30 September 2020
The papers published in the September issue of the Magyar Nemzeti Bank’s scientific journal discuss the general characteristics and impact of the COVID crises in Hungary’s FX forward market, a possible supervisory benchmark model of corporations’ probability of default, credit institutions’ operational risk management and challenges of mortgage bank refinancing.
The study by Anna Boldizsár, Zalán Kocsis, Zsuzsa Nagy-Kékesi and Gábor Sztanó deals with the FX forward market in Hungary, partly on the occasion of the global market turbulence caused by the spread of the coronavirus. The authors demonstrate that mutual funds have become key actors in this market in recent years, with their share exceeding that of the previously dominant non-financial firms active in international trade. During the depreciation of the HUF (the Hungarian legal tender) together with regional currencies at the end of March 2020, non-financial firms did not increase their net long HUF forward positions as would have been usual, while mutual funds reduced their HUF forward exposure by short HUF trades to manage the adverse effects on their portfolio and liquidity.
Márk Szenes and Borbála Zsófia Dabi present a possible modelling approach to the long-term probability of default (PD) for corporations financed by banks. Their PD model is based on corporate default data of large banks in Hungary, rendering the modelling approach comprehensive and reliable to an extent, hitherto unseen. The PD model is able to pinpoint the differences in the credit quality of corporate clients across a wide set of company size ranges, from the micro to the large corporate segment, and it also offers a uniform risk metric, applicable for the banks’ advanced credit risk capital requirement calculation.
Norbert Kozma examines the application of the principles of proportionality in credit institutions’ operational risk management. The author reveals a strong correlation between institution size and risk exposure by analysing Hungarian data. He offers an analysis of resident banks’ choices of methods and the experiences in supervisory practice, and from this he derives a possible implementation of risk management, based on the principles of proportionality. He comes to the conclusion that the introduction of forward-looking instruments for smaller banks and the harmonisation of methodologies for large institutions may ensure that the sector might be prepared to identify and manage its operational risks.
Gyula László Nagy, Zsombor Incze and Erik Landgraf based on mortgage banks’ operational models present the most important challenges that refinancing mortgage banks are currently facing in Hungary, with regards to the imminent implementation of the European covered bond directive, passed in December 2019. In addition to a description of the crucial and relevant sections of the covered bond directive, the authors also formulate development proposals and alternatives. According to the authors, their proposals may support that the collateral system of mortgage loans become more effective while maintaining the fundamentals of the existing regulation.
In his essay, Róbert Hausmann examines the long-term transformation of global supply chains and the effects of the coronavirus pandemic on international production organisation in the manufacturing sector. He identifies five feasible trends: the regionalisation of value creation, the shortening of supply chains, making suppliers multi-centered and the accumulation of safety stocks, the shift from production focusing on a single product towards manufacturing several products and the digitalisation and automation of production organisation. He concludes that economic policy may facilitate progress by using different tools such as subsidies for strategic industries, promoting the development and integration of digital infrastructures or training employed persons.
In addition to these, the September issue of the Financial and Economic Review contains two book reviews.
The studies are available on the Financial and Economic Review’s website: https://en-hitelintezetiszemle.mnb.hu/
We wish you a very pleasant reading.
Magyar Nemzeti Bank