Macroprudential report - 2024

In its annually published Macroprudential Report, the MNB describes and evaluates – also including the MNB’s resolution and consumer protection activities – the operation of its macroprudential instruments and the adjustment of market participants to these. In addition, the report provides a more in-depth analysis of some of the most relevant issues from a financial stability perspective. In October 2024, the following main messages can be formulated:

1. The indicators examined when determining the Countercyclical Capital Buffer (CCyB) rate, which is set at 0.5 per cent as from 1 July 2024, indicate an easing of the risks associated with overheatedness. At the same time, given the still high geopolitical and macroeconomic uncertainty, it is of paramount importance to maintain the strong capital position of the banking system and to build up capital buffers that can be released in times of crisis. For this reason, in line with the expanding European practice, the MNB decided to apply the so-called positive neutral framework in Hungary: from 1 July 2025, it has set a minimum CCyB rate of 1 per cent in a risk-neutral environment not yet characterised by risks of overheatedness. Owing to banks’ strong capital positions and outstanding profitability, existing free capital buffers provide substantial lending capacity for financing the economy.

2. To address the risks associated with Commercial Real Estate (CRE) lending, not yet excessive but to be monitored from a financial stability perspective, the MNB decided in June 2023 to reactivate the Systemic Risk Buffer (SyRB), which was suspended for an indefinite period in the wake of the outbreak of the coronavirus pandemic, in a revised form 1 July 2024 for preventive purposes. Due to the low level of problematic portfolios, none of the banks were required to have an effective requirement from 1 July 2024.

3. The MNB has not changed the scope of Other Systemically Important Institutions (O-SIIs) in its 2023 review. Banks of systemic importance will have to comply with the full set of institution-specific buffer rate target levels from 2024, thus the gradual rebuilding of the buffer introduced at the start of the coronavirus pandemic has been completed after the temporary release. In the past year, the moderate change in the systemic importance and concentration of O-SII banks did not justify the changing of buffer rates.

4. Household over-indebtedness cannot be identified even as lending activity is on the increase. The average income burden of borrowers has eased following a previous increase. At the same time, after the previous downturn, the collateral encumbrance of borrowers is on the rise again, but does not indicate excessive risk-taking. Over the past year, the MNB has particularly assessed (1) the financial stability implications of the credit recovery as the interest rate environment normalised, (2) the use of higher loan-to-value limits available to first-time home buyers as of January 2024, (3) the potential unintended effects of the borrower-based measures standards, (4) and the scope for further development of the provisions from a green perspective.

5. As in previous years, banks are meeting the Liquidity Coverage Ratio (LCR) requirement with safe buffers. The liquidity-increasing effect of interest income on deposits held at the central bank and the growth of deposits exceeding the credit growth continued to play a crucial role in the evolution of the sectoral LCR over the past year. Strengthened LCR requirements by the MNB’s as supervisory authority, also responding to increasing interest rate risks and international bankruptcy events, have also substantially strengthened prudent liquidity management. The Net Stable Funding Ratio (NSFR) requirement is met by the banking system with significant and gradually increasing surpluses, with an internal structure characterised by a stable growing share of capital-type liabilities and retail deposits.

6. Banks continue to meet the MNB’s macroprudential funding requirements with adequate buffers and a favourable funding structure. The banking system’s short-term external debt as a proportion of its balance sheet total remains low. The requirements, which also reduce short-term external debt vulnerability, have been fine-tuned by the MNB from 1 October 2024 to support institutions entering the market or small enough not to pose a systemic risk.

7. Banks meet the Mortgage Funding Adequacy Ratio (MFAR) requirement with safe buffers, which is supported by the preferentially treated green mortgage bond issuances. The past year has seen a further increase in the amount of domestically issued mortgage bonds, with green mortgage bonds becoming increasingly significant. Additionally, the first foreign currency mortgage bond issues have taken place, which can mitigate concentration risks by promoting ownership diversification. Due to the continuing unfavourable conditions in the mortgage bond market, the MNB has postponed the green requirement for new foreign currency mortgage-backed liabilities for an indefinite period, which was originally due to come into effect on 1 October 2024.

8. As of 1 January 2024, credit institutions have complied with the MREL requirements set by the MNB, acting within its resolution mandate. Institutions have met these requirements by issuing various equity instruments and MREL-compliant non-priority unsecured bonds, as well as by issuing parent bank loans and MREL-compliant bonds subscribed by the parent bank of some banks falling under one-stop resolution. With the development of resolution plans and the fulfilment of MREL requirements as a source of successful resolution, the preparation for resolution has reached a new level. From this year onwards, the focus will shift to operationalising and testing resolution plans.

9. In the context of its consumer protection activities, which contribute to maintaining financial stability by strengthening confidence in the financial system, the MNB has over the past year drawn attention to the shortcomings of institutional practices regarding the management of overdue loan transactions and online personal lending. It has also taken further steps to curb cyberfraud by issuing executive circulars to domestic payment industry participants.

10. Also in line with its Green Mandate, the MNB pays special attention to assessing the financial stability risks and potential regulatory options arising from climate change. Monitoring of corporate bank credit exposures subject to climate and potential transition risks indicates rising vulnerabilities. No significant improvement in the energy efficiency of mortgage-financed properties is visible from a market-based perspective. The financing of energy-efficient buildings could also be supported by the application of green borrower-based standards similar to those applied internationally along with the green development of the Certified Consumer-Friendly Framework.

11. With the spreading of online processes, technological development and the rise of geopolitical risks, cyber incidents are becoming more frequent and more serious both internationally and in Hungary. In extreme cases, they can also pose a risk to financial stability. The financial stability dimension of cyber risks and the related regulatory options are closely monitored by international organisations as well. The MNB is constantly reviewing cyber risks and regulatory options, and considers it necessary to improve banking security systems, fraud prevention processes, modernise outdated IT solutions and train customers on digital financial awareness.

12. Since the global economic crisis of 2008/09, an economic and financial upswing, and in recent years the coronavirus pandemic, the Russo-Ukrainian war and the subsequent energy crisis and inflation shock in Europe, have all tested the macroprudential framework. Owing to the strengthening regulatory requirements, the introduction of macroprudential regulations and the tightening of supervisory practices, the Hungarian banking system was well prepared to face the new challenges that had to be faced. Experience suggests that the effectiveness of the macroprudential toolkit can be further intensified by fine-tuning borrower-based measures, the early build-up of releasable capital buffer requirements and the strengthening of funding requirements.

After a one-year delay, as of 1 July 2024, the Countercyclical Capital Buffer (CCyB) rate for domestic exposures has increased to 0.5 per cent for the first time since the introduction of the framework in 2016. Over the past year, cyclical systemic risks have continued to decline, based on monitored indicators. There are signs of a turnaround in household lending, but the level and dynamics of cyclical systemic risks do not in themselves indicate a risk to be addressed. In view of the continued high geopolitical and macroeconomic uncertainty, as well as the recommendations of international institutions on the build-up of capital buffers, the MNB decided to apply a domestic positive neutral CCyB framework, which is increasingly used by European Economic Area (EEA) countries, at a level of 1 per cent with effect from 1 July 2025. The activation of the revised framework is also supported by the current high profitability of banks and their adequate capital position.

Based on the country-specific benchmark additional credit-to-GDP gap as a starting point for the rule-based assessment of the domestic credit cycle, the risk of overheated lending is steadily declining since the beginning of 2022. The additional credit-to-GDP gap for the household segment shows a credit-to-GDP ratio that has been consistently below the estimated equilibrium level since 2010. In the corporate segment, the indicator points to a declining credit-to-GDP since the beginning of 2022, indicating a close-to equilibrium level by the end of 2023 (Figure 1). Looking ahead, as the macroeconomic environment improves and lending grows, the benchmark credit gap is likely to gradually narrow.

Chart 1: The evolution of the benchmark additional credit-to-GDP gap

Source: MNB

The indicators of the cyclical systemic risk map, which measures cyclical systemic risk, also indicated a decline in cyclical risks over the past year. At the end of 2022, gap indicators referring to corporate lending showed a medium risk and external balance indicators showed elevated or high risk due to the Russo-Ukrainian war and the subsequent inflation shock. However, as inflation shocks phase out and lending slows down, these indicators already point to a medium risk with declining dynamics by the first quarter of 2024 (Chart 2). Therefore, the level of domestic cyclical financial systemic risks does not require macroprudential intervention, either on a rule-based basis or according to the quantitative and qualitative information monitored.

