Instruments to mitigate the impact of misaligned incentives that increase systemic risk

Identification of other systemically important institutions and the applicable capital buffer

The MNB identifies and annually reviews the list of globally and other systemically important credit institutions and investment firms based in Hungary, and if necessary, imposes an additional capital buffer requirement on these institutions while continuously monitoring their operation.

Improving the loss-absorption capacity of systemically important institutions is a preventive macroprudential tool intended to limit the severe contagion effects stemming from the insolvency or stress situation of systemically important institutions. The purpose of the buffers is to lower the probability of negative external financial and real economy effects generated by the stress situation of important institutions (as well as the costs to be incurred by the state budget during the prevention of such effects). The requirement may curtail the misaligned motivation of managers and owners of capital arising from the moral hazard problem, as a higher “skin in the game” may prompt stakeholders to reduce the extent of their risk-taking.

On the negative side, banking operations may become more expensive due to the increase in the cost of funds. Imposing the surcharge may reconfirm the institution's priority status both for the relevant institution and its creditors, which could give rise to a special kind of moral hazard , as it increases their expectations about a funding subsidy in the event of a default. This risk, however, is considerably reduced by the uniform resolution framework (BRRD) harmonised at the EU level (e.g.: through bail-in).

Taking into account the exceptional circumstances caused by the coronavirus pandemic, the MNB has decided to release capital buffer requirements set for domestic systemically important banks from 1 July 2020, which supported the maintenance of lending capacity and the prevention of a potential contraction in credit supply. Since then, the MNB has assessed the capital position and lending activity of systemically important banks as sufficient to prescribe once again the phase-in of the buffers along the path already envisaged in 2020 from 2022 onwards. Systemically important banks will need to rebuild their buffers over three years to strengthen their loss absorbing capacity in a proportionate and gradual manner. In 2022 and 2023, the transitional buffer rates have increased by one-quarter of the expected final rates, and from 2024 onwards, the MNB will expect compliance with the intended final buffer rates. The MNB will modify the final buffer rates if material future changes in the systemic importance of the credit institutions necessitate adjustments during the annual revisions.

• Press release on the identification of other systemically important institutions and the rebuilding of their capital buffers from 2023 (1 December 2022)
• Methodological note
• Other systemically important institutions in the EU countries
• Archive