MNB: Financial risk reduced, but regulatory intervention still needed

The report also noted risks related to a short-term external funding and currency mismatch that could be mitigated by the tightening of the Foreign Exchange Funding Adequacy Ratio and the introduction of the Foreign Currency Equilibrium Ratio in order to limit the banksʼ open currency position.

The MNB said repayment burdens of households with FX car and personal loans – not affected by the recent conversion of FX mortgages – had increased substantially since the appreciation of the Swiss franc early in 2015.

Swiss franc-denominated loans were once the most popular retail lending product in Hungary.

There are about 250,000 such loans with a value of HUF 300 bln, the MNB said. It added that 30,000 borrowers with FX car loans also have a mortgage and warned that defaults on these car loans could become problematic for some HUF 230 bln of loans overall.

To mitigate systemic risks, the MNB is considering introducing "macroprudential tools" that would give lenders an incentive to convert such FX loans by making it more expensive to hold them, according to the report. The MNB acknowledged that such a conversion could occur at either the institutional level or by legal means, but added that the legal option would be warranted because of the frequent unwillingness of borrowers to participate voluntarily and the administrative burden posed by leaving banks and borrowers to settle the matter on an individual basis.

The MNB said its Funding for Growth Scheme (FGS), which provides 0% financing to banks for SME lending, had "achieved considerable results in avoiding a credit crunch" but conceded that the corporate lending portfolio had still not started to grow.

The MNB projected an annual corporate lending growth of 3.7% for Q4 of this year and 2.5% for Q4 of next year, but said a "more expansive credit dynamic" would be desirable for the next two years. The forecast lending growth rate of around 4% "can be considered a minimum expectation", it said, adding that supporting the economy in the medium term would be served by a rate "significantly above 6%".

The MNB acknowledged "significant heterogeneity" among banksʼ ability to expand their lending, but said its expected all banks will contribute "according to individual capacity" to achieve the 4% growth threshold.

"This means that banks with shrinking balance sheets, at least – disregarding the effects of MNB-supported portfolio cleaning – are expected to stop the decline in outstanding corporate loans. For banks with higher lending capacities, well above the 6%, growth is recommended, but it should still be based on prudent lending," according to the report.

Hungaryʼs government recently agreed to gradually lower the countryʼs bank levy with a view to boosting lending activity, although increased lending was not stipulated as a condition for the reduction.