Chart 2: The cyclical systemic risk map (Q1 2024)

Source: MNB

In view of the intensifying financial stability risks, macroprudential capital buffers are being increased in most EEA countries, but there are still countries that do not apply such buffers. According to the assessment of the European Systemic Risk Board (ESRB), the macroeconomic environment in the EEA is improving, but the risk of unforeseen shocks remains significant due to geopolitical tensions and uncertainty. Accordingly, 22 EEA countries have already reported positive CCyB ratios by the end of June 2024 to strengthen the banks’ resilience to shocks. In 8 EEA countries, the CCyB requirement is still at 0 percent, but all countries in the CEE region have already set a positive CCyB requirement (Chart 3). Countries that did not activate the CCyB requirement opted to maintain the 0 per cent rate mainly because of declining cyclical risks and negative credit-to-GDP ratios.

Chart 3: CCyB requirements in the EEA countries (July 2024)

Note: Buffers announced but not necessarily activated. The CCyB rates shown relate to the exposures of the relevant country. *Countries using or planning to implement a framework that can be considered as a positive neutral CCyB rate. Source: ESRB, websites of national authorities. Source: MNB

In the EEA countries, the so-called positive neutral application of the capital buffer, independent of the increase in cyclical risks, is also becoming increasingly common (Positive Neutral Rate of CCyB, PNR CCyB). In this case, the CCyB rate to be used is a combination of a cyclical CCyB rate, which is dependent on the overheating risk, and a so-called positive neutral rate of CCyB, which is determined in a ”normal” risk environment, i.e. also in a period without cyclical overheating risks. A positive neutral rate of CCyB is thus not only aimed at addressing the cyclical systemic risks that characterise the overall operation of the financial system, but also support the macroprudential counterbalancing of a potential macroeconomic shock. The aim of a positive neutral ratio of CCyB is therefore to ensure that authorities have sufficient capital buffers available to be released in the event of unforeseen shocks from outside the financial system, such as the coronavirus pandemic or the Russo-Ukrainian war.

Currently, 15 EEA countries apply a positive neutral or similar so called early-build-up CCyB framework, with 0.5 to 2.5 per cent, but in our region most often with 1 per cent positive neutral CCyB-rates (Chart 4). In the CEE region, the Baltic States, the Czech Republic and Slovenia have a positive neutral CCyB rate of 1 per cent, Poland 2 per cent, while the Nordic countries have higher rates of 2–2.5 per cent.

Chart 4: Applied positive neutral CCyB rates in the EEA countries (July 2024)

Note: Countries using or planning to use positive neutral CCyB or an ”early CCyB build-up“ similar to positive neutral CCyB (indicated by the pattern filling in the map). In Norway, authorities are targeting the upper half of the CCyB rate range of 0–2.5 per cent, without setting a numerical minimum. In Cyprus, the target is a CCyB rate above 0.5 per cent, but no numerical minimum rate has been set. Source: ESRB, websites of national authorities.

In its June 2022 rate review, the MNB decided to activate the CCyB rate applicable to domestic exposures at a level of 0.5 per cent. In view of the easing of cyclical systemic risks and the risks associated with the overvaluation of the housing market, it was postponed by one year at the June 2023 rate review to 1 July 2024.

In June 2024, the MNB decided to implement the positive neutral CCyB framework in Hungary as part of its review of the strategy and methodology for the application of the CCyB. Domestic cyclical systemic risks have remained low over the past year as lending activity has declined. However, the level of geopolitical and macroeconomic uncertainty remains high, calling attention to the importance of maintaining a strong banking system capital position and of building-up capital buffers. In addition, the current record level of bank profitability will allow credit institutions to accumulate capital more intensively. Against this background, and also in the light of the recommendations of international institutions on the build-up of capital buffers, the MNB, following the extending European practice, decided on the domestic application of the positive neutral CCyB framework and, accordingly, on the renewal of the CCyB strategy and methodology.

Under the new framework, a positive neutral rate of 1 per cent has been set for a neutral risk environment that is not yet characterised by excessive cyclical risk. The requirement will enter into force on 1 July 2025 and will be a minimum requirement in future non-crisis periods. The MNB may set a requirement of over 1 per cent depending on the evolution of cyclical systemic risks in its quarterly rate decisions, with the higher of the rate reflecting cyclical systemic risks and the positive neutral rate of CCyB of 1 per cent becoming applicable (Chart 5). In the event of a stress situation, the MNB will decide on the need to release the entire required capital buffer. The introduction of the new framework will therefore allow the banking sector to hold a capital buffer in non-crisis periods of at least 1 per cent of the domestic risk exposure value that can be released in a crisis situation, regardless of the state of the financial cycle.

Chart 5: The operation of the Hungarian CCyB framework

Source: MNB

Given the current strong capital position of banks, imposing a higher capital buffer would not impair the lending capacity of institutions and would not lead to a significant increase in interest rates. Based on the capital position as of 30 June 2024 and considering the imposition of the CCyB at the level of 1 per cent as from 1 July 2025, and assuming that all other factors remain unchanged and considering the uncapitalised interim profits, banks have a HUF 2,157 billion of free capital at their disposal at sector level (Chart 6). The total use of this could allow for the disbursement of household and corporate loans in the amount of around HUF 26,000 billion, assuming that the household and corporate exposure ratio and average risk weight of individual banks are fixed, and that the TREA increase could be achieved by using the free buffer. Based on this, bank resilience can be strengthened by increasing the capital buffer requirement without any current negative lending effects. In addition, even in the case of an actual capital injection, the increase in the capital buffer would not lead to a material increase in costs for banks, and thus would not lead to a material increase in interest rates. The interest rate increase of a 1 per cent PNR CCyB requirement for a mortgage loan with a 35 per cent risk weight and a 12 per cent cost of capital could be in the order of 0.04 per cent on average.

Chart 6: Development of macroprudential capital requirements and the capital position

Note: Estimation focusing only on the change in the combined buffers, disregarding other additional regulatory capital requirements affecting the free buffers (e.g. possible change in Pillar 2 capital, P2G, etc.) and the MREL requirement, as well as the expected change in lending and profitability. Profit not taken into account: part of the mid-year or year-end profit that cannot be taken into account. Source: MNB

Household over-indebtedness cannot be identified in the first half of 2024, even with increasing lending activity. The temporary increase in the income burden of new borrowers has discontinued and started to decline again as the interest rate environment normalised. At the same time, since early 2023, the encumbrance of mortgage collaterals has been rising again, but without excessive risk-taking. Over the past year, the MNB has intensified its review of (1) the financial stability implications of the reviving credit growth as the interest rate environment normalised, (2) the use of the LTV limits for first-time home buyers available from January 2024, (3) the possible unintended effects of the borrower-based measures, (4) and the scope for further, in particular green, improvements to the rules.

In the first half of 2024, a strong recovery in household lending activity, which was depressed by the inflation shock, can be witnessed. In 2024 H1, banks provided HUF 1,240 billion in retail loans, which is nominally the same as in 2021 H1, before the inflation shock (Chart 7). Regarding household mortgage lending, although still below the record levels of 2022 before the inflation shock, the growth rate of lending in 2024 H1 was particularly strong compared to the same period of the previous year, reaching an increase of around 150 per cent. The strong growth is explained by the normalisation of the interest rate environment and macroeconomic outlook, the materialisation of deferred loan demand, the increase in average loan amounts and the low base of the previous year. Regarding consumer credits, lending growth remained moderate, rising 34 per cent in 2024 H1 compared to the same period of the previous year.

Chart 7: The development of new household lending by loan type

Note: Credit institution sector. Without individual entrepreneurial loans. Source: MNB

Apart from the technical effect of the state-subsidised CSOK+ schemes, fixed-rate loans continue to dominate new mortgage lending for housing. The weight of floating rate home loan products in new loan disbursements has been negligible due to the impact of a number of MNB measures since the end of 2018, the increase in early 2024 being explained by the pricing methodology of the interest rate subsidy for CSOK+ loan schemes, which does not impose any real interest rate risk to borrowers (Chart 8). The cessation of new variable-rate loan products has also greatly accelerated the amortisation of the remaining portfolio, reducing the share of variable, non-subsidised interest rate mortgages in the total bank mortgage portfolio to 13 per cent by 2024 Q2.

