At the end of 2012, the capital adequacy ratio of the Hungarian banking sector stood close to 16 per cent, which is high by international standards. Owing to the sector’s ongoing strong capitalisation, only a couple of banks would have capital injection needs under an adverse macroeconomic and financial market scenario. The owners of those banks have already proven their commitment to their Hungarian subsidiaries through capital injections to offset losses.

Domestic financial markets continue to function smoothly and the banking sector’s liquidity position is adequate. Banks can meet the regulatory minimum level of liquidity, and moreover the overwhelming majority of them would have sufficient liquidity buffers in a stress situation. The loan-to-deposit ratio, a measure of the banking sector’s reliance on external funding, is expected to fall from the current 110 per cent to below 100 per cent by the end of 2014, which, taking into account expected changes on the asset side of the banking sector, indicates only a moderating need to deleverage.

The ratio of non-performing loans to the household and corporate sectors stopped rising at the end of 2012. A further significant deterioration in the quality of loans to households is unlikely, owing to increasing participation in the Government support programmes for debtors, particularly the exchange rate cap scheme. In the corporate sector, the ratio of non-performing loans fell at the end of last year; however, the recent improvement in portfolio quality should not be interpreted as a trend reversal.

Despite the banking sector’s strong capacity to lend, credit supply remains tight. Low willingness to lend acts a drag on growth, thereby hindering the economic recovery. Tight credit conditions have resulted in low credit availability particularly for small and medium-sized enterprises. The Bank’s easing cycle that began in 2012 has led to a reduction in market stress and is estimated to have mitigated the fall in outstanding corporate loans by 1 percentage point.

However, conventional interest rate policy is insufficient by itself to reverse earlier trends in lending. By launching the Funding for Growth Scheme, the Magyar Nemzeti Bank seeks to mitigate the real economic costs created by banks’ excessive risk aversion using its monetary policy instruments. The first pillar of the Scheme allows a wider range of small and medium-sized enterprises to access funding at a price which enables them to meet their repayment obligations in the current economic environment. By generating more intense competition, the development of the terms of the Scheme may also trigger changes in the structure of the corporate lending market. In the SME sector, the Scheme is expected to lead to a recovery in lending already in 2013.

Hungary’s external debt has fallen significantly in recent years. The objective of the second and third pillars of the Funding for Growth Scheme is to ensure that the country’s debt structure continues to change in a way that serves economic stability. The second pillar is aimed at reducing SMEs’ exchange rate exposure. The third pillar of the Scheme is aimed at reducing the country’s external vulnerability through a reduction in short-term external debt, which in turn will provide an opportunity to reduce the MNB’s foreign exchange reserves determined by international standards and the outstanding amount of two-week bills.

Report on Financial Stability (May 2013)

21 May 2013

Monetary Council