Draghi: ECB continues to monitor MNB foundations

MNB

The European Central Bank (ECB) continues to monitor several operations of the National Bank of Hungary (MNB), including the investment strategy of its Pallas Athene foundations, checking their compliance with the prohibition on monetary financing, ECB President Mario Draghi confirmed in a letter to an MEP dated August 29.

As Draghi recalls in the letter to MEP Sophie in ʼt Veld, a member of the Dutch party Democrats 66, part of the Alliance of Liberals and Democrats for Europe, the ECB has been monitoring several operations of the MNB from the perspective of compliance with Article 123 of the Treaty on the Functioning of the European Union (TFEU). He adds that this encompasses the network of the Pallas Athene foundations established by the MNB to promote financial literacy, including their investment strategy.

As Draghi recalls, Article 123 of the TFEU "prohibits the ECB and national central banks from purchasing public debt instruments directly on the primary market." In addition, he adds: "Secondary market purchases of public debt instruments are allowed [...] but they must not be used to circumvent the objectives of the prohibition on monetary financing, as clarified in Council Regulation (EC) No 3603/93."

Draghi referred to the ECB’s Annual Report 2016, saying that "in view of the multitude, scope and size of the foundations established by the [MNB], the ECB will continue its close monitoring of their operations to ensure that there are no conflicts with the prohibition of monetary financing and of privileged access." Furthermore, he added, the MNB "should ensure that the central bank resources it has conferred on its network of foundations are not used, directly or indirectly, for state financing purposes."

"Based on its continuous monitoring, and in case the investment strategy or activities of the foundations are used to circumvent the objectives of the prohibition on monetary financing, the ECB would consider the appropriate steps to take, which may involve the initiation of infringement proceedings," the ECB president warned in the letter.

Reducing securities holdings

The ECB made similar observations in its 2015 report released in April 2016, after which the MNB foundations said that the government securities in their endowment would "gradually be exchanged for yield-producing real estate, in line with the stand of the European Central Bank."

In September 2016, the Pallas Athene foundations said they were scaling back their portfolio of government securities but maintained that keeping such instruments in their portfolio is not a violation of the law. They said their government securities holdings fell by HUF 56 billion in nine months to HUF 156.9 bln at the end of September 2016, when they held HUF 70.8 bln in real estate, HUF 19.0 bln in bank deposits, and HUF 21 bln in corporate bonds. The portfolio was practically unchanged at the end of 2016.

The latest figures reported by Optima, the asset manager of the six foundations, show that their government securities portfolio fell to HUF 122.6 bln at the end of June, their real estate portfolio grew to HUF 84 bln, and they held HUF 22.1 bln in bank deposits and HUF 39.1 bln in corporate bonds, according to MTI.

The MNB set up the foundations with a contribution of about HUF 267 bln in 2014, the state news agency recalled.

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