Chart 8: The development of new residential mortgage lending according to interest rate fixing

Note: Loans from credit institutions, without individual entrepreneurial loans. Source: MNB

The share of housing loans with a high income burden is on the decrease with the normalisation of the interest rate environment, but the burden of collateral increases. The volume of household loans, which is clustered around the debt-service-to-income ratio (DSTI) limits, is gradually declining as the interest rate environment eases, especially in the case of housing loans. While in 2023, banks disbursed almost 33 per cent of housing loans at a high DSTI of over 40 per cent, this fell slightly to 32 per cent by the end of 2024 H1. The decreasing level of DSTI exposure on a volume basis may be explained by the increase in lending at lower DSTIs, which is confirmed by the fact that the DSTI distribution by number of contracts does not show a significant change compared to the trend of recent years (Chart 9). In terms of collateralisation, the weight of housing loans with a low down payment, or a loan-to-value ratio (LTV) of more than 70 per cent in new loan disbursements increased to 32 per cent by 2024 H1, compared to an average of 24 per cent in 2023. The increase in the collateral encumbrance can be explained by the decreasing income burden induced by the normalisation of the interest rate environment, the rising house prices, the growth of credit-financed home purchases, the reduction in non-refundable state subsidies, the shift towards interest-rate subsidised schemes, and to a lesser extent the more favourable LTV limit for first-time home buyers introduced in January 2024. However, the currently visible LTV values correspond to the level preceding the inflation shock, so the increase in the collateral stretch indicates a renewed strengthening in lending and does not point to a significant increase in risk exposure.

Chart 9: The development of new residential mortgage lending near borrower-based measures limits based on the number of contracts

Note: Overlap is possible between loans granted with a DSTI above 40% or with an LTV above 70%. The most typical effective DSTI and LTV limits. Source: MNB

Online lending is gaining ground. Full online lending is more common for uncovered loans, mainly personal loans, commodity loans and, to a lesser extent, prenatal support loans. In 2024, the share of fully online loans increased significantly, from 18 per cent in 2023 Q4 to 32 per cent in 2024 H1. This is mainly due to the increase in fully online, often pre-approved, personal loan disbursement, where the share rose from 29 per cent to 41 per cent. The increase in demand resulting from the growth in the availability of personal loans online may also have contributed to a smaller decline in the personal loan market compared to the housing loan market over the past year and a half.

Table 1: Main attributes of personal loans granted online and traditionally (2024Q1-Q2)

Note: Credit institution sector. Source: MNB

There is no evidence of the excessive accumulation of risks in the case of online lending. In 2024 H1, the average maturity of fully online personal loans was 5 years, one year shorter than that of traditional loans. The average APRC for online loans is 23 per cent, which is 4 percentage points higher than for loans that are not fully online, probably due to the smaller amounts and a shorter maturity (Table 1). There is no significant difference between the two types of loans in terms of average loan amount, income and DSTI, therefore online loans do not pose a higher risk but can increase bank efficiency. There are no significant differences between settlement types of borrowers’ residence in the share of personal loans disbursed online.

Overall, household lending has a healthy structure, complying with the borrower-based measures, denominated in forints, with interest rates fixed over a longer period. The income and collateral stretch of borrowers do not indicate any signs of over-indebtedness.

The MNB has introduced a higher 90 per cent loan-to-value (LTV) limit for first-time home buyers as from 1 January 2024, which is now applied by the majority of major housing loan providers. The share of loans with LTV limits above 80 per cent still accounted for only 2.6 per cent of all residential mortgage lending in 2024 H1, compared to the 12 per cent within borrowers who had claimed to be first-time home buyers and are eligible to higher LTV limits. The share of loans with LTVs between 80–90 per cent increased gradually over the six-months period, accounting for more than 4 per cent of total monthly lending by volume in June. However, higher LTV limits for first-time home buyers are also likely to have increased the amount taken by borrowers for higher but below 90 per cent LTV housing loans due to the often lower internal limits applied by institutions compared to regulatory limits. This is confirmed by the fact that the share of loans with 70–80 per cent LTV that do not directly utilise first-time home buyer limits also increased by about 6 percentage points compared to the previous year (Chart 10), while the LTV distribution did not change significantly for loans with lower collateralisation. Also for first-time home buyers, the share of housing loans with an LTV of between 70–80 per cent increased by nearly 6 percentage points compared to the previous year. At the same time, housing loans with higher LTVs are not coupled with higher DSTI, so borrowers are not considered to be under a tight income squeeze, and consequently, given the limited volume of total residential mortgage lending and the expected lower credit risk of the affected customers, the more favourable first-time home buyer limit introduced does not entail excessive systemic risk.

Chart 10: LTV distribution of new mortgage lending placements by volume*

Source: MNB

Based on data from the first half of the year, the first-time home buyer LTV requirement could have been a significant support for young borrowers with low down payment, but having sufficient income to achieve their housing goals. Based on 2024 H1 housing loan data, middle-income households account for the majority of first-time home buyer LTV limit users (Chart 11, left panel, share of HUF 600–900,000), and there is no significant strain in the distribution of these borrowers by DSTI, as the share of high DSTI borrowers did not increase even with the higher LTV limit (Chart 11, right panel). Among first-time home buyers, there is a higher share of those with no previous loans (either housing or other), and therefore their income squeeze is lower, which contributes to the lower DSTI level. In addition, there is no significant difference in the territorial distribution between the different types of settlements, therefore the higher LTV limit supports first-time home buyers’ access to housing loans without significant territorial differences. Overall, the LTV requirement for first-time home buyers could provide opportunities for wider access to the credit market without substantially increasing credit risks.

Chart 11: The evolution of new mortgage lending by LTV and contract income (left panel) and by DSTI and income (right panel)

Note: 2024 H1 data Source: MNB

No significant increase has been seen in the financing of the down payment through unsecured borrowing. The share of personal loans disbursed 180 days prior to taking out a housing loan, which is likely to finance the down payment or the associated costs of home purchase, is stable at 3–4 per cent of residential mortgage lending from 2020 H2, compared to the 7–8 per cent seen in the preceding period (Chart 12). The decrease was triggered by the MNB’s executive circular issued in 2019 for institutions as a guidance for the assessment of own contributions (available in Hungarian only) and the prenatal baby support loans available from 2019.

Looking forward, customer demand for financing the down payment with uncovered personal loans may be moderated by higher LTV limits for first-time home buyers. On the other hand, the tightening of the amount of non-reimbursable state subsidies, the increase in the amount of subsidised loans available and the narrowing of the eligibility criteria for state subsidised loans could lead to an increase in the amount of housing loans and an increasing usage of the portfolio-level limit as defined in the Executive Circular, closely monitored by the MNB.

Chart 12: Estimated development of personal loans used to finance down payment

Note: The ratio of mortgage lending by contract number within the disbursement of each LTV category, for which the principal debtor took out a personal loan as well maximum 180 days before the conclusion of the mortgage contract. Without prenatal baby support loans. Source: MNB

There is no significant shift towards longer-term loans by borrowers with a high income burden. Borrowers can also adjust to high repayments by extending the maturity, which may be caused by increasing instalment payments in the recent high interest rate environment and the temporarily intensifying braking effect of the DSTI requirement. As a result of the rise in interest rates from 2022 H2, the average maturity of income-stretched housing loans with a DSTI above 40 per cent increased relative to those with a lower DSTI, with the observed maturity difference peaking at 4.5 years in 2023. In 2024, however, as the interest rate environment normalises, the spread between average maturities has also narrowed and appears to stabilise at around 3.5 years (Chart 13). However, the average maturity is not considered risky even for the 20 years typical of financially squeezed customers. No significant maturity extension was observed for consumer loans.

Chart 13: Average term according to DSTI and loan type

Note: 2024 H1 data.

From January 2025, the MNB will also support the introduction of green home loan products and increase consumer demand for green collateral and loan purposes through the green differentiation of borrower-based measures. In order to facilitate the bank financing of green real estates, the MNB decided to apply more favourable borrower-based limits for green collateral and loan purposes as of January 2025, based on the conditions of the Green Preferential Capital Requirement Program (Table 2; for a more detailed analysis of the green borrower-based requirements, see Chapter 10.):

• The LTV limit is increased from the standard 80 per cent to 90 per cent.
• The DSTI limit will be increased to 60 per cent for forint loans with an interest rate fixation period of at least 10 years, regardless of income.

Table 2: The proposed LTV and DSTI limits after the introduction of the green amendments

Source: MNB

Source: MNB

The legal requirement for Liquidity Coverage Ratio (LCR) is met by banks with significant and stably developing buffers. The liquidity-providing effect of interest income on deposits with the central bank and the growth of deposits in excess of credit growth continued to play a crucial role in the evolution of the sectoral LCR over the past year. Strengthened LCR requirements by the financial supervisory authority, also responding to increasing interest rate risks and international bankruptcy events, have also substantially strengthened prudent liquidity management. The Net Stable Funding Ratio (NSFR) requirement is met by the banking system with significant and gradually increasing surpluses of funding, in an internal structure characterised by a stable growing share of capital-type liabilities and retail deposits.

