Economy
ECB warns Hungary not to curb central bank independence
It also noted that the frequent changes to the MNB Law are “incompatible with the principle of legal certainty." The ECB also criticised the government for its failure to consult it before proposing new substantive amendments to the draft law at a stage when the Bank has not yet adopted its opinion.
The draft law will recast the Central Bank Act (‘MNB Law’). The draft law maintains several provisions of the MNB Law, as well as introducing new provisions into the current legal framework.
Under the new Constitution effective on 1 January 2012, this subject matter will be regulated in a law adopted with a qualified majority, referred to as an organic law.
The draft law will introduce several changes into the MNB’s legislative framework.
Decision-making bodies
The draft law modifies the appointment procedure for the Monetary Council adopted in January 2011. The Prime Minister rather than the Governor may give recommendations to Hungary’s President on deputy governors. The possible number of deputy governors will increase to three and the Deputy Chair of the Monetary Council will act for the Governor in the event of his absence.
The Monetary Council will have five to nine members chaired by the Governor. Its members will comprise the Deputy Governors and other members, nominated by Hungary’s President, for six years.
The draft law reinstates the Executive Board, with the Governor as Chair, and the Deputy Governors to take over the Governor’s implementing responsibilities for Monetary Council decisions. Its further tasks include in particular financial management, internal organisation, operational management of the MNB and auditing. The Monetary Council will become the supreme decision-maker for all MNB tasks.
1.2 Monetary policy
The MNB may set different levels of reserve ratios for different types of liabilities, individual assets and non-balance sheet items of financial institutions and investment companies. Furthermore, it may remunerate the minimum reserves deposited by the institutions. Remuneration depends on the different reserve ratio components.
1.3 Macroprudential supervision
The MNB’s task is identifying business and economic risks threatening the financial system as a whole and facilitating the prevention and mitigation of systemic risks. On the basis of the Monetary Council’s decision, the Governor may issue decrees on this matter. Also, the MNB will track the operations of major financial institutions and assess their liquidity positions.
1.4 Changes in the salary structure
The draft law proposes three alternative salary structure scenarios linking the remuneration of the Governor, Deputy Governors, other Monetary Council members and the Chair and members of the Supervisory Board to a certain baseline, such as average monthly gross income or the financial sector’s average monthly gross income, with the proviso that no MNB employee monthly salary may exceed the salary of the MNB’s Deputy Governors.
1.5 Relations with the Government, the ministries and the public
The Governor will be subject to a comprehensive reporting scheme to the Parliament on request and to the Parliament’s Committee for Economic Affairs every six months. In addition, the MNB will be required to draw up a prior annual operating and investment cost plan. The Parliamentary Committee for Economic Affairs and the State Audit Office, on the basis of the MNB’s subsequent internal performance review, will monitor its adherence. Article 31(4) of the draft law sets out the competence of the Parliamentary Committee for Economic Affairs and the State Audit Office to examine the operational efficiency of the management of the MNB.
The MNB will submit its opinion on the budget proposal to the Minister responsible for budgetary matters. However, the MNB will no longer have an opportunity to submit this opinion to the Parliament’s relevant committee. Furthermore, the Governor will present the MNB’s opinion to the Budgetary Council.
1.6 Relations with the general budget
The forint and the exchange rate equalisation reserves may be offset against each other. The rules for recapitalisation will change as follows. Recapitalisation will only be available to the Government if the balance of the respective equalisation reserves is negative and this negative balance exceeds the sum of the accumulated profit reserve and the balance sheet. The shareholder may provide capital injections in cash to the accumulated profit reserve any time throughout the year, regardless of the balance of the MNB’s accumulated profit reserve.
1.7 Relations with the Hungarian Financial Supervisory Authority
The MNB will cooperate with the Financial Supervisory Authority, including, inter alia, exchanging information and sharing the results of its on-site checks in matters falling under the Financial Supervisory Authority’s powers.
1.8 Balance sheet and dividend payments
In the future, the Executive Board rather than the shareholder will adopt the MNB’s balance sheet, financial statement, profit and loss statement, as well as decisions on dividend payments, subject to an affirmative resolution by the shareholder.
The ECB emphasised the need for a stable institutional framework.
Previous ECB Opinions repeatedly highlighted the key role of credible monetary policy in controlling inflationary expectations and promoting sustainable convergence towards price stability.
“A credible monetary policy is rooted in an independent central bank with a stable institutional environment. The Treaty’s requirement of central bank independence reflects the view that the primary objective of price stability is best served by a fully independent institution with a precisely defined mandate. It is of utmost importance to design an institutional structure that separates monetary policy from the influence of short-term political interests," it said in an Opinion dated 14 December.The ECB reiterated its previous observations regarding frequent amendments to the MNB Law.
