The current weakness of lending by the banking sector could be explained in part by banks’ limited lending capacity and in large part by their reduced willingness to lend. The MNB has no instrument available to boost banks’ willingness to lend; however, it stands ready to offset the recent weakening in the banking sector’s lending capacity by introducing a long-term collateralised credit facility and a new mortgage bond purchase scheme.

Banks’ capacity to lend was quickly restored following the turmoil at the end of 2008; however, it began to weaken again at the end of last year, due in part to growing liquidity strains and falling capital buffers as a result of early repayments of foreign currency mortgages and a deterioration in the quality of loan portfolios. In this situation, the aim of the MNB is to create a safety net for banks by boosting surplus liquidity and providing long-term financing. This will ensure that the sector’s lending capacity is less of a constraint on the improvement in lending activity should banks’ willingness to lend increase.

The Bank will stand ready to provide two-year variable-rate refinancing to credit institutions at its prevailing policy rate against securities delivered as collateral. The conditions for the provision of such refinancing have been designed to facilitate an expansion in bank lending to the corporate sector. The new instrument conforms to international practice adopted to offset a weakening in the banking sector’s capacity to lend and allows banks to access to financing at maturities of limited availability in the market without the need to pay a term premium on longer-term funding. By providing a long-term lending facility, the Bank expects to contribute to a strengthening in banks’ balance sheets through an improvement in the maturity match between assets and liabilities, which in turn may offset the decline in lending activity.

The Bank seeks to promote lending to the household sector by introducing a universal mortgage bond purchase scheme. Mortgage bonds are a key factor contributing to an improvement in the maturity match between assets and liabilities. In the Bank’s view, a universal structure for mortgage bond issuance may foster the development of a more efficient mortgage bond market. However, the benefits of the model change can only be realised if banks have adequate potential and willingness to issue mortgage bonds. Based on the experiences drawn from the previous programme in 2010, the MNB is able to effectively improve banks’ access to funding related to forint mortgage lending via purchases in the primary market if an amendment to the regulation giving all credit institutions the right to issue mortgage bonds, drawn up in agreement with the Government, is passed by Parliament.

In addition to the above, by expanding the range of eligible collateral the MNB can alleviate liquidity constraints potentially impeding lending to the corporate and household sectors through an increase in banks’ liquidity buffers. Extending the right to issue mortgage bonds may be an important support in this area, as a result of an increase in the outstanding amount of mortgage bonds accepted as eligible collateral. Linking the minimum credit rating limit for bank and corporate bonds to the lower rating of government debt instead of the current ‘BBB-’ is expected to result in a further easing in conditions.

The Bank expects to introduce the two-year collateralised lending facility and expand the range of eligible collateral in March 2012. The mortgage bond purchase programme is expected to be launched within one month of the date on which the required amendment to the regulation is passed.