the liquidity coverage requirement can be ensured by raising the stock of high-quality liquidity assets and by borrowing longer-term funds. On the whole, these steps may reduce the profitability of the financial sector, as the holding of liquid assets and the use of long-term funds are associated with relatively higher costs. Therefore, to avoid a significant deterioration of lending activity, the adequate timing of the instrument’s introduction is essential.

According to EU legislation, the institutions must satisfy 60 per cent of the liquidity coverage ratio from 1 October 2015 and 70 per cent from 1 January 2016. The MNB prescribes 100 per cent compliance with the liquidity coverage ratio from 1 April 2016.

Net stable funding ratio

The net stable funding ratio (NSFR) required by EU regulation directly applicable in all Member States requires stable funding of credit institutions over a 1-year period. The regulation, which focuses on long-term liquidity risks, encourages credit institutions to finance their assets over a sufficiently long period of time and in a stable structure, and prevents excessive maturity mismatches between assets and liabilities.

The ratio gives weights for liabilities and own funds depending on stability and expected renewal, while for assets and off-balance sheet items it gives weights based on liquidity, encumbrance and probability of drawdown, on the basis of which the Available Stable Funding (ASF) and Required Stable Funding (RSF) is determined. The ratio of these two aggregates, the NSFR, should reach at least 100 per cent, i.e., institutions should have sufficient stable funds to meet their financing needs under normal and stress conditions over a one-year time horizon.

Since 28 June 2021, the regulation must be complied with by all banks both on the consolidated and the individual level.

Foreign exchange funding adequacy ratio

The instrument expects institutions to hold a sufficient amount of stable foreign currency funds in proportion to their foreign currency assets that require stable financing.

The impact mechanism of the regulation is twofold. On the one hand, the instrument requires the use of stable foreign currency funds to finance foreign currency assets requiring stable financing. This reduces the risks stemming from on-balance sheet currency mismatches. In addition, with respect to foreign currency liabilities, it orients banks towards the use of funds embodying long-term financing, thereby reducing the maturity mismatches on the balance sheets of credit institutions as well.

Supplemented by other instruments, such as the Foreign Exchange Coverage ratio, the instrument can also mitigate the external vulnerability of the banking sector.

Foreign exchange coverage ratio

The regulation imposes a limit on the degree of currency mismatches between assets and liabilities relative to the balance sheet total.

The instrument lowers the risks associated with excessive currency mismatches. The reduction of on-balance sheet currency mismatches also reduces institutions’ reliance on off-balance sheet instruments (mainly swaps) which, in turn, lowers the risks stemming from these instruments as well (renewal, liquidity and margin call risks).

With its simple structure and targeted effect on risks, the indicator lowers the probability of regulatory arbitrage. Supplemented by other instruments, such as the Foreign Exchange Funding Adequacy Ratio, the instrument can also mitigate risks stemming from the vulnerability of external financing.

Mortgage Funding Adequacy Ratio

According to the Mortgage Funding Adequacy Ratio (MFAR) regulation, forint household mortgage loans with a remaining maturity of more than 1 year must be financed in a certain proportion by long-term forint funds covered by household mortgage loans.

Mortgage bond based, mortgage-backed funds can be considered as a stable, long-term form of funding, the cost of which is relatively low due to their favourable risk rating. This allows credit institutions to reduce their on-balance sheet maturity mismatches on favourable terms and to mitigate their interest rate risk with the increasing prevalence of loans with longer interest rate periods.

Interbank Funding Ratio

The regulation sets a maximum limit for the weighted amount of liabilities based on denomination and time to maturity which are originated from all financial corporations divided by the balance sheet total excluding own funds.

Excessive reliance on funds from financial corporations can carry a significant systemic risk and the possible materialization of this can have serious implications for the financial system and the real economy. The targeted measure and the established regulatory limit may prevent the build-up of over-reliance on wholesale financing.