Hungarian promises to IMF and future trends in EU10 banking regulation

By Zdenek Kudrna

Hungary had signed a Stand-by agreement with IMF on November 4, 2008. Apart the standard clauses on the fiscal and monetary policy, it includes a section on the financial sector policies. Although, these commitments are made under pressure to fence off the impact of the global financial crisis, they may foreshadow future changes of the EU10 banking regulatory regimes.

The reason why Hungary is threatened by the financial crisis more than her Visegrad neighbors is fiscal profligacy of her government. High debts and high deficits of public finance over the last few years induced the independent central banks to restrictive monetary policy. In turn, high interest rates (and rather stable exchange rate of forint) motivated households to borrow in euro, Swiss francs or even yen. This resulted in the much higher vulnerability of household balance sheets as they essentially bear unhedged exchange rate risk. Both of these risks were exacerbated by the financial crisis that triggered liquidity trap and capital outflows from emerging markets.

In this context, the Stand-by agreement reviews what by today counts as standard firefighting measures including:

• IMF stand-by of up to 12.5 bn euro for the next 17 months;


• ECB lending facility of up to 5 bn euro;


• EBRD is also mentioned as ready to step into banks;


• doubled deposit insurance from 6 to 13 million HUF, topped by blanket guarantee of all deposits;


• providing a support package for systemically important banks that contains provisions for added capital and funds a guarantee fund for interbank lending (up to 600 billion HUF in total); this support could increase banks' CAR to 14 pc.

To address the foreign lending problem of households, the agreement envisages that banks and indebted families would

• at the request of the debtor, allow the duration of the loan to be extended with fixed monthly installments;
• debtors who deem that exchange rate fluctuations carry excessive risks will be allowed to convert their foreign currency-based loan to a forint loan, without extra charges; and
• in the event that a debtor is unable to service the existing loan, the banks will be amenable to transitionally reducing the installments at the request of the debtor.

The crisis also induced the Hungarian government to submit laws to the parliament that would allow Hungarian Financial Service Authority and financial infrastructure to catch up with what most of their EU10 neighbors have done a few years ago.

• introducing well defined triggers of remedial actions and emergency powers;
• improving the efficiency of the bank resolution regime to facilitate paying out quickly to depositors in case of need,
• introduction of a positive credit registry for households,
• modification of the Central Bank Act to allow the MNB to request individual but unidentifiable data to adequately analyze credit risk,
• enhanced regulation of insurance and credit brokers and their products,
• introduction of maximum loan-to-value ratio requirements for new mortgage loans,
• close monitoring of banks’ foreign exchange exposures, and
• strengthening communication with financial authorities in home and host countries regarding risk assessments and liquidity contingency plans.

Judging what all this means for the future of banking regulation in EU10 is fraught with uncertainties. However, unless we see major moves on the EU level and providing that existing regulatory regime will only be patched not scrapped, we could observe the following:

• a comfortable capital adequacy for turbulent times in emerging markets is neither 8 pc required by Basel Accord, nor 9 to 12 pc. observed across EU10, but more (Hungarian government is betting on 14);
• reintroduction of some simple regulatory measures such as loan-to-value ratios that fell out of fashion during the good times;
• to make the EU10 regulatory regime credible vis-a-vis parent banks and their home-country regulators, a rigid trigger of regulatory action may be needed;
• more transparency and data sharing to monitor system level risks;
• integration of regulation of banking and other financial services;
• stronger regulatory cooperation on EU level.

All of this has always been on the table. However, the unpleasant experience of Hungary and also Baltic states, Romania, and Bulgaria, may help to turn proposals into action in other EU states and on the EU level.