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MNB disincentivises emergence of systemic risk arising from foreign currency project loans by revising systemic risk buffer

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Budapest, 16 September 2019 – Based on the decision of the Financial Stability Council of the MNB, the systemic risk buffer (SyRB) requirement shall be amended. While calculating the capital requirement, the MNB will take into account not only problem project loans but also non-problem foreign currency project loans in the future to prevent the potential re-emergence of systemic risks related to the unhealthy structure of commercial real estate project financing. The modifications, which will come into effect on 1 January 2020, are preventive in nature, so it is expected that no institution will have to maintain a capital buffer during the initial period.

As of 1 January 2020, the calibration of the systemic risk buffer required by the MNB will be extended to new risks: in addition to problem exposures already covered, project loans qualified as non-problem, but denominated in foreign currency will also be included in the determination of the capital buffer rate. In order to ensure that the capital buffer does not unduly hinder lending processes, non-problem FX commercial real estate project financing loans will initially be taken into account with a low, 5 percent weight. At the same time, the de minimis limit for the exemption threshold is also being modified: the limit on the amount of problem and non-problem foreign currency project loans is raised to HUF 20 billion in order to exempt institutions that manage a stock which is non-material from a systemic risk perspective.

Since 2016, project lending in the commercial real estate market has been growing dynamically, in an institutionally and geographically concentrated manner, primarily in foreign currency. These loans may pose higher risks in cases when firms renting commercial real estate and paying their rents in foreign currency do not have natural foreign currency coverage, and thus the borrowers are indirectly exposed to exchange rate risk.

So far, the systemic risk buffer requirement has been aimed at mitigating systemic risks related to non-performing and restructured, but not yet performing project loans, together with on-balance sheet held-for-sale commercial real estate (the so-called problem stocks). As the targeted systemic risk related to problem exposures has been substantially decreased with the support of the existing systemic risk buffer and along favourable market conditions, adjusting the instrument in accordance with the changing risk environment has become timely. The amendment of the requirement is intended to strengthen the shock resilience in case of an excessive outflow of foreign currency project loans and may also contribute to counteracting excessive risk-taking.

In line with the preventive nature of the modification, it is expected that there will be no institution required to maintain a systemic risk buffer as of 1 January 2020 based to the rate determination conducted on third quarter data for 2019. Accordingly, while disincentivising the emergence of problem portfolios, the tool does not hamper lending in a healthy structure.

The revised General Decision can be found here.

Magyar Nemzeti Bank

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