News Article economy Hungary MNB residential
by Property Forum | Economy

In recent quarters, the National Bank of Hungary (MNB) has measured substantial and growing overvaluation in the housing market, which has been coupled with an increase in banking sector risks related to lending. These risks have not decreased so far even with the uncertainty related to the war situation of the past months; hence, supporting banks' resilience with regulatory tools is warranted. The Financial Stability Board of the MNB has therefore decided to raise bank capital requirements and will increase the countercyclical capital buffer rate to 0.5% from 1 July 2023, for the first time since its introduction six years ago, Hungarian economic daily reports.

The Financial Stability Board (FSB) of the Magyar Nemzeti Bank (MNB) will raise the countercyclical capital buffer rate applicable to exposures in Hungary to 0.5% as of 1 July 2023.

In accordance with international practice, the uncertainty during the coronavirus pandemic required the lifting of capital requirements or their postponement to enable credit institutions to properly finance the recovery of the real economy from the crisis situation. Accordingly, the MNB decided to release the previously introduced macroprudential capital buffers in the spring of 2020, supporting the successful credit-based crisis management.

However, with the reopening of the economy and the easing of uncertainty, strong credit growth persisted in both the corporate and household segments, along with the high house price increase, which is particularly important in terms of banks’ risk-taking.

This among other things has resulted in the overvaluation of the country-wide housing market rising to a historically high level, which could, due to the housing price increase seen in recent months, continue to grow even given the strong household income dynamics. Accordingly, based on the evaluation of the FSB, it has become necessary to strengthen banks' resilience against shocks, which can be supported by the activation of the countercyclical capital buffer (CCyB) designed to tackle cyclical risks. The measure is in line with recent European Union regulatory practice and the European Systemic Risk Board's warning regarding the domestic residential real estate market.

Locking in a portion of the current substantial free capital buffers for regulatory purposes, the imposition of a rate of 0.5 percentage points does not excessively increase the burdens of the banking sector, even taking into account the uncertainty arising from the Russo-Ukrainian war situation; therefore, it does not prevent the maintenance of the necessary lending capacities of the banking system while supporting the maintenance of stable operations. Possible adaptation at the individual level is facilitated by the fact that the MNB requires the maintenance of the capital buffer from 1 July 2023, providing a 12-month preparation period.

The countercyclical capital buffer (CCyB) is an element of the capital buffer requirements with macroprudential purposes that are part of the combined buffer requirements, which were introduced following the global financial crisis to strengthen banks’ capital adequacy. The purpose of macroprudential capital buffers is to mitigate excessive systemic financial risks capable of damaging the entire economy by increasing the shock-resistance (loss-absorbing) capacity of the banking system, or by incentivising appropriate balance sheet adjustment (e.g. lending activity).

Macroprudential capital buffers increase banks' ability to withstand shocks without jeopardizing the regulatory minimum capital adequacy, and their temporary violation has less severe consequences, which supports the maintenance of the lending capacity of institutions, the smooth financing of the economy, and the dampening of the cyclicality of the financial system if risks materialize.

The countercyclical capital buffer rate applicable to domestic exposures is set quarterly by the MNB, the currently unchanged list of significant third countries is reviewed annually, as well as the level of countercyclical capital buffer rates applicable to them. The amount of the buffer rate activated by the current decision will thus be determined by the Financial Stability Board during the forthcoming quarterly decisions, depending on the development of risks.