31 March 2022
The March issue of our journal focuses on some financial issues related to climate change. An article in the section entitled ‘Our Vision’ deals with central banking practices on climate change. The studies in the current issue focus on US mortgage lending affected by climate change, the climate exposure of Hungarian credit institutions, the estimation of credit risk losses, and the transition to IFRS-based reporting. The topic of the essay is the work of the 2021 Nobel Laureates in Economics. The feature articles are about data assets and the future role of banks.
In their article, Péter Pál Kolozsi, Sándor Ladányi and András Straubinger draw attention to the fact that the availability and transparency of reliable financial information are essential for understanding the risks and opportunities posed by climate change. The authors present the challenges of assessing the green risks of financial instruments based on the professional literature and practical experience related to environmental sustainability reporting, as well as the climate exposure measurement methodologies and practical solutions used by central banks that publish stand-alone climate risk reports.
Eszter Baranyai and Ádám Banai examine the regional disparities in US mortgage lending based on climate change considerations and the related central bank options. They point out that more credit is flowing in proportion to the areas most exposed to future heat, which is associated with larger population size and economic presence. Lenders in these areas reject slightly more loan applications. The example discussed in this study serves as an illustration of why and how central banks should focus on the impact of climate change on the financial system.
In his study, Renátó Ritter assessed the climate exposure of the corporate loan portfolio of credit institutions operating in Hungary based on two methodologies that are the same as those used in the European Banking Authority's survey, thus it is possible to place the results in an international context. Using the two methods together, risk groups were formed. Hungarian institutions may be more exposed to the negative effects of climate change than their counterparts in the European Union: 1.2 per cent of Hungarians are classified in the upper quarter exposed to very high transition risks, while more than 55 per cent are classified in the upper-middle quarter exposed to high transition risks.
The study by András Viktor Szabó aims to further develop credit risk loss estimation, which is one of the most important components of the supervisory stress test framework. In addition to the two-step determination of the short-term probability of default of mortgage loans disbursed by banks, the author also presents a methodology that is in line with the requirements of IFRS 9 on loan loss provisions. The applied models can help estimate the loss-absorbing needs of Hungarian financial institutions more accurately in a stressful situation.
Financial statements prepared in accordance with IFRS are becoming more common not only at consolidated level but also at the level of individual financial statements. In the course of bank credit ratings, both the structure different from the Hungarian one and the differences in the content of the individual balance sheet and/or profit and loss account lines have to be tackled. In their study, Eleonóra Tarpataki, Janka Filyó and Norbert László analysed the data of Hungarian companies transitioning to IFRS and pointed out that although there are significant differences individually, the difference in the main financial data is not substantial.
In the 1980s and 1990s, labour economics was at the forefront of combining economic theories, statistical methods, and new data sources. David Card, Joshua Angrist and Guido Imbens, who received the Nobel Prize in Economics in 2021 for answering causal questions from observational data, played a pioneering role in this. As a result of their major methodological innovations, economics has shifted from a more theoretical discipline to a science dominated by empirical results, the methods of which are also applied in many other social sciences. Zoltán Hermann, Hedvig Horváth and Attila Lindner review these innovations, illustrated with economic applications.
Gábor Izsák, Alexandr Palicz, Katinka Szász and Balázs Varga present the expected effects of the key economic role of data in the 21st century and highlight with successful international examples that the transition to a data economy is not only a measure of economic efficiency but also a key to survival, especially in the financial sector, in which public involvement is also essential.
Banks have been key players in the economy for centuries, but in the current century, digital development has created a new competitive environment for them. In their feature article, Ádám Nyikes, István Papp and Péter Sajtos present the main directions of the transformation of the financial sector and outline three possible future development scenarios based on them.
In addition to the above, the March issue of the Financial and Economic Review includes a book review and two conference reports.
The publication can be viewed on the website of the Financial and Economic Review:
https://en-hitelintezetiszemle.mnb.hu/
We wish you a pleasant reading.
Magyar Nemzeti Bank