Budapest, October 5, 2009 - The Magyar Nemzeti Bank has proposed to the Ministry of Finance to regulate commercial banks’ foreign currency lending practices. Discussions initiated earlier by the Bank, aimed at developing self-regulation for the banking sector, have not produced the desired results. In addition, the Hungarian Competition Authority prefers to make regulations rather than promote self-regulation of the market. Therefore, regulatory intervention is required to reduce the vulnerability of the Hungarian economy as well as to reduce the risks of the households. The rules proposed by the MNB would result in a marked improvement in the stability of the Hungarian financial intermediary system and the economy.
The Magyar Nemzeti Bank has, on several occasions, drawn public attention to the increased risks associated with foreign currency lending for years. As the financial crisis has significantly enhanced the dangers of foreign currency lending, the MNB urges the authorities to adopt, as soon as possible, regulations designed to reduce such risks materially. The Bank’s initiative is in line with the intentions of both the European Commission and the European Central Bank, which have recently emphasised the risks associated with foreign currency lending as well as the need to adopt measures to limit those risks.
Over recent years, Hungarian households have increasingly borrowed in foreign currency. Intense competition among banks, which has led to the introduction of more and more risky foreign currency products (e.g. euro, Swiss franc and Japanese yen denominated loans), coupled with the gradual loosening of lending criteria (banks have tended to provide mortgages without requiring any minimum downpayment or proof of income), has contributed to the rapid accumulation of household debt to excessive levels.
The greatest danger associated with foreign currency denominated lending lies in the inadequate assessment of risks. Encouraged by loose credit standards and a relatively stable exchange rate, individuals are inclined to take on debt that they have difficulty servicing or are unable to service under adverse circumstances (e.g. sharp fluctuations in the exchange rate or an increase in interest rates).
The combination of these factors not only jeopardises households’ ability to service their debt and their livelihood but also significantly increases the country’s vulnerability as well as the costs of financing the already high public sector debt.
Banks following their own business interest do not and cannot take into account risks arising from their activities which may compound one another at the system level. The adequate management of systemic risks is the shared responsibility of the Magyar Nemzeti Bank and other institutions responsible for financial stability. These institutions follow an integrated approach in monitoring and supervision of the operation of domestic financial system.. This approach is reflected in the new regulation proposed by the MNB.
The proposed regulation is aimed at tightening credit standards by defining payment-to-income (PTI) and loan-to-value (LTV) ratios that reflect the true level of risk and limiting the maximum term of car purchase loans. Furthermore, tighter criteria should be introduced for foreign currency-denominated loans, as these may carry a significantly higher risk due to exchange rate fluctuation.
The MNB has sent the proposed concept about the regulation and the accompanying impact study to the Ministry of Finance. According to the impact study, the proposed limits to PTI and LTV ratios would slow down the recovery somewhat in the short term. However, the composition of growth would show a more balanced pattern, the risks facing households would be lower, and consequently, the country would become less vulnerable due to a lower current account deficit. That, in turn, would make it possible to reduce the interest rate differential between the forint and the euro, and would contribute to faster growth over the longer term.
The Government may issue a decree or submit a draft legislation to the Parliament to regulate foreign currency lending. The MNB is ready to consult on the proposal with other institutions responsible for financial stability as well as with market participants.
Summary of the MNB’s proposal
Currency | MNB proposal | |||
For all types of household loans Maximum payment-to-income ratio | Forint Euro Other currency | Up to HUF 250,000 monthly net income* | Up to HUF 500,000 monthly net income* | From HUF 500,000 monthly net income* |
30 per cent 23 per cent 15 per cent | 40 per cent 31 per cent 20 per cent | 50 per cent 38 per cent 25 per cent | ||
For household mortgages Maximum loan-to-value ratio | Forint Euro Other currency | 70 per cent 54 per cent 35 per cent | ||
For car purchase financing Maximum loan-to-value ratio | Forint Euro Other currency | 80 per cent 62 per cent 40 per cent | ||
Maximum maturity of car financing: 5 years | ||||
* The income limit applies to the entire household (incomes are added together in the case of two wage-earners).