The more than doubling of short-term external funding from EUR 8.5 billion to nearly EUR 20 billion in 2007–2008 caused systemic problems for the domestic banking sector and financial markets. From 2010, the changed external environment and the economic policy reform led to a massive deleveraging of balance sheets. As a result, the banking sector’s external debt fell from its historical high of EUR 42 billion to EUR 19.5 billion by the end of the first quarter of 2015. Meanwhile, short-term external debt shrank from some EUR 20 billion to around EUR 9.5 billion. Despite continuous adjustment efforts, the ratio of short-term external funding to the banking sector’s balance sheet total remains nearly 9 per cent compared with 6 per cent in 2002–2003.

The MNB has undertaken negotiations with the domestic banking sector and the European Central Bank since early April 2015. As a result of the consultations, the MNB’s Financial Stability Board adopted Decrees on changes to the foreign exchange funding adequacy ratio (FFAR) and on the introduction of the foreign exchange coverage ratio (FECR) on 7 July 2015. After the tightening of the FFAR, outstanding swaps can no longer be included in the ratio and the required level of the FFAR will be raised to 100 per cent. The new FECR regulation will limit the on-balance sheet currency mismatch at 15 per cent of the balance sheet total, thereby reducing banks’ excessive reliance on the swap market. The new MNB Decrees will take effect on 1 January 2016.

The new regulations will not only prevent a renewed rise in the banking sector’s short-term external funding, but will also contribute to a reduction in its amount. As an effect of the new regulations, the banking sector’s short-term external debt may fall by as much as EUR 2–3 billion to EUR 6–7 billion by the end of the 2016, which is equal to 6 per cent of the balance sheet total.

The texts of the MNB Decrees are expected to be published in the Hungarian Gazette in July 2015.

Magyar Nemzeti Bank