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MNB reviews macroprudential regulations addressing FX funding risks

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8 September 2020

Taking into account developments in banks’ funding conditions over the past six months, on 7 September 2020 the MNB’s Financial Stability Council decided to restore the requirements on the Foreign Exchange Coverage Ratio (FECR) and Foreign Exchange Funding Adequacy Ratio (FFAR), tightened temporarily in response to the coronavirus pandemic, and to amend the regulation on the Interbank Funding Ratio (IFR).The decision – while preserving financial stability – may increase the room in funding for banks providing specialised financial services, which in turn may contribute to the more efficient operation of the FX swap market in the future.

On 18 March 2020, the Financial Stability Council (FSC) announced a package of prudential measures to offset the effects of the worldwide spread of the coronavirus pandemic on the banking sector and to support the contribution of the banking sector to economic growth. Accordingly, effective since 24 March 2020 the Foreign Exchange Coverage Ratio (FECR) and Foreign Exchange Funding Adequacy Ratio (FFAR) regulations were tightened temporarily to mitigate the risks posed by the pandemic to bank funding in a preventive manner. In case of the FECR, the permitted maximum currency mismatch was lowered from 15 percent to 10 percent; and long-term funds from financial corporations were weighted in the FFAR in such a way as to incentivise banks to raise longer-term funding.

The MNB, based on its continuous monitoring of the developments in risks and the effects of the coronavirus pandemic on the financial sector, has considered it necessary to review these temporary measures. As the risks targeted by the preventive measures had not materialised and the pandemic situation had not led to a material change in funding structures, the restoration of the FECR and FFAR requirements to their previous form and the withdrawal of the tightening measures was warranted. Accordingly, on 7 September 2020 the FSC decided to restore the FECR and FFAR requirements in effect up to March and to repeal the amendments made in relation to the coronavirus pandemic. This may provide more room in funding for banks providing certain specialised services in their financing, which in turn may contribute to the more efficient operation of the FX swap market in the future.

Furthermore, the Council decided to amend the requirements of the Interbank Funding Ratio (IFR). Accordingly, on-balance sheet liabilities arising from derivative transactions with financial corporations and from the revaluation of such transactions will be exempted when determining the IFR requirement, as these show significant volatility for banks active in the FX swap market, and therefore they may limit the predictability of compliance and trigger unwanted adjustments.

The above amendments will take effect in September, on the day following the publication of the Decree in the Hungarian Gazette.

Further information on the MNB’s macroprudential instruments to manage liquidity and funding risks is available here.

Magyar Nemzeti Bank

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