Capital buffer requirement for Hungarian banks will increase as planned

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Conforming to the previous decision of the MNB’s Financial Stability Board, the capital requirement for systemically important institutions has become effective from 2017 and will gradually increase over a four-year period, the National Bank of Hungary (MNB) announced. According to the central bank’s annual review, it is not warranted to change the original schedule; therefore the capital buffer requirement will increase in 2018 as planned. With the gradual approach the MNB in addition to maintaining financial stability supports lending as well.
Potential financial difficulties faced by systemically important institutions may pose a threat to the functioning of the financial intermediary system through contagion effects, and may indirectly lead to problems for the real economy as well. For this reason, the MNB closely monitors their operation in line with EU legislation and at least annually reviews the rates of the specific capital buffers introduced to strengthen their resilience to shocks. In 2017, the MNB identified eight other systemically important institutions (O-SIIs), the same institutions as last year.

In order to strengthen their resilience to shocks, from 2017, the MNB has started to set capital buffer requirements for the institutions affected in the range of 0.5 to 2 percent, which will increase gradually until 2020. In 2018, according to the decision of the MNB’s Financial Stability Board, the capital buffer rates will increase along the phase-in path announced last year. The schedule defined is consistent with international regulatory practices. The adjustment period is expected to enhance financial stability, and, in addition, to contribute to the current pick-up in lending. It also allows sufficient time for the preparation of institutions concerned to meet their obligations.

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Identification of other systemically important institutions and the applicable capital buffer

The MNB identifies and annually reviews the list of globally and other systemically important credit institutions and investment firms based in Hungary, and if necessary, imposes an additional capital buffer requirement on these institutions while continuously monitoring their operation.

Improving the loss-absorption capacity of systemically important institutions is a preventive macroprudential tool intended to limit the severe contagion effects stemming from the insolvency or stress situation of systemically important institutions.

The purpose of the buffers is to lower the probability of negative external financial and real economy effects generated by the stress situation of important institutions (as well as the costs to be incurred by the state budget during the prevention of such effects).

The requirement may curtail the misaligned motivation of managers and owners of capital arising from the moral hazard problem, as a higher “skin in the game" may prompt stakeholders to reduce the extent of their risk-taking.

On the negative side, banking operations may become more expensive due to the increase in the cost of funds. Imposing the surcharge may reconfirm the institution's priority status both for the relevant institution and its creditors, which could give rise to a special kind of moral hazard, as it increases their expectations about a funding subsidy in the event of a default. This risk, however, is considerably reduced by the uniform resolution framework (BRRD) harmonised at the EU level (e.g.: through bail-in).
 

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