Economy
Hungary to merge central bank with market regulator PSZÁF
The proposal says the duties and powers of the National Bank of Hungary would be taken over by a new organisation, whose Chairman would be appointed by President Pál Schmitt at the request of Prime Minister Viktor Orbán for a six-year term.
NBH Governor András Simor and PSZÁF President Károly Szász would be Deputy Chairmen of the new organization until their mandate expires.
MPs are to vote on the proposed amendment during an extraordinary session on Friday. The new institution would be established via the adoption of a cardinal law requiring a two-thirds majority.
The constitutional committee argues that “merging the two institutions could be the adequate response to new challenges in the financial sector that were created by the integration of money markets and the blurring of boundaries between banking and other financial activities."
Many ways to do it
According to a study conducted in 2008, encompassing 150 countries, in 25% of the cases there is a single regulatory body overseeing the financial intermediary system; in 35% of the cases there is an institution that operates separately from the central bank and in 40% of the cases there are hybrid solutions with several agencies at work.
In 2009, the International Monetary Fund (IMF) provided Hungary technical assistance regarding the overhaul of the financial regulatory regime. It saw two possible solutions: (i) keeping and strengthening the PSZÁF and (ii) integrate it into the NBH. Then economic policy opted for the former scenario (both in laws and in the new Basic Law). In this view, the current proposal is definitely unexpected.
The constitutional committee argues that merging macro- and microprudential supervision in a single institution could provide the appropriate response to new challenges arising on the financial markets.
Not a new idea
The idea of merging the NBH and the PSZÁF has not come out of the blue. It was raised in May 2009 that the financial markets watchdog would be amalgamated into the central bank.
Then the press department of the NBH gave an "evasive" answer, underlining that supervisory tasks are carried out within the central bank in several countries of the region, e.g. in the Czech Republic, Slovakia, Slovenia and Romania.
On 26 April, the issue came up again, when Viktor Orbán said after winning the elections that “Parliament has the right to change the rules on the PSZÁF and the National Bank."
Orbán said they would like to be "proud" of institutions such as the PSZÁF and the central bank and their respective leaders. The central bank, he said, should not "serve as the lodging for offshore knights", referring to NBH Governor András Simor, who had been in the centre of media attention and a constant target of Fidesz in 2009 for his ownership of a Cyprus-based company.
In December 2009, Simor liquidated his Cyprus-based company that had been a bone of contention with opposition party Fidesz. Simor came under attack in June when opponents claimed his investment in an "offshore" company served the purpose of tax evasion.
A day later Mihály Varga, then Vice President of the centre-right Fidesz party, said: "Everything can be reorganised. Parliament can change this legislation, parliament can consider whether or not to merge the financial supervision (PSZÁF) with the central bank, this idea has come up several times already."
"I believe such solution needs to be found that is the best the country. One that maintains the stability of monetary policy but one that also facilitates a much better co-ordination between the government and the leaders of the NBH," Varga added.
The debate was closed - apparently only temporarily - last May by Orbán when he said it made no sense to merge the NBH with the PSZÁF, stressing implicitly it was no way to remove Simor.
For the first time, he said this would be below the government’s dignity .
"I’m no fan of being foxy," he said. "For now it makes absolutely no sense to merge the central bank with the PSZÁF. Only to deal with a personnel issue, come on! Now honestly, would this be a dignified thing to do? We’re talking about a government representing ten million people and a central bank..."
Simor could be the target
The current amendment proposal, however, still indicates that the ruling party is striving to have Simor removed. The government had previously thought merging the NBH with the PSZÁF was the way to do it, but it had no legal means to follow that thought through. And the European Central Bank (ECB) is unlikely to support the present effort, either.
According to our knowledge, neither the ECB nor the NBH knew of this proposal, which stipulates only that the current NBH and PSZÁF chiefs would become Deputy Chairmen of the new body.
There may be a precedent
The ECB ruled in 2004 in an Italian case how the reorganisation of the central bank could affect the position of its Governor. According to its decision any change implemented may affect only the next Governor not the one who presides.
“The ECB also notes that the draft law is silent concerning the future status of the existing Governor of the Banca d'Italia. In this context it would like to point out that in order to protect the personal independence of the governors of the national central banks, any reorganisation of such a bank affecting the term of office of its governor should foresee that the existing Governor can continue to perform his duties until the end of the term of office he has been appointed for."
