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MNB to offer 2-year collateralized loan, mortgage bond buyback to prop up lending

The National Bank of Hungary (MNB) said it would offer banks two-year collateralized loans, will accept more securities as collateral and will launch a new universal mortgage bond purchase scheme in order to offset the recent weakening of the lending capacity of banks.

The central bank will start offering the 2-year loan and widening the range of collaterals in March, the bank said in a statement on its website on Wednesday.

It would launch the new mortgage bond purchase programme within a month from the enactment of the necessary legislation.

The bank is ready to provide two-year variable-rate collateralised loans at the prevailing central bank base rate (at present 7%) to banks at conditions which support the expansion of corporate lending.

It would support retail lending through the launch of a universal mortgage bond purchase programme, the bank said, noting that mortgage bonds could be instrumental in improving the maturity match. Extending the right to issue mortgage bonds in Hungary – a step requiring legislative amendments – could help to create a more efficient market for the bonds, the bank said.

A third move to help banks overcome liquidity limits will be linking the credit rating limit for bank and corporate bonds eligible as collateral instead of the current BBB- to the lower rating of government debt.

The three big international credit agencies downgraded Hungary's rating into the non-investment grade between late November and early January. The government has a rating is BA1 with Moody's and is BB+ with Standard & Poor's and Fitch, one grade below the MNB's current BBB- limit.

Although banks' low lending activity reflects to a larger part their limited willingness to lend, weaker lending capacity is also a factor behind low lending activity, the MNB said, noting that lending capacity was quickly re-established after the 2008 crisis but started to worsen again from the end of last year as fx liquidity tensions rose and capital buffer declined because of the preferential-rate fx mortgage repayments and the deteriorating portfolio quality.

The MNB said it could provide a safety buffer to banks in the situation through increasing their liquidity and securing long-term funding.

The 2-year collateralised loan facility is in line with international practice offsetting weakening lending ability, and will allow banks access to financing without a maturity premium on terms only limitedly available on the market, the bank said. The resulting improving maturity match will strengthen banks' balances.

The bank said that based on the experience of its 2010 mortgage bond programme it could effectively support such issues through primary market purchases only if amended legislation, to be prepared in consent with the government, was passed by Parliament. It noted that the benefits of universal mortgage bonds can be realised only if there is adequate potential and willingness to issue mortgage bonds.