“In the context of central bank independence, the central bank legal framework needs to provide a stable basis for the central bank’s functioning. The appointment procedure for Monetary Council members, as well as the MNB’s decision-making bodies’ salary structure, was subject to several recent amendments without consulting these bodies or taking the MNB’s functional needs or the prevailing economic environment into account. These frequent changes to the MNB Law are incompatible with the principle of legal certainty. They have already significantly impacted the MNB’s organisational and governance stability, as will the planned increase in the number of members of decision-making bodies."The ECB understands that the new Constitutional framework justifies a recast of the MNB Law, and would welcome a recast that results in a long-term stable basis for central banking in Hungary.
Some central bank and monetary financing prohibition issues in the ECB’s December 2006 and May 2010 Convergence Reports are still not addressed, the Frankfurt-based bank added.
Failure to consult... again
The ECB has learned that the version of the draft law submitted to the Government contains “substantive amendments compared to the version submitted to the ECB, in particular as regards macroprudential and remuneration policy matters."
“The ECB reiterates its position that it should be re-consulted if there are substantive amendments proposed to the draft law at a stage when the ECB has not yet adopted its opinion. In such situations, the ECB expects the consulting authority to submit the amended draft legislative provision to it as soon as possible, so that the opinion can be based on the most recent text. The ECB would appreciate the Ministry for the National Economy giving due consideration to honouring its obligation to consult the ECB in the future."Measures to curb MNB independence, influence decision-making
“Against the backdrop of constant changes in the composition of the MNB’s decision-making bodies, the increase in the number of Monetary Council members, together with the possibility of increasing the number of deputy governors - without due justification for the need to amend the MNB’s institutional framework - gives rise to concerns whether this could be used to influence the decision-making process to the detriment of central bank independence."
Apart from the prohibited employment relationships specified under the conflict of interest rules in the draft law, members of the MPC may also have employment relationships other than their membership in the Monetary Council.
The draft law provides that, following 1 January 2012, all decisions in connection with MNB tasks previously not taken by the Monetary Council will have to be discussed and decided by the Monetary Council.
“To provide for a smooth transition in the decision-making process, and to ensure the MNB’s operational continuity, the ECB would welcome implementation of the changes in the decision-making process to ensure a smooth handover of decision-making to the Monetary Council. A transitional period would appropriately address this."
Governor’s reporting obligations
The Governor will be subject to an “exceptional reporting obligation" at the request of the Speaker of the Hungarian Parliament or the Chair of the Parliamentary Committee for Economic Affairs.
The dialogue between national central banks (NCBs) and third parties, even when based on statutory obligations to provide information and exchange views, “is compatible with central bank independence provided that:
The ECB understands that such reporting respects the limits of central bank independence set out in the Convergence Report and that it will concern the MNB’s activities and monetary policy. The ECB recommends clarifying in this sense the scope of the reporting.
The purpose of the obligation to forward the agenda of the meetings of the Executive Board to the Government is unclear. The representative of the Government participates without voting rights in Monetary Council and not in Executive Board meetings. This obligation should be clarified to avoid the impression that the Government actively takes part in Executive Board decision-making.
MNB role in macroprudential supervision
The ECB welcomes the MNB’s new macroprudential mandate to identify, monitor and assess risks to financial stability and take on macroprudential policy in Hungary.
“However, the draft law should ensure that the MNB’s macroprudential mandate does not interfere with the orderly fulfilment of its monetary policy mandate, in particular with its primary objective of maintaining price stability, and that it does not restrict the Eurosystem’s contribution to the stability of the financial system."
The MNB needs to be equipped with tools and powers to efficiently fulfil the tasks attributed to it, the ECB added.
The ECB also notes that, as the general rules allow the MNB to collect data in the central banking information system, these provisions of the draft law would enable the MNB to collect data specifically in respect of its macroprudential mandate.
“In this respect, it is of crucial importance, if the MNB is to effectively fulfil its new macroprudential mandate, that it receives in a timely manner all necessary data and information, including information specific to supervised institutions, and that it may designate - in cooperation with the micro-prudential supervisor - systemically relevant financial structures and institutions."
Changes in the salary structure - financial and personal independence
A central bank may not be put into a position where it has limited or no control over its staff, or where a Member State’s government is in a position to influence the NCB’s policy on staff matters.
“To protect the MNB’s autonomy in staff matters, in accordance with the principle of central bank independence [...], the Hungarian authorities must ensure that any amendment to the legislation on the remuneration of the MNB’s staff is decided in close cooperation with the MNB, taking due account of the MNB’s views regarding the impact of such legislative amendments on its ongoing ability to carry out its tasks."
