Issuance of mortgage bonds to improve funding

Following the conversion of household foreign currency mortgage loans into forints the maturity mismatch between the banking sector’s forint assets and liabilities has increased significantly. By introducing the Mortgage Funding Adequacy Ratio (MFAR), the MNB expects to mitigate this risk, requiring banks to issue long-term securities, which may appear in the market mainly in the form of mortgage bonds.

The conversion of foreign currency-denominated mortgage loans into forints has led to a significant improvement in the stability of the Hungarian financial system. Exchange rate risk no longer places a burden on households and, indirectly, on the banking sector. However, significant liquidity risks have arisen in the banking sector as a side-effect of the conversion. The reason for this is that the overwhelming majority of mortgage loans converted into forint have maturities of more than ten years, while the banking sector’s forint liabilities, typically in the form of deposits, have maturities of less than one year.

In order to reduce the maturity mismatch, from 1 October 2016 the MNB is going to introduce the Mortgage Funding Adequacy Ratio (MFAR). The new ratio is defined on a consolidated level as forint liabilities backed by household mortgage loans (e.g. mortgage bonds, other securities backed by household mortgage loans and refinancing mortgage loans extended by a mortgage bank) divided by the net stock of residential forint mortgage loans with residual maturity of more than one year. The required minimum level for the MFAR is 15 per cent, i.e. at least 15 per cent of mortgage loans must be financed by long-term liabilities.

The MNB will allow enough time for the banking sector to ensure compliance with the new requirement. During this period, institutions without a mortgage bank will be able to establish a mortgage bank. Based on preliminary estimates, the new regulation is likely to encourage the establishment of a number of new mortgage banks and the issuance of mortgage bonds of some HUF 300 billion. It is expected that these mortgage bonds will be purchased mainly by institutional investors and financial institutions.

The MNB has consulted with the European Central Bank and market participants on the new regulation and has incorporated a number of improvements into the regulation, thereby contributing to the smooth application of the MFAR Decree.

The text of the MNB Decree is expected to be published in the Hungarian Official Gazette in June 2015.

Vissza a tetejére

The primary objective of the MNB shall be to achieve and maintain price stability. (...) Without prejudice to its primary objective, the MNB shall support the maintenance of the stability of the system of financial intermediation, the enhancement of its resilience, its sustainable contribution to economic growth; furthermore, the MNB shall support the government’s economic policy and its policy related to environmental sustainability, using instruments at its disposal.