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Stability of domestic financial system improves

The stability of Hungary's financial system has improved since the spring and the banking sector is “able to meet the challenges posed by the new economic environment,” the National Bank of Hungary (MNB) said in its fresh Report on Financial Stability published on Wednesday.

“The domestic financial system has become more stable since the publication of the April 2009 Report,” MNB said in the report.

Banks' capital buffer has strengthened and the sector's capital adequacy ratio is expected to remain over 11%, MNB said. Banks' loan-to-deposit ration has been reduced and their liquidity position has improved, it added.

Banks will probably write off increasing loan losses in 2009 and 2010 because of the recessionary environment, but the sector's profitability could be higher than expected in 2009 because of one-off factors such as revenue from financial transactions, rising interest income and improvements in operating efficiency. Some financial businesses could make losses in 2009, and strong profitability is unlikely to be maintained in the future, MNB said.

“The deterioration in the quality of credit portfolios has been broadly in line with expectations,” MNB said.

Stress tests conducted by MNB suggest that even if underlying economic conditions were to deteriorate more than expected, additional bank recapitalization needs “would remain at manageable levels” - HUF 100 billion – HUF 170 billion in the bank's stress scenario - MNB said. Based on past experience and commitments, parent banks would remain committed to supporting their subsidiaries under adverse conditions, it added.

In both the baseline and the stress scenario, loan losses reach their peak only in 2010, the bank noted.

MNB said that it deemed it necessary to use regulatory instruments to prevent an excessive build-up of household debt and reduce the risks associated with foreign currency lending, and ultimately to promote responsible lending practices and reduce the country's vulnerability. The bank also considers it important to develop a new, more efficient regulatory and supervisory framework, and has proposed a new supervisory structure, together with the Finance Ministry and financial market regulator PSzÁF. The government has submitted the proposal to Parliament.

MNB acknowledged that the economic downturn had been aggravated by government austerity measures, but it said efforts to reduce high levels of public and private debt would contribute to a sustainable improvement in Hungary's long-term growth prospects. (MTI-Econews)