The LCR of the banking system is stable at around 170 per cent, with significant free buffers. After a steady increase in 2023, the sectoral LCR calculated on individual compliance stabilised at over 170 per cent in the first half of 2024 (Chart 14). Over the period covering the second half of 2023 and the first half of 2024, all banks achieved LCR levels above 140 per cent, typically with a strengthening liquidity, in line with overall liquidity, deposit and lending trends.

Chart 14: Development of institutions’ LCR

Note: The chart shows the first and ninth deciles, the first and third quartiles and the average. Excluding mortgage banks and housing savings banks, based on solo compliance data. Source: MNB

Overall, there was no change in the factors determining the evolution of the LCR and its long-term structural change. Liquid assets of the banking system increased for most of the past year, mainly due to the accumulation of liquidity deposited with the central bank and the revaluation effect of eligible collateral, mainly government bonds. The composition of the liquidity deposited with the central bank, which mainly affects liquid assets, also changed somewhat in the first half of 2024, as the simplification of the central bank’s toolkit in October 2023 allowed banks to tie up their unused funds in the central bank’s reserve account and in discount bonds. The steady increase in the LCR came to a halt in mid-2024 as cautious credit outflows began and autonomous factors affecting banking system liquidity (changes in the State Treasury Account balance, cash development) took hold. However, available liquidity remains ample. The increase in net outflows was explained by a substantial increase in deposits related to real wage growth and government bond interest payments, which was not followed by a change in inflows related to changes in lending.

The uncommitted liquidity available in the actual liquidity position is significant and developing stably. The banking system’s Operational Liquidity Reserve (OLR), supplemented by the amount of the central bank’s minimum reserve requirement, remains ample despite a slight decline. OLR averaged nearly HUF 21 thousand billion in July 2024, covering around 70 per cent of the private sector’s deposits. The increase in the liquidity reserve over the past year was explained by the liquidity-expanding effect of interest received on the high liquidity deposited with the central bank, the increase in the portfolio of eligible assets due to the revaluation effect, and the expansion in the portfolio of retail deposits, which has outpaced the growth in loans since end-September 2023, mainly seen in the retail deposit portfolio. The slight decline in the banking system’s liquidity reserve, mainly from the second quarter of 2024, was caused by the factors already referred to, which also affected the evolution of the LCR, with a reduction in liquidity on the reserve account.

The EU-wide NSFR requirement for long-term stable funding is met by banks with significant and growing surpluses. Banks have complied with the requirement that has a 100 per cent minimum level with a ratio of 135 per cent by the end of June 2024, up from 128 per cent last year, based on individual compliance at sector level. The sector-level stable funding surplus increased by HUF 2,800 billion, or 30 per cent, by 30 June 2024, reflecting a 9 per cent increase in the banking system’s stable funding, while required stable funding increased by only 3 per cent. The overwhelming majority of large banks had a surplus of funding above the safe buffer level of 25 percentage points (Chart 15), while small banks tended to have smaller stable funding surpluses.

Chart 15: Development of institutions’ NSFR

Note: Bottom and top deciles (vertical lines), bottom and top quartiles (light blue bars), and median values (average and median). The NSFR entered into force on 28 June 2021 (green shading), estimated data beforehand. Based on individual bank compliance data. Source: MNB

The change in the sector-level NSFR has also been favourable in terms of the internal structure of the available stable funding. Over the past year, credit growth has expanded, while the decline in liquid assets has reduced the overall moderately increasing stable funding requirements. Among stable funding, which grew more strongly and in all major item groups, liabilities arising from equity items and instruments, which can be largely traced back to extraordinary profitability, as well as in operational deposits and liabilities that cannot be identified in terms of other partners, expanded above the average. Retail and corporate funding of stable deposits grew close-to-average, showing an almost equal growth.

The MNB’s additional LCR liquidity requirements under its 2023 supervisory powers have been effective in increasing shock resilience. In the August 2023 Management Circular (available in Hungarian), the MNB informed banks of the additional supervisory requirements expected from banks in relation to the LCR, which institutions had to comply with by the end of 2023. As a result of the higher Pillar 1 MNB requirements to maintain a more stringent 140 per cent LCR, strict liquidity management, and the Pillar 2 large deposit buffer requirement, which is dependent on the deposit concentration level, both sector-level and individual LCR-levels have increased and there have been essentially no institutions below 140 per cent on a continuous basis. As a result of the Pillar 2 additional liquidity requirement, by 30 June 2024, some HUF 1,100 billion of excess liquidity emerged, with 70 per cent of individual banks having such a requirement. Typically, however, this requirement was a substantial additional requirement for smaller banks compared to total outflows. Considering the Pillar 2 surplus requirement, the overall LCR at sector level is about 17 percentage points lower. (Chart 16).

Chart 16: Sector-level LCR with the Pillar 2 requirement

Note: Sectoral averages calculated according to individual compliance. Source: MNB

The banking system’s short-term external debt to total assets ratio and the related external vulnerability is low by historical standards. The requirements do not hinder the continuation of sustainable lending activity, as the elements of the macroprudential toolkit targeting external, foreign exchange and interbank financial risks are met by the banking sector with safe buffers. The requirements consisting of three instruments, which also reduce short external vulnerabilities, have been fine-tuned by the MNB from 1 October 2024 to support the functioning of institutions that enter the market or are small and do not pose a systemic risk.

The banking system’s short external debt to total assets ratio and related external vulnerability is low by historical standards. The previous concentrated growth in the banking system’s short-term external liabilities was reversed in the past year as monetary conditions eased. However, there was no material change in the degree of vulnerability relative to total assets, as the previous increase in the portfolio also took place against a material increase in the balance sheet total. At the end of the second quarter of 2024, the domestic banking system’s outstanding short-term external debt stood at EUR 10 billion, representing 5.1 per cent of the banking system’s balance sheet total, up  by 0.4 percentage point year-on-year. This is still close to the historical minimum, 2 percentage points higher, but significantly lower than the historical maximum in 2010, at 13.3 percentage points (Chart 17). Short-term external debt remains concentrated institutionally, fluctuating with intra-group transactions of the banking groups concerned, with a relatively low level of risk.

Chart 17: Development of short-term debt of the banking system

Note: Credit institutions sector, including EXIM, MFB and KELER data. Historical minimum calculated from 1998 Q1. Data for 2024 Q2 are estimated from reports of balance of payments statistics. Source: MNB

The elements of the macroprudential toolkit targeting the external, foreign exchange and interbank financial risks of the banking system are met by the sector with safe buffers. Banks have substantial room for manoeuvre to comply with the regulatory requirements for country-specific vulnerabilities, which are applied domestically to complement the EU-level Basel liquidity funding requirements (Chart 18). Substantial and stable buffers over time provide sufficient space to ensure safe and sustainable operations and to maintain lending capacity.

Chart 18: Compliance of the banking sector with financing requirements decreasing domestic external vulnerability

Note: Data as of 30 June 2024. The ends of the blue rectangle are the lower and upper quartiles, the ends of the dark blue line are the 10th and 90th of the distribution. Source: MNB

Banks are meeting the regulatory minimum requirement for the Foreign Exchange funding Adequacy Ratio (FFAR) in a stable manner, with a significant stable funding surplus. The sector-level indicator was at historically high levels over the past year, reaching 163 per cent at the end of June 2024. The improvement in the FFAR recently was mainly driven by an increase in the ratio of foreign currency liabilities outstanding with a remaining maturity of over one year to stable liabilities. This more than covered the increase in corporate foreign currency lending and the decrease in foreign currency deposits with no maturity and short-term household and SME foreign currency deposits, as well as non-financial corporate foreign currency deposits (Chart 19).

Chart 19: Development of asset and liability groups and financing indicators requiring and providing stable foreign currency financing

Note: Based on unweighted items of the FFAR. A temporary tightening was in effect between March and September 2020. A: assets, L: liabilities Source: MNB

The banking system’s on-balance-sheet foreign exchange surplus declined, but the sector average level of the Foreign Exchange Coverage Ratio (FECR) still remained within the allowed limits of -30 to 15 per cent, and at a safe distance from the thresholds. The foreign exchange surplus on the banking system’s on-balance sheet shrank substantially, as household and corporate foreign currency deposit holdings and non-bank corporate foreign currency liabilities declined significantly following the phasing out of interest rate caps, and foreign currency lending increased moderately. At the end of June 2024, the average FECR level in the sector was -5.5 per cent, with around HUF 3.5 thousand billion of open on-balance sheet FX positions (Chart 20). Thus, the off-balance sheet forint FX swap exposure, which was mainly required for on-balance sheet flows, has also been reduced, mitigating the excess forint liquidity. The market, counterparty and liquidity system risks associated with swap market exposures may also have fallen as the net FX swap position was also adjusted.