The question is how the ECB would interpret the Hungarian motion, because Simor would remain responsible for central bank matters (as Deputy Governor of the new organisation) until the end of his term.
The amendment proposal is even more interesting knowing that the government submitted the draft of the new Central Bank Act to Parliament on the very same day (14 Dec), and it did not say a word about the possible merger of the two institutions and the appointment of a new Chairman.
Note that the new Central Bank Act, which will be soon assessed by the ECB, is to come into effect from 1 January 2012, just like the law on temporary regulations of the Basic Law, to which the amendment proposal has been submitted.
“Blood-curdling" way to do make that call
István Farkas, former President of the PSZÁF’s Supervisory Council told local newswire MTI it “blood-curdling" that “based on a ten-minute committee debate" they can decide such serious issues as the merger of the central bank and the market regulator.
You find a number of different solutions all over the world. Sometimes the supervision of banks is the responsibility of the central bank. But you will hardly find any example for having such an integrated type of supervision as the Hungarian - where not only banks but the capital markets and the insurers are also overseen by the market watchdog - merged into a single organisation that would also have the powers of a central bank, he added.
What do analysts think?
Analysts talking to MTI said it is not unprecedented in the world that the central bank and the financial regulator are merged, but the money markets would definitely not welcome the Hungarian move. Zoltán Török, analyst at Raiffeisen Bank in Budapest, said the merger of the NBH and the PSZÁF would, in theory, result in more efficient supervisory and regulatory operations and improve both the quality and the efficiency of the work, adding that this is the general practice in Europe.
He noted, however, that market players’ perception of the central bank’s job is positive and it would not be fortunate if this changed. He said the initial market reaction could be negative because they would think the change will be for the worse, although the merger would make financial supervision and regulation more efficient.
György Barcza, chief economist at K&H Bank, does not believe the merger would substantially change interest rate and exchange rate policy, adding that the newly appointed members already have majority in the Monetary Council. While any change of this kind brings more uncertainty to markets, if monetary policy remains steady, jitters will abate soon.
Zsolt Kondrát, analyst at MKB Bank, noted that there are a lot of open issues regarding the planned merger. He believes passing the amendment would be a “bad start" of the talks with the IMF/EC about a credit line.
NBH Governor András Simor and PSZÁF President Károly Szász would be Deputy Chairmen of the new organization until their mandate expires.
MPs are to vote on the proposed amendment during an extraordinary session on Friday. The new institution would be established via the adoption of a cardinal law requiring a two-thirds majority.
The constitutional committee argues that “merging the two institutions could be the adequate response to new challenges in the financial sector that were created by the integration of money markets and the blurring of boundaries between banking and other financial activities."
Many ways to do it
According to a study conducted in 2008, encompassing 150 countries, in 25% of the cases there is a single regulatory body overseeing the financial intermediary system; in 35% of the cases there is an institution that operates separately from the central bank and in 40% of the cases there are hybrid solutions with several agencies at work.
In 2009, the International Monetary Fund (IMF) provided Hungary technical assistance regarding the overhaul of the financial regulatory regime. It saw two possible solutions: (i) keeping and strengthening the PSZÁF and (ii) integrate it into the NBH. Then economic policy opted for the former scenario (both in laws and in the new Basic Law). In this view, the current proposal is definitely unexpected.
The constitutional committee argues that merging macro- and microprudential supervision in a single institution could provide the appropriate response to new challenges arising on the financial markets.
Not a new idea
The idea of merging the NBH and the PSZÁF has not come out of the blue. It was raised in May 2009 that the financial markets watchdog would be amalgamated into the central bank.
Then the press department of the NBH gave an "evasive" answer, underlining that supervisory tasks are carried out within the central bank in several countries of the region, e.g. in the Czech Republic, Slovakia, Slovenia and Romania.
On 26 April, the issue came up again, when Viktor Orbán said after winning the elections that “Parliament has the right to change the rules on the PSZÁF and the National Bank."
Orbán said they would like to be "proud" of institutions such as the PSZÁF and the central bank and their respective leaders. The central bank, he said, should not "serve as the lodging for offshore knights", referring to NBH Governor András Simor, who had been in the centre of media attention and a constant target of Fidesz in 2009 for his ownership of a Cyprus-based company.
