By István Madár The instruments of the Hungarian central bank (NBH) can significantly support renewed corporate lending, but they are insufficient in themselves, said András Simor, Governor of the NBH, in a recent interview with Portfolio.hu. On 15 February, the NBH announced its intention to introduce a two-year collateralised credit facility, expand the range of eligible securities for repos, and propose a universal forint-denominated mortgage bond purchase scheme in order to ease bank liquidity pressures and reduce the risk of a credit crunch. Simor believes this two-year facility is a “real safety net": banks can achieve greater security in terms of funding and they can be more comfortable and confident in lending. He reminded, however, that the Bank has no means to boost the willingness to lend. Simor said the universal mortgage bond purchase programme is only one step in the development that can finally lead to a pickup in household mortgage lending. He emphasised that the new instruments do not increase inflation, otherwise they would not have introduced them.
Portfolio.hu: In its previous Report on Financial Stability and in earlier studies, the central bank concluded that limited corporate lending is principally attributable to supply and less to demand factors. With the significant expansion of central bank instruments published today, of the two components of loan supply, the willingness and capacity to lend, the MNB is focusing on the breakdown of factors limiting the latter.
András Simor:On the basis of its mandate, the central bank is continuously monitoring trends in lending. With regard to corporate lending, we observed that the decline in the loan portfolio was increasingly attributed to the tightening of loan supply constraints following the crisis in October 2008.
What you mention is nothing new. We have been distinguishing limits to lending willingness and lending capacity within supply limits to lending in the past, that determine banks’ willingness or capacity to lend. The Reports on Financial Stability of the MNB concluded that lending willingness limits were dominant in 2010 and 2011. The central bank, however, is unable to break down the willingness limits; these are attributable to the uncertain development of the economic environment and the related low risk tolerance.
The situation has changed at the end of last year, and the lending capacity limits also became more pronounced. This, too, can be broken down into two parts. Firstly, into capital constraints (there is increasingly less capital available for lending), which is attributable to the bank tax, the early repayment scheme and portfolio deterioration. The central bank has no responsibilities in these areas.
The other side of the story is the availability of liquidity and funding. Harmony between the maturity of assets and liabilities plays an important role in this case, and the central bank should and does take steps. Obviously, we cannot resolve all of the problems, but we make all efforts to prevent a further decline in lending activity.
P.: What caused the decreased funding of banks?
A.S.: Funding should be divided into two parts: foreign exchange and forint funding. Foreign exchange funding initially contracted in 2008 and 2009; the central bank has limited resources to manage this issue. It has been continuously and successfully using these since March 2009: central bank swap instruments are available on the market to enable banks to convert their forint liquidity to foreign exchange liquidity.
Foreign exchange liquidity constraints eased in 2009 and 2010, attributable to the starting decline in corporate and household FX loans. Foreign exchange liquidity, however, contracted again in 2011, leading to the renewed rise in outstanding swaps in the banking sector.
The fluctuation of the forint exchange rate and the increase in the country risk premium, however, prompted banks to set up increasingly large forint liquidity buffers that they can convert to foreign exchange with swaps, if necessary. They simply need more forint funds to manage the liquidity risks.
We see that although forint funds are ample on a systemic level, in certain periods, the cautious liquidity management of certain banks may limit their lending activity in some cases. In parallel, we also see that average maturity on the liabilities side of banks’ balance sheets has also shortened, which is a problem we think should be addressed.
P.: So forint liquidity risks are also basically attributable to foreign exchange constraints?
A.S.: Correct. If this factor continues, it may limit lending capacity in the future. We should add that as a result of deteriorating risk perception, turnover has also declined on the domestic interbank market; banks show much less confidence in each other. As a sign of this trend, the use of the central bank overnight deposit has sharply increased.
P.: Is all this related to the fact that deleveraging poses challenges for the banking sector in Europe?
A.S.: This is obviously true, but it is also certain that it affects each country in the region differently because, for example, a unit of central bank funds has a different yield in other countries.
P.: Recently the central bank may have been encouraged to expand its instruments from two sides. Firstly, the government called on the central bank to take all measures necessary to promote economic growth. Secondly, the European Central Bank is also increasingly active in using unconventional instruments.
A.S.: As an independent institution, the MNB is continuously aiming to develop its instruments that serve the long-term interests of the country. Until now, bank lending activity declined as a result of factors which the MNB could not influence (unpredictable economic environment, sectoral special taxes, the early repayment scheme, etc., ed.). Presently, however, factors arise, and may arise in the future, which our instruments can address. Our job is to use these instruments. And this is what we’re doing.
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