Chart 20: On-balance sheet open FX position and net FX swap position

Note: A negative FX swap position is a forint FX swap position. Source: MNB

The sector-wide reliance on riskier corporate funding remained stable at a low level, well below the 30 per cent maximum permitted by the interbank funding ratio (IFR) requirement. At the end of the second quarter of 2024, the sector-level average stood at 9.2 per cent, showing a slight increase compared to the same period last year. (Chart 21). Most banks, including the big ones, comply with the requirement with significant buffers. Larger branches continue to have the highest and most volatile ratios due to concentrated intra- and extra-group transactions. On the one hand, the share of funds of higher risk targeted by the IFR in corporate finance increased moderately in the past year, i.e. the share of exempted special funds with a lower risk decreased. On the other hand, within the funds counted by the IFR, the proportion of more volatile short-term exposures, including those in forint, increased, which was reflected in a smaller increase in the indicator due to higher weights. However, despite a small, unfavourable internal structural shift, the reliance on financial corporate liabilities does not show any significant vulnerability due to the relatively low level of total financial corporate funds.

Chart 21: Development of the banking system’s funds from financial corporations targeted by IFR

Note: Gross unweighted funds from financial corporations. Gross IFR represents the unweighted financial corporate funds targeted by unweighted IFR compared to the total funds. Exempted funds: mortgage-backed funds, loans received from special institutions, funds from foreign branches of credit institutions, bonds with a maturity exceeding 2 years at the time of issue, balances of margin accounts, additional capital portfolio, funds received from credit institutions belonging to the group (not from the parent company), financial derivatives within the fair balance source side value. Source: MNB

Small banks and branches that enter the market or do not pose a systemic risk are exempted from macro-prudential funding requirements aimed at short-term external vulnerability under a certain size limit. From 1 October 2024, banks and branches that do not exceed the de minimis balance sheet total limit of HUF 100 billion will no longer have to comply with the FFAR, FECR and IFR requirements. In the case of IFR, such an exemption already existed previously, but for a smaller balance sheet total of HUF 30 billion, while there was no such limit for the other two requirements. New institutions may face initial compliance problems with funding requirements, and smaller banks and branches that do not pose a systemic risk may also face excessive compliance burdens, so it was appropriate to reconsider the provisions. The new de minimis threshold provides an opportunity, initially, to reduce undue regulatory burdens on smaller institutions without increasing systemic risks, by regularly reassessing the effectiveness of the limit and revising it as necessary.

Thanks to the easing, the segment with a combined market share of 0.3 per cent of the sector-level balance sheet total is exempted, which represents a negligible risk to financial stability. Based on the balance sheet data as of 30 June 2024, the institutions that are exempted from meeting the requirements as a result of the amendment, account for around 0.3 per cent of the sector-level balance sheet total. The supervisory requirements and macro-prudential standards on capital and liquidity adequately address the main risks in the business models of the small institutions concerned. However, the MNB will continue to monitor developments in the macroprudential funding indicators based on the relevant data reporting requirements maintained for all banks.

Banks comply with the Mortgage Funding Adequacy Ratio (MFAR) requirement by providing safe buffers. Over the past year, we have seen a gradual increase in the overall portfolio of mortgage bonds, including green mortgage bonds, and the launch of the first foreign currency issues, which also mitigates potential concentration risks by supporting ownership diversification. Following its earlier regulatory relief measures, the MNB has postponed the green requirement for new foreign currency mortgage-backed liabilities for an indefinite period, which was originally due to come into force on 1 October 2024, in view of the still unfavourable mortgage-backed securities market conditions, the administrative time needed for foreign currency issuance, the large portfolio of mortgage-backed securities maturing and due for renewal, and the slow build-up of green collateral in sufficient volumes. A move to support the growth of foreign currency bond issuance could also help to utilise the financial stability benefits of investor diversification.

The MFAR requirement is met by the vast majority of banks and by the sector as a whole, with significant buffers. The MFAR banking system average stood at 31.7 per cent on 30 June 2024, at almost exactly the same level as a year earlier (Chart 22). There are differences in the MFAR compliance of individual banks, but still substantial buffers are visible. Banks that are somewhat closer to the 25 per cent minimum regulatory limit can still meet the requirement securely due to the predictability of the requirement, which depends on the maturity of mortgage bonds (and the related refinancing), new issuance and the evolution of the loan portfolios, i.e. on fundamentally non-volatile balance sheet items.

Chart 22: Development of MFAR compliance

Note: The chart shows the first and ninth deciles, the first and third quartiles and the average. Source: MNB

Over the past year, we have seen a gradual increase in the total portfolio of mortgage bonds, including green mortgage bonds, and the launch of the first foreign currency issues, which has also shifted the ownership distribution in a positive direction. Growth was also supported by the MFAR regulation and the possibility of renewing mortgage bonds with the central bank. As of 31 June 2024, there were HUF 2,079 billion of Hungarian issued mortgage bonds in the market at face value, of which HUF 258 billion (12.4 per cent) were green forint mortgage bonds and HUF 198 billion (9.5 per cent) were non-green foreign currency mortgage bonds. Thus, all banks have now issued green mortgage bonds, but the issuance of foreign currency mortgage bonds has so far been limited to one bank. These changes could also strengthen ownership diversification, as the participation of domestic non-bank institutional investors in green stocks increased, while the participation of non-resident entities in foreign currency stocks also increased (Chart 23).

Chart 23: Development of the stock of domestic and green mortgage bonds in circulation according to ownership sectors

Note: Data at face value. Source: MNB

Under the current, unfavourable market conditions,  given the significant maturing mortgage bond stocks and the gradual recovery of the mortgage loan portfolio, maintaining MFAR compliance may be challenging for some institutions in the period ahead. In the remainder of 2024, HUF 305 billion of mortgage bonds, representing 15 per cent of the total stock, and in 2025, HUF 269 billion of mortgage bonds, representing 13 per cent of the total stock, will mature, creating a substantial issuance need (Chart 24). In 2024 and 2025, taking into account the estimated growth of mortgage loan portfolios, a minimum issuance of around HUF 420 billion may be essential to maintain MFAR compliance for issues without green rating and a minimum issuance of around HUF 280 billion for green issues. If the aim is to maintain the current level of MFAR buffers, issuance of HUF 789 billion or HUF 526 billion may be required, depending on whether green or non-green mortgage bonds are issued.

Chart 24: Issuance needs of mortgage banks in 2024-2025

Note: Estimate based on MFAR compliance data as of 30 June 2024. Taking into account the predicted increase in loan portfolios in the denominator of MFAR. In the case of the issuance need, adaptation needs emerging at other banks through refinancing relationships also appear. Source: MNB

As the momentum and fundamentals of mortgage bond market developments are not currently favourable, a wait-and-see approach to further regulatory tightening is justified, and even a postponement of previously planned tightening was necessary. Given the current uncertainties, expected returns remain high, albeit moderately declining (Chart 25). This will keep mortgage-based funds more expensive compared to other available funds, such as retail deposits. In addition, the build-up of the corresponding credit portfolio, mainly green, will only start gradually. For these reasons, the MNB may decide on the potential timing of the previously planned MFAR tightening in the future, depending on the normalisation of the economic and financial market environment.

Chart 25: 3- and 5-year domestic mortgage bond and government bond market yields

Note: BMBX: mortgage bond market index; 3Y, 5Y: 3 and 5 year terms. Source: MNB

Green issuance can meet the regulatory requirement at a lower cost, but its main limitation, and in particular the limitation of issuance in the quantity required for foreign currency mortgage bonds, is the lack of sufficient free green collateral and the slow pace of its build-up. Following a significant drop in the lending activity in 2023, mortgage lending is currently showing a substantial pick-up. At the same time, the amount of green loan assets already built up and not yet encumbered remains limited, preventing the issuance of large series of green mortgage bonds. Thus, for all banking groups, and in particular for a potential large volume of green foreign currency mortgage bond issuance, there are significant challenges in accumulating the necessary loan portfolio with sufficiently high energy efficiency backing for green mortgage bond issuance. We estimate that around HUF 180 billion of green mortgages could be available for further green issuance, with different proportions available per bank. As the green mortgage bonds, typically issued in 2021–2022, are not expected to mature in the near future, this way there is no ”released” collateral either. Another obstacle remains the lack of availability of energy data on the collateralisation of existing loan portfolios by banks.