In December 2009, Simor liquidated his Cyprus-based company that had been a bone of contention with opposition party Fidesz. Simor came under attack in June when opponents claimed his investment in an "offshore" company served the purpose of tax evasion.
A day later Mihály Varga, then Vice President of the centre-right Fidesz party, said: "Everything can be reorganised. Parliament can change this legislation, parliament can consider whether or not to merge the financial supervision (PSZÁF) with the central bank, this idea has come up several times already."
"I believe such solution needs to be found that is the best the country. One that maintains the stability of monetary policy but one that also facilitates a much better co-ordination between the government and the leaders of the NBH," Varga added.
The debate was closed - apparently only temporarily - last May by Orbán when he said it made no sense to merge the NBH with the PSZÁF, stressing implicitly it was no way to remove Simor.
For the first time, he said this would be below the government’s dignity .
"I’m no fan of being foxy," he said. "For now it makes absolutely no sense to merge the central bank with the PSZÁF. Only to deal with a personnel issue, come on! Now honestly, would this be a dignified thing to do? We’re talking about a government representing ten million people and a central bank..."
Simor could be the target
The current amendment proposal, however, still indicates that the ruling party is striving to have Simor removed. The government had previously thought merging the NBH with the PSZÁF was the way to do it, but it had no legal means to follow that thought through. And the European Central Bank (ECB) is unlikely to support the present effort, either.
According to our knowledge, neither the ECB nor the NBH knew of this proposal, which stipulates only that the current NBH and PSZÁF chiefs would become Deputy Chairmen of the new body.
There may be a precedent
The ECB ruled in 2004 in an Italian case how the reorganisation of the central bank could affect the position of its Governor. According to its decision any change implemented may affect only the next Governor not the one who presides.
“The ECB also notes that the draft law is silent concerning the future status of the existing Governor of the Banca d'Italia. In this context it would like to point out that in order to protect the personal independence of the governors of the national central banks, any reorganisation of such a bank affecting the term of office of its governor should foresee that the existing Governor can continue to perform his duties until the end of the term of office he has been appointed for."
The question is how the ECB would interpret the Hungarian motion, because Simor would remain responsible for central bank matters (as Deputy Governor of the new organisation) until the end of his term.
The amendment proposal is even more interesting knowing that the government submitted the draft of the new Central Bank Act to Parliament on the very same day (14 Dec), and it did not say a word about the possible merger of the two institutions and the appointment of a new Chairman.
Note that the new Central Bank Act, which will be soon assessed by the ECB, is to come into effect from 1 January 2012, just like the law on temporary regulations of the Basic Law, to which the amendment proposal has been submitted.
“Blood-curdling" way to do make that call
István Farkas, former President of the PSZÁF’s Supervisory Council told local newswire MTI it “blood-curdling" that “based on a ten-minute committee debate" they can decide such serious issues as the merger of the central bank and the market regulator.
You find a number of different solutions all over the world. Sometimes the supervision of banks is the responsibility of the central bank. But you will hardly find any example for having such an integrated type of supervision as the Hungarian - where not only banks but the capital markets and the insurers are also overseen by the market watchdog - merged into a single organisation that would also have the powers of a central bank, he added.
What do analysts think?
Analysts talking to MTI said it is not unprecedented in the world that the central bank and the financial regulator are merged, but the money markets would definitely not welcome the Hungarian move. Zoltán Török, analyst at Raiffeisen Bank in Budapest, said the merger of the NBH and the PSZÁF would, in theory, result in more efficient supervisory and regulatory operations and improve both the quality and the efficiency of the work, adding that this is the general practice in Europe.
He noted, however, that market players’ perception of the central bank’s job is positive and it would not be fortunate if this changed. He said the initial market reaction could be negative because they would think the change will be for the worse, although the merger would make financial supervision and regulation more efficient.
György Barcza, chief economist at K&H Bank, does not believe the merger would substantially change interest rate and exchange rate policy, adding that the newly appointed members already have majority in the Monetary Council. While any change of this kind brings more uncertainty to markets, if monetary policy remains steady, jitters will abate soon.
Zsolt Kondrát, analyst at MKB Bank, noted that there are a lot of open issues regarding the planned merger. He believes passing the amendment would be a “bad start" of the talks with the IMF/EC about a credit line.