“Against this background, the MNB should be effectively involved in drawing up the relevant parts of the draft law so as to safeguard the principle of central bank independence."
Under the new Constitution effective on 1 January 2012, this subject matter will be regulated in a law adopted with a qualified majority, referred to as an organic law.
The draft law will introduce several changes into the MNB’s legislative framework.
Decision-making bodies
The draft law modifies the appointment procedure for the Monetary Council adopted in January 2011. The Prime Minister rather than the Governor may give recommendations to Hungary’s President on deputy governors. The possible number of deputy governors will increase to three and the Deputy Chair of the Monetary Council will act for the Governor in the event of his absence.
The Monetary Council will have five to nine members chaired by the Governor. Its members will comprise the Deputy Governors and other members, nominated by Hungary’s President, for six years.
The draft law reinstates the Executive Board, with the Governor as Chair, and the Deputy Governors to take over the Governor’s implementing responsibilities for Monetary Council decisions. Its further tasks include in particular financial management, internal organisation, operational management of the MNB and auditing. The Monetary Council will become the supreme decision-maker for all MNB tasks.
1.2 Monetary policy
The MNB may set different levels of reserve ratios for different types of liabilities, individual assets and non-balance sheet items of financial institutions and investment companies. Furthermore, it may remunerate the minimum reserves deposited by the institutions. Remuneration depends on the different reserve ratio components.
1.3 Macroprudential supervision
The MNB’s task is identifying business and economic risks threatening the financial system as a whole and facilitating the prevention and mitigation of systemic risks. On the basis of the Monetary Council’s decision, the Governor may issue decrees on this matter. Also, the MNB will track the operations of major financial institutions and assess their liquidity positions.
1.4 Changes in the salary structure
The draft law proposes three alternative salary structure scenarios linking the remuneration of the Governor, Deputy Governors, other Monetary Council members and the Chair and members of the Supervisory Board to a certain baseline, such as average monthly gross income or the financial sector’s average monthly gross income, with the proviso that no MNB employee monthly salary may exceed the salary of the MNB’s Deputy Governors.
1.5 Relations with the Government, the ministries and the public
The Governor will be subject to a comprehensive reporting scheme to the Parliament on request and to the Parliament’s Committee for Economic Affairs every six months. In addition, the MNB will be required to draw up a prior annual operating and investment cost plan. The Parliamentary Committee for Economic Affairs and the State Audit Office, on the basis of the MNB’s subsequent internal performance review, will monitor its adherence. Article 31(4) of the draft law sets out the competence of the Parliamentary Committee for Economic Affairs and the State Audit Office to examine the operational efficiency of the management of the MNB.
The MNB will submit its opinion on the budget proposal to the Minister responsible for budgetary matters. However, the MNB will no longer have an opportunity to submit this opinion to the Parliament’s relevant committee. Furthermore, the Governor will present the MNB’s opinion to the Budgetary Council.
1.6 Relations with the general budget
The forint and the exchange rate equalisation reserves may be offset against each other. The rules for recapitalisation will change as follows. Recapitalisation will only be available to the Government if the balance of the respective equalisation reserves is negative and this negative balance exceeds the sum of the accumulated profit reserve and the balance sheet. The shareholder may provide capital injections in cash to the accumulated profit reserve any time throughout the year, regardless of the balance of the MNB’s accumulated profit reserve.
1.7 Relations with the Hungarian Financial Supervisory Authority
The MNB will cooperate with the Financial Supervisory Authority, including, inter alia, exchanging information and sharing the results of its on-site checks in matters falling under the Financial Supervisory Authority’s powers.
1.8 Balance sheet and dividend payments
In the future, the Executive Board rather than the shareholder will adopt the MNB’s balance sheet, financial statement, profit and loss statement, as well as decisions on dividend payments, subject to an affirmative resolution by the shareholder.
The ECB emphasised the need for a stable institutional framework.
Previous ECB Opinions repeatedly highlighted the key role of credible monetary policy in controlling inflationary expectations and promoting sustainable convergence towards price stability.
“A credible monetary policy is rooted in an independent central bank with a stable institutional environment. The Treaty’s requirement of central bank independence reflects the view that the primary objective of price stability is best served by a fully independent institution with a precisely defined mandate. It is of utmost importance to design an institutional structure that separates monetary policy from the influence of short-term political interests," it said in an Opinion dated 14 December.The ECB reiterated its previous observations regarding frequent amendments to the MNB Law.
“In the context of central bank independence, the central bank legal framework needs to provide a stable basis for the central bank’s functioning. The appointment procedure for Monetary Council members, as well as the MNB’s decision-making bodies’ salary structure, was subject to several recent amendments without consulting these bodies or taking the MNB’s functional needs or the prevailing economic environment into account. These frequent changes to the MNB Law are incompatible with the principle of legal certainty. They have already significantly impacted the MNB’s organisational and governance stability, as will the planned increase in the number of members of decision-making bodies."The ECB understands that the new Constitutional framework justifies a recast of the MNB Law, and would welcome a recast that results in a long-term stable basis for central banking in Hungary.
