Budapest, 7 December 2021 – The MNB reviewed its regulation on the foreign exchange coverage ratio (FECR) and decided to relax it asymmetrically. The amendment gives more scope to banks' FX swap market activity without leading to a significant increase in systemic risks. The decision may therefore also support the realisation of the MNB's monetary policy objectives and increase the efficiency of monetary transmission.
Taking into account market developments and risks, the MNB's Financial Stability Council (FSC) decided on 5 November 2021 to loosen the regulatory limit on the foreign exchange coverage ratio (hereinafter: FECR). Accordingly, in the case of excess FX liabilities, the expected minimum value of the indicator will decrease from -15 to -30 percent. In case of excess FX assets, the current limit remains unchanged.
Due to the continuously increasing sector-level FX liability surplus, mainly as a result of increasing customer deposits denominated in foreign currencies, the current regulation may hinder normal liquidity management transactions of some institutions that do not pose excessive systemic risk-taking. Accordingly, the amendment gives more scope to the FX swap market activity of banks.
The easing will significantly increase the room for manoeuvre in changing the denomination structure of bank balance sheets without leading to a substantial increase in systemic risks. Excess FX liabilities carry significantly lower risks compared to an FX asset surplus, which was one of the main characteristics of the unsustainable financing structure that led to the 2008 financial crisis. Exchange rate risk arising from intra-balance sheet FX differences is managed by banks with derivative instruments. Prior to the 2008 crisis, this meant mainly short-term swaps for receiving foreign currency due to FX asset surpluses, which carried significant renewal risks. However, in the case of the currently observable surplus of foreign currency funds, swap transactions for receiving HUF are required, which means that the risk of the FX swap market drying up is much lower, as the MNB can be available to provide Hungarian forint liquidity to the extent of acceptable collateral. In addition, the foreign exchange funding adequacy ratio (FFAR) regulation continues to ensure that FX funds are sufficiently long-term and stable. The MNB monitors the relevant processes and risks and is ready to amend the regulations accordingly, if necessary.
The greater room for manoeuvre of banks supports the efficiency of the FX swap market, which could also help increase the efficiency of monetary transmission and reduce end-of-quarter swap market turbulence.
The FECR requirement, in force since 2016, limits the degree of currency mismatch between assets and liabilities in proportion to the balance sheet total. The purpose of the instrument is to reduce the risks arising from excessive denomination mismatches and over-reliance on off-balance sheet instruments. The MNB set the expected maximum level of FECR at 15 percent, which was temporarily tightened when the coronavirus appeared.
The amending decree is expected to be published in the Hungarian Gazette in the next few days, and its provisions will enter into force on the day following its publication.