Hungary banking system will remain stable after FX early repayment scheme, says watchdog head

Hungary's banking system is stable and will remain so after a government scheme allowing full early repayment of foreign currency-denominated mortgages at discounted exchange rates ends, Károly Szász, head of financial market watchdog PSzÁF told MTI after giving testimony before Parliament's Audit and Budget Committee on Monday.

Banks' losses because of the scheme will depend on how many borrowers avail of it, Szász said.

Banks must shoulder the difference between the discounted exchange rate and the market rate under the scheme.

When the scheme winds up at the end of 2011, forint lending is likely to come to the forefront and the market share of banks that have access to forint resources to finance their lending will grow, Szász said. The banking system will remain stable and secure after the scheme ends too; banks will wait it out, they will not withdraw nor will they take capital out of the country, he added.

Szász conceded that the scheme presents the danger of slowing economic growth because of the risk that the banking system may find its new equilibrium at a restructured business profile and reduced lending activity.

The stability of Hungary's banking system is good, Szász said. Even in comparison with other European countries, the sector's indicators are always better, especially in the case of capital adequacy, he added. With the adoption of the new stricter Basel Accords on capital adequacy and liquidity, Hungarian banks will lose some of this advantage, he added.

Szász acknowledged that banks' profitability, capital adequacy, liquidity and the quality of their assets also reflect the financial and economic crisis.

PSzÁF will continuously review the capital adequacy and liquidity of lenders and take measures if necessary, he said. Stress tests show how some Hungarian banks' capital adequacy could suffer under certain scenarios and these banks have prepared to deal with such situations, he added.