Some central bank and monetary financing prohibition issues in the ECB’s December 2006 and May 2010 Convergence Reports are still not addressed, the Frankfurt-based bank added.
Failure to consult... again
The ECB has learned that the version of the draft law submitted to the Government contains “substantive amendments compared to the version submitted to the ECB, in particular as regards macroprudential and remuneration policy matters."
“The ECB reiterates its position that it should be re-consulted if there are substantive amendments proposed to the draft law at a stage when the ECB has not yet adopted its opinion. In such situations, the ECB expects the consulting authority to submit the amended draft legislative provision to it as soon as possible, so that the opinion can be based on the most recent text. The ECB would appreciate the Ministry for the National Economy giving due consideration to honouring its obligation to consult the ECB in the future."Measures to curb MNB independence, influence decision-making
“Against the backdrop of constant changes in the composition of the MNB’s decision-making bodies, the increase in the number of Monetary Council members, together with the possibility of increasing the number of deputy governors - without due justification for the need to amend the MNB’s institutional framework - gives rise to concerns whether this could be used to influence the decision-making process to the detriment of central bank independence."
Apart from the prohibited employment relationships specified under the conflict of interest rules in the draft law, members of the MPC may also have employment relationships other than their membership in the Monetary Council.
The draft law provides that, following 1 January 2012, all decisions in connection with MNB tasks previously not taken by the Monetary Council will have to be discussed and decided by the Monetary Council.
“To provide for a smooth transition in the decision-making process, and to ensure the MNB’s operational continuity, the ECB would welcome implementation of the changes in the decision-making process to ensure a smooth handover of decision-making to the Monetary Council. A transitional period would appropriately address this."
Governor’s reporting obligations
The Governor will be subject to an “exceptional reporting obligation" at the request of the Speaker of the Hungarian Parliament or the Chair of the Parliamentary Committee for Economic Affairs.
The dialogue between national central banks (NCBs) and third parties, even when based on statutory obligations to provide information and exchange views, “is compatible with central bank independence provided that:
- it does not result in interference with the independence of the members of the NCB’s decision-making bodies;
- the special status of Governors in their capacity as members of the ECB’s General Council is fully respected; and
- confidentiality requirements resulting from the Statute of the European System of Central Banks and of the European Central Bank (hereinafter ‘Statute of the ESCB’) are observed."
The ECB understands that such reporting respects the limits of central bank independence set out in the Convergence Report and that it will concern the MNB’s activities and monetary policy. The ECB recommends clarifying in this sense the scope of the reporting.
The purpose of the obligation to forward the agenda of the meetings of the Executive Board to the Government is unclear. The representative of the Government participates without voting rights in Monetary Council and not in Executive Board meetings. This obligation should be clarified to avoid the impression that the Government actively takes part in Executive Board decision-making.
MNB role in macroprudential supervision
The ECB welcomes the MNB’s new macroprudential mandate to identify, monitor and assess risks to financial stability and take on macroprudential policy in Hungary.
“However, the draft law should ensure that the MNB’s macroprudential mandate does not interfere with the orderly fulfilment of its monetary policy mandate, in particular with its primary objective of maintaining price stability, and that it does not restrict the Eurosystem’s contribution to the stability of the financial system."
The MNB needs to be equipped with tools and powers to efficiently fulfil the tasks attributed to it, the ECB added.
The ECB also notes that, as the general rules allow the MNB to collect data in the central banking information system, these provisions of the draft law would enable the MNB to collect data specifically in respect of its macroprudential mandate.
“In this respect, it is of crucial importance, if the MNB is to effectively fulfil its new macroprudential mandate, that it receives in a timely manner all necessary data and information, including information specific to supervised institutions, and that it may designate - in cooperation with the micro-prudential supervisor - systemically relevant financial structures and institutions."
Changes in the salary structure - financial and personal independence
A central bank may not be put into a position where it has limited or no control over its staff, or where a Member State’s government is in a position to influence the NCB’s policy on staff matters.
“To protect the MNB’s autonomy in staff matters, in accordance with the principle of central bank independence [...], the Hungarian authorities must ensure that any amendment to the legislation on the remuneration of the MNB’s staff is decided in close cooperation with the MNB, taking due account of the MNB’s views regarding the impact of such legislative amendments on its ongoing ability to carry out its tasks."
“Against this background, the MNB should be effectively involved in drawing up the relevant parts of the draft law so as to safeguard the principle of central bank independence."