The MNB has postponed for an indefinite period the green requirement for new foreign currency mortgage-backed liabilities eligible for the MFAR since 2022, which was previously postponed by one year and will enter into force on 1 October 2024. In view of the uncertain conditions in the mortgage bond market, the administrative difficulties and time requirement for foreign currency issuance, the large stock of maturing and renewable mortgage bonds, and the challenges of building up green collateral in sufficient volumes, the MNB considered the postponement justified. The investor diversification that comes with an increase in foreign currency issuance can bring significant financial stability benefits in terms of stable funding, which can only be leveraged, given these constraints, by postponing the green requirement under the current market conditions.

The 2024 Annual Periodic Review of the MNB classified again the same seven banks as in previous years to be domestic (Other Systemically Important Institutions – O-SIIs). Systemically important banks have to comply with the individual buffer rate target levels from 2024 on, this concludes the gradual rebuilding of the buffers following the release introduced at the start of the coronavirus pandemic has come to an end. The relatively modest change in the systemic importance and concentration of O-SII banks in the past year, mainly due to the foreign acquisitions of OTP Bank Plc, did not justify any change in buffer rates.

Under the identification process for 2024, the same seven groups of banks as last year had been classified as other systemically important credit institutions. During the latest regular identification of Other Systemically Important Institutions (O-SIIs) headquartered in Hungary in 2024, the MNB continued to use the same measurement of systemic importance as in previous years, based on the aggregation of the EU-harmonised core indicators and the added optional domestic indicators. Using the audited data as of 31 December 2022, the MNB thus reviewed the O-SII scores representing systemic importance, which, as in previous years, exceeded the 275 basis point threshold for systemic importance for seven banking groups (Chart 26).

Chart 26: Components of the scores of other systemically important institutions and their final buffer rates

Note: The scores shown are the results of the 2023 review. The horizontal blue line indicates the standard 350 basis points in the EBA Guidelines, while the red line indicates the domestic threshold level above which a bank can be rated O-SII, reduced to 275 basis points in 2020 as permitted by the EBA Guidelines. Source: MNB

Given the stability of the scores and market concentration of O-SII banks and their adequate capital position, the two-year gradual re-introduction of buffers has reached the targets by 2024. As in previous years, the distribution of scores measuring systemic importance does not show a significant shift and has proved to be stable (Chart 27). The overall market concentration of major banks continued to increase slightly compared to previous years (8,087 basis points). The more stable components of the scores, primarily size-related balance sheet totals and real economy loans outstanding, expanded significantly during 2022, which year forms the basis of the 2024 identification exercise, with an average yearly growth rate of over 10 per cent for O-SII banks. This increase was relatively steady and did not significantly restructure the relative position of the banks concerned. Of OTP Group’s acquisitions, only the Albanian one was completed in 2022, with the larger Slovenian and Uzbek expansions expected to show up in the systemic importance scores in 2024, while the sale of the Romanian subsidiary will only have a longer-term impact. In comparison with the more stable components, the more volatile financial market and interbank indicators often cause only temporary variance in scores. Still, a shift with structural characteristics in terms of the indicator of outstanding debt securities continued, with the issuance of bonds required to comply with MREL requirements. Relative positions have become more balanced as more O-SII banks made large issuances. O-SII buffer compliance required banks to hold a HUF 627 billion of capital at the end of 2024 Q1, while operating with a substantial voluntary capital buffer of nearly HUF 1,856 billion, although there are significant individual differences. important-SII banks continued to operate with high voluntary capital buffers of HUF 1,873 billion at the end of 2024 Q2 (see Chart 5 at the banking system level). Individual voluntary buffer ratios typically improved or remained at favourable levels compared to the same period of the previous year. The O-SII buffers, which have reached their final value by 2024, required around HUF 639 billion of capital at the same time. Overall, the stable capital positions and profitability will continue to provide the opportunity to maintain lending capacity.

Chart 27: Changes in the scores of other systemically important banks

Note: The years indicate the validity period of the scores, the scores are calculated by the MNB on the basis of the audited data provided by December 31 of the antepenultimate year. Source: MNB

Macro-prudential monitoring also follows closely the systemic risk contribution of systemically small but rapidly expanding medium-sized banks. The banking system stress experienced in the US in the spring of 2023, triggered by medium-sized US credit institutions, has again highlighted that smaller institutions can trigger a confidence crisis, financial information contagion and may require the intervention of monetary, deposit insurance and prudential authorities, even though their systemic footprint falls short of the impact of the largest systemically significant players.1 In particular, institutions that operate with similar business and funding models and portfolio segmentation (e.g. US commercial real estate lenders) may be affected. In the Hungarian market, the annual growth rate of significance scores among banks other than institutions identified as O-SIIs has shown a noticeable and concentrated increase in recent years. The concentrated expansion was reflected in indicators describing both payments, deposits and interconnectedness, as specialised service provision increased in some systemically important activities, for example through the development of digital channels or as the partner institution of specialised state credit institutions (Table 3). Interconnectedness with non-bank financial institutions is also expanding through their expansion with subsidiaries. Although the significance of these banks remains limited and their score is still considerably below the country-specific, tightened 275 basis points O-SII identification threshold, nonetheless the MNB monitors their increasing contribution to systemic risk from a macroprudential perspective.

Table 3: Some indicative indicators of the expanding activities and specialised business models of the domestic credit institutions that do not qualify as O-SII

Note: Credit institution branches operating on the domestic market are not included in the non-O-SII domestically based credit institutions

The risks associated with commercial real estate lending in Hungary are currently considered to be moderate. At the same time, in view of their potential increase, the MNB decided in June 2023 to reactivate the Systemic Risk Buffer (SyRB), which was suspended in the wake of the coronavirus outbreak, in a revised form for preventive purposes, the final terms of which were announced in October 2023. As a result of the low risk levels and the portfolio screening measures taken by some banks following the announcement of the reactivation of the SyRB, no banks were prescribed to maintain an effective capital buffer requirement from 1 July 2024.

The commercial real estate market still shows low but increasing cyclical and structural risks. In the commercial real estate market, vacancy rates have risen substantially for both Budapest office and industrial/logistics properties, but are still not historically high, while further increases are expected (see more in Commercial Real Estate Market Report). At the same time, investment turnover in 2023 was 38 per cent down on the previous year, and capital values in the Budapest office market fell by 9 per cent in one year, reflecting the rise in prime yields. The rising commercial real estate market risks are mitigated by the credit institutions’ moderate exposure through project loans and the adequate portfolio quality of the project loan portfolio (Chart 28). Looking ahead, however, risks may increase substantially as a result of the still uncertain macroeconomic outlook, new supply coming to the market in the near future, and structural changes in the commercial real estate market (e.g. the escalation of online shopping and the demand for flexible office leases, ”rightsizing“, the focus on sustainability in the decisions of both tenants and investors).

Chart 28: The evolution of outstanding commercial real estate project loans

Note: Data before June 2023 based on L70 reporting, relating to domestic and foreign exposures, while after June 2023 based on transaction level data according to HITREG. Therefore, the different periods can only be compared to a limited extent due to modifications affecting data content and calibration. The ratio of a bad portfolio is the ratio of the bad portfolio to the total portfolio. Source: MNB

In view of the risks also visible in the global commercial real estate market, in June 2023 the MNB decided on the reactivation of the Systemic Risk Buffer (SyRB) for preventive purposes, which was suspended in the wake of the coronavirus outbreak. Prior to the coronavirus outbreak the Bank successfully used the facility to support the off-balance sheet clean-up of problematic commercial real estate project loans concentrated in the balance sheets of large banks and to strengthen the shock resilience of banks against the remaining exposures. The reactivation of the tool suspended during the pandemic was justified as the pandemic subsided, along with the revitalisation of commercial real estate lending, the still low but increasing risks in the global commercial real estate market, and the risk predictions and calls for action of international organisations (e.g. the European Systemic Risk Board).

By reactivating the SyRB, the MNB is strengthening the shock resilience of banks against commercial real estate market risks. The introduction of SyRB in the current low-risk period will, on a preventive basis, strengthen the resilience of banks to shocks and encourage timely portfolio adjustments. Accordingly, the MNB announced in October 2023 the revised criteria for the establishment of the SyRB, thus providing banks with sufficient adjustment time, as the institution-specific SyRB ratios were set on the basis of the methodology known to banks.

Based on the commercial real estate financing project loan portfolio and the capital position as at 31 March 2024, the MNB determined the capital buffer requirements for each institution. In line with the low risk levels and the inherently preventive nature and repeated application of the tool, none of the banks were required to have an effective SyRB from 1 July 2024. The next review of the capital buffer rates will be carried out by the MNB within one year, by June 2025, based on data as of 31 March 2025, in addition to the continuous monitoring of exposures.

