6 April 2009
The negative effects of the global economic crisis have increased significantly and both the private and banking sectors have deleveraged their balance sheets in the past six months. As financing conditions deteriorated, global economic activity weakened more sharply than expected and liquidity problems in the global financial system became more acute. Hungary could not remain unaffected by these adverse influences, due to the high degree of openness and deep financial and trade integration of the economy. The increase in indebtedness of the country and the public sector, the large amount of the private sector’s foreign currency denominated debt and the substantial weakening in the economy’s growth potential added to negative sentiment in the market for Hungary.
In Hungary, as in other countries, firms have adjusted to the adverse economic and financial market environment by reducing their demand for credit and curtailing their activities. Banks have increasingly sought to attract household deposits, in order to reduce their dependence on money markets, and tightened the supply of credit in response to the decline in risk tolerance. Reflecting these developments, Hungary’s net external financing requirement is expected to fall, but the economy is likely to slip into recession. If firms’ and banks’ funding fell excessively in response to the worse-than-expected external and domestic conditions, it would lead to a deeper and more protracted economic downturn. That, in turn, would increase risks to financial stability.
Hungarian banks have been exposed to increasing liquidity and capital adequacy risks, due to deteriorating financial market conditions and the unfavourable economic environment. However, liquidity risks may be mitigated by the strong commitment of foreign parent banks to their Hungarian subsidiaries, the Magyar Nemzeti Bank’s actions to enhance forint and foreign currency liquidity and the Government’s liquidity support facility ensuring that credit institutions have easier access to finance.
The economic downturn, rises in the costs of external funding and the weakening of the exchange rate have had adverse effects on domestic banks’ solvency through a slowdown in lending and a deterioration in loan portfolio quality. However, low Hungarian loan-to-value ratios by international standards, the absence of a house price bubble, households’ strong propensity to repay their debts and banks’ flexibility in clients’ debt management can help mitigate losses arising from increasing risks.
Currently the banking sector has sufficient capital buffers to absorb losses. However, strengthening banks’ capital position further could help counteract the negative effects of the worse-than-expected economic and financial market environment.
The authorities responsible for maintaining financial stability should respond to changes in the operating environment of the financial system by broadening the range of their instruments and improving risk-based oversight. In addition to individual institutions, problems affecting the entire financial system should be monitored on a continuous basis, and there needs to be a shift in focus from ex-post intervention to prevention. In Hungary, this goal may be achieved by taking regulatory actions to expand the powers of the supervisory authority, managing the risks of foreign currency lending, strengthening lending discipline (with special regard to lending through agents), reducing the procyclical behaviour of the financial system, limiting maturity mismatches, and developing banks’ credit and liquidity risk management. The Magyar Nemzeti Bank will take actions and make proposals to ensure that the operation, oversight and regulation of the financial system can meet these new challenges as soon as possible.
MAGYAR NEMZETI BANK
Monetary Council