The announcement of the reactivation of the SyRB in June 2023 has effectively stimulated a prudential review of project loan portfolios of banks for commercial real estates. As a result of the announcement and discussions with banks, the restructured portfolios of several banks that had increased due to participation in the payment moratorium during the COVID-19 pandemic have been reviewed and treated in line with prudential requirements, as well as reclassified back to performing category as necessary (Chart 29).

Chart 29: The change in SyRB calibration indicator due to the adaptation of banks

Note: The calibration indicator is the weighted stock of the targeted project loan stock (the numerator of the calibration indicator) and the quotient of the Pillar I capital requirement (the denominator of the calibration indicator). Source: MNB

The use of the SyRB is not as widespread as the other combined buffer requirements, and its character and targeted exposures vary considerably across EEA countries. The sectoral application of the SyRB has become increasingly popular in most cases, replacing the former risk weights for exposures predominantly to the real estate market (Articles 124 and 164, Article 458 CRR). Within the real estate markets, sectoral capital requirements are also almost exclusively in place for residential real estate exposures (Table 4).

Table 4: EEA practice and key characteristics of the SyRB application

Note: Sectoral regulations are marked in light blue, while general SyRB regulations are marked in grey. The classification was given on the basis of the projection of the capital buffer requirement. Source: MNB

A SyRB for sectoral exposures could be a longer-term tool to prevent the accumulation of systemic risks in the housing market, but could also be a means to achieve green objectives in the financial sector. The MNB has already taken steps to prevent a possible build-up of overvaluation in the residential real estate market and the associated build-up of credit risks by increasing the countercyclical capital buffer and applying the borrower-based measures, so no further prudential action is justified for the time being. At the same time, at a theoretical level, a sectoral SyRB that can be released in a stress situation could be taken into consideration in increasing the banking system’s shock resilience to a possible housing market correction and in targeting the development of exposures considered to be of high risk. In addition, in the medium term, the development of a monitoring system for climate risk exposures could pave the way for the application of a sectoral SyRB targeting climate risks (see the climate risk chapter of the 2022 Macroprudential Report).

Credit institutions met the mandatory MREL requirements set by the MNB, along the intermediate targets closely monitored by the MNB, by 1 January 2024. The institutions have adjusted by issuing various equity instruments and MREL-eligible bonds through SNP (senior non-preferred unfunded bonds). In addition, some SPE (Single Point of Entry) banks have also met the requirements by issuing parent bank loans or MREL-eligible bonds underwritten by the parent bank. With the development of the foundations of resolution plans and the fulfilment of MREL requirements as a source of successful resolution, preparation for resolution has reached a new level. From this year onwards, the focus will shift to operationalising and testing resolution plans.

On 1 January 2024, the institutions met the mandatory MREL requirements set by the MNB. The institutions concerned were required to fully comply with the MREL requirements set out in the resolution planning, essentially after three years of adjustment along a linear path, from 1 January 2024. The requirements in terms of total risk-weighted assets, excluding capital buffer requirements, range from 18.9 to 28.6 per cent.

Most of the adjustment took place in 2023 Q4, mainly through foreign issuance. After the intermediate targets were met, several of the institutions concerned took a “wait-and-see” position, which meant that the full MREL-eligible resources of around HUF 600 billion essential for meeting the final requirement in 2023 were raised in 2023 H2. The vast majority of these were issues to foreign institutional investors, parent bank loans and bond purchases. The volume of domestic retail borrowing and domestic institutional purchases were much lower.

The institutions concerned have met this requirement by mobilising several types of MREL-eligible resources. Institutions have adapted by issuing various capital instruments and by issuing MREL-eligible bonds – senior and senior non-preferred (external MREL) bonds. In addition, banks with a centralised resolution strategy (SPE) through parent bank intervention also met the requirements by providing a parent bank loan that enables the flow of losses to the parent bank, or by issuing MREL-eligible bonds subscribed by the parent bank (internal MREL) for the implementation of the strategy. (Chart 30) The pricing of MREL-eligible liabilities was largely determined by their seniority, with equity-type liabilities being more expensive, while non-priority unsecured bonds and senior bonds and parent bank liabilities were cheaper.

Chart 30: MREL capacity’s distribution for large banks

Source: MNB

Of the external MREL-eligible funds mobilised, HUF 275 billion will – ceteris paribus – mature in the next two years. The easing of financial markets in 2023 H2 and 2024 H1 and the declining yield environment provided a favourable opportunity to renew external MREL-eligible resources. At present, we see that emissions are significantly oversubscribed. (Chart 31)

Chart 31: Expiry of external MREL eligible liabilities

Source: MNB

Core Tier 1 capital held to meet capital buffers is from 2023 no longer regarded as an MREL-compliant resource because of the prohibition on using it concurrently for several purposes. In the calculation of the MREL requirement, capital buffers were excluded from the calculation, while the core Tier 1 capital (CET1) that covers capital buffers is not part of MREL-compliant funds. Consequently, a possible increase in buffers will reduce the stock of available MREL-eligible resources and may therefore result in need for issuance. The activation of the countercyclical capital buffer for domestic exposures of 0.5 percentage point on 1 July 2024 could lead to an increase in MREL requirements of around HUF 112 billion for the institutions concerned, based on data at the end of 2024 Q2, excluding the impact of changes in exposures in the estimate. The increase of the countercyclical capital buffer to 1 per cent in July 2025 could also increase this by another HUF 112 billion.

The MNB carries out the annual resolution assessments of the institutions concerned, based on which banks can develop their resolution plans. The MNB continuously identifies any impediments to resolution during its annual resolution assessment, requiring the credit institutions concerned to remedy any impediments identified in order to ensure the feasibility of the resolution plans.

The focus of resolution planning is now shifting towards ensuring resolution through operationalising and testing plans. Ensuring resolution is possible through the cooperation and continuous work of the authorities and institutions. Following the development of the foundations and key elements of resolution plans, the focus has shifted to the processes that ensure the practical implementation of the defined strategies and the maintenance of operations during resolution. Developing these in as much detail as possible and evaluating the procedures developed and testing their reliability will be a key task of resolution planning in the coming years.

As a next step of the preparation, in 2023 the MNB initiated the development of the data reporting capacity of the institutions concerned, with a focus on providing the information required for independent assessments during resolution. Specific institutional-level project plans have been developed and their implementation will be reviewed annually by the MNB. Providing the information essential for independent assessments at the time of resolution is crucial in underpinning the decisions on resolution. To this end, in 2023, the MNB initiated the development of data reporting capacity at the institutions concerned to ensure timely and high quality information for independent assessments during resolution. In 2023, a timetable for the implementation of the above tasks was individually defined with the institutions concerned, and individual bank project plans were prepared, with the aim of establishing the above data reporting capabilities by the end of 2025.

Through strengthening confidence in the financial system, the MNB’s financial consumer protection activities, which have become increasingly complex and focused in recent years, also make a significant contribution to maintaining financial stability. As part of its consumer protection activities, the MNB continuously assesses the actual consumer risks. In 2023, the number of investigations launched upon consumer complaints to the MNB increased. The MNB drew attention to the shortcomings of institutional practices for handling overdue loan transactions and minor information gaps in online personal lending, and took further steps to curb cyberfraud by issuing executive circulars to domestic payment service providers.

Despite a decrease in the number of complaints to the credit institution sector, the number of consumer complaints to the MNB continued to increase in 2023. In 2023, the number of complaints filed with credit institutions decreased by 5 per cent, while the number of consumer complaints filed with the MNB increased by 10 per cent in 2023, similar to the previous year (Chart 32). The majority of consumers continued to complain about the institutions’ handling of complaints and their handling of fraudulent online or phone transactions. While the number of investigations launched by the MNB has increased, the share of decisions finding non-compliance has decreased (below 60 per cent in 2024 H1). The consumer protection warnings issued as part of the continuous monitoring, which allow for rapid action, were typically issued in 2023 due to shortcomings in the information published by the institutions. The most common subjects of complaints received by credit institutions in 2023 were, in order, financial abuse, settlement disputes and the execution of orders. Although credit institutions received fewer complaints, the share of complaints on financial abuse increased by nearly 5 percentage points to 27.3 per cent in 2023.

Chart 32: Consumer complaints and consumer protection activities in the credit institution sector

Source: MNB

The MNB has checked the compliance of 21 credit institutions with the new rules on the handling of overdue loans, which apply from September 2022 as set out in the MNB Recommendation on the handling of non-performing loan transactions. In order to ensure transparency in the handling of overdue loans, the Recommendation sets out standard expectations for the period before the termination of a loan agreement, in particular with regard to the content and frequency of consumer information and the expectations of the steps in the resolution process. The examination of compliance with the Recommendation revealed that some institutions had breached the time limits for contacting the customer, the content of consumer notification letters was incomplete, the number of solutions offered to the debtor was insufficient, internal rules and, in some cases, the mandatory information on the institution’s website were incomplete. While the audit did not identify any systemic failures, the MNB called on credit institutions to address and correct the identified deficiencies within a short timeframe.

In 2023, the MNB launched a thematic inspection to check whether financial institutions provide their customers with sufficient pre-contractual information in accordance with the law when applying for personal loans online. The MNB reviewed six credit institutions to check whether the information required by law to be provided to consumers in the period leading up to the conclusion of the contract was actually provided to them, giving them information on the main characteristics of the product they are applying for and helping them to assess whether the product meets their needs and financial capacity.

At several institutions, the investigation found that the information on the change in the repayment instalment did not include the average monthly net income for the previous calendar year, as required by law, and one credit institution did not indicate the interest rate that could be considered representative. In the transactions of two of the credit institutions examined, the content of the prospectus to be drawn up on the basis of the form on the characteristics of the loan was incomplete, and two institutions added information to the prospectuses that went beyond the required content, which is not permitted by law. In addition, one credit institution could not provide evidence of having provided the loan agreement and the related business rules and notices to customers. With regard to the infringements, the MNB imposed a total of HUF 6.6 million in fines, and also identified practices in the online loan application process of several institutions, formulating its expectations in a management letter in order to clarify and fine-tune these practices.

Cyber fraudsters continue to actively attack customers in a variety of ways. The MNB has therefore continued to be actively involved in the CyberShield cooperation during the reference period and issued two executive circulars (Chart 33) in 2024 H1 to curb cyberfraud.

The aim of the executive circular on information expectations in relation to payment service abuse is to help the relevant payment service providers to ensure that their websites comply with the expectations set out in the MNB Recommendation on the prevention, detection and treatment of payment service abuse, aimed at educating and informing customers, in a uniform and attention-grabbing manner. The MNB requires, among other things, that market players should present to consumers on their websites (by navigating from the main page of the website) a separate information page on the main types of fraud, the steps to avoid and prevent them, and who and how to contact at the financial institution in question if they detect abuse. The circular also requires payment service providers to draw attention to the kiberpajzs.hu (cybershield) website in their customer information leaflets on bank accounts and bank cards.

In another circular the MNB called on account management institutions to warn their customers of the risk of cyberfraud by 15 May 2024 for those with existing authorisations and for those granting new authorisations, as criminals can (also) gain access to the accounts of authorised customers by compromising their internet or mobile banking access. In the MNB’s view, it is a good practice for service providers not to set the default proxy settings for certain channels (e.g. online banking), but for authorisers to decide on their own via which channels they allow access to their accounts, and if this can be changed (even by setting transaction limits) later. It is also a good practice if the abuse-filtering systems of institutions take into account authorising party-authorised party relationships.

Chart 33: Expectations of MNB circulars aimed at curbing cyber fraud

Source: MNB

Systemic risk monitoring of corporate bank credit exposures exposed to climate change and its potential transition risks indicates increasing but still relatively moderated levels of vulnerability. In relation to vulnerabilities, the development of systemic risk monitoring is still essential. Since 2021, no significant improvement in the energy efficiency of mortgage-financed properties is visible, with the exception of properties financed under the Green Home Programme (GHP). The MNB also supports the improvement of the energy efficiency of Hungarian real estates through the green differentiation of borrower-based measures, as is increasingly the case internationally. This will include a 10 percentage point higher maximum LTV limit of 90 per cent for loans meeting green criteria from January 2025, and a maximum PTI limit of 60 per cent will be available regardless of income. The MNB also supports the integration of green aspects into the lending process by strengthening the green standards of the Certified Consumer-Friendly certification.

Sectoral credit exposures in the banking system’s corporate loan portfolio, which are vulnerable to migration risks, are at high levels and have expanded. In recent years, the so-called climate policy relevant sectors (CPRS), used  recurrently by risk monitoring systems, have increased at a similar pace as the growth of the overall corporate loan portfolio Alessi and Battiston (2022)) (Chart 34). The ratio of the CPRS credit exposure to the banking system’s total corporate portfolio has not changed significantly since 2019 from its relatively high level of around 56 per cent at the end of 2024 H1. This measurement approach provides an upper estimate of the climate vulnerable exposures of selected sectors 2, which can be reduced by, for example the EU 2020/852 Taxonomy Regulation and its complementary EU 2021/2139 regulation or other sustainable financing schemes, but even beyond this there may be significant disparity in the climate change-related financial risks of activities in the covered sectors. There are significant differences between the portfolio composition of credit institutions in terms of the share of CPRS exposures and the GHG intensity of the activity financed. Including corporate credit and securities exposures in the calculation, the risk level of the portfolios is assessed at an institutional level by the banking system climate risk matrix of the MNB Green Financial Report (for the methodology see Ritter (2022)). Based on the updated values of the matrix for 2024 Q2, four domestic systemically important banks have a relatively higher risk rating (the so-called middle-top quartile of the matrix), while another three have a more moderate risk rating (the so-called middle-bottom quartile).

Chart 34: The evolution of exposures to climate policy relevant sectors (CPRS)

Note: The graph shows end of the year loan exposures (outstanding principal debt) in case it is not specified further. For the NACE sectoral definition of the CPRS classification, see Alessi and Battiston (2022), Battiston et al. (2022) and Battiston et al. (2017). The green loan part of the exposure to the CPRS sectors includes i) the EU green taxonomy aligned exposure as they are provided in the credit register data reporting, ii) the green corporate loans of the preferential capital requirements program, iii) green loans provided under the Gábor Baross Reindustrialisation Loan Program and iv) loans benefiting from the CRR Art. 501.a infrastructure supporting factor. Green loans financing fossil fuel, energy intensive, transport and agriculture CPRS sectors are not shown on the graph as their order of magnitude is yet too small compared to the scale of the graph. Source: MNB

The climate change risk intensity of the vulnerable elements of the loan portfolio also increased. In order to map climate change-related financial systemic risks, the MNB expands the scope of examined risk indicators every year, in parallel with the risk indicators of EU surveys (for the latest European overview, see the ECB/ESRB (2023) report). A measure of climate risk exposure, which is also representative of the intensity of the risks, is shown by the increase in credit exposures weighted by the annual share of GHG emissions from the industries (Chart 35), of which around two-thirds have a longer term to maturity. These transactions could still be affected by the possible intensification of transition risks in the medium term. The reallocation of lending between industries towards high output sectors was moderate, with the increase in the indicator mainly due to a growth in the loan portfolio. However, the so-called GHG real financing gap indicator (cf. the similar carbon-financing tilt indicator) nuances the changes further, ECB/ESRB (2023)), which is the ratio of GHG emissions weighted by loan financing to the same emissions weighted by the sectoral gross value added (GVA) to compare the GHG intensity of sectoral GVA to that of the sectoral loan financing, and indicate whether loan financing diverges towards sectors with relatively higher or lower GHG intensity. The evolution of the indicator is driven by high value-added (GVA) activities requiring less and less GHG emissions, while the change in the composition of activities financed by the banking system’s loan portfolio is at any rate smaller, i.e. activities with relatively higher GHG emissions receive a larger share of the banks’ loan portfolio than their share of real economic value added. It is also worth observing the evolution of the Bank Carbon Risk Index (BCRI), which is regularly updated in the MNB’s Green Finance Report, and shows that after a stagnation and slow decline in transition climate risks between 2020 and 2022, a sharp increase in exposure was noted in the Hungarian corporate loan portfolio in 2023 (for the methodology see Bokor (2021)). The BCRI is adjusted for more accurate risk characterisation by including green corporate loans, which are considered climate risk-free and whose domestic portfolio exceeded HUF 633 billion at the end of 2024 Q2, and by including individual GHG emissions of companies participating in the European Emissions Trading System (ETS) for sectoral GHG intensity data (Ritter (2023)).

Chart 35: GHG emission weighted loan exposures related to transition risks

Note: The graph uses end of the year loan exposure (outstanding principal debt) data and the greenhouse gas emission (GHG) data of the given year. For the weighted loan exposures, the GHG emission weights are given by the sectoral shares in proportion to the total industrial GHG emissions. The GHG real financing deviation indicator (carbon tilt measure, CTM) is the ratio of GHG emissions weighted by the share of loan exposures in total corporate loan exposure and the GHG emissions weighted by the sectoral gross added value (GVA), that is,  where index i denotes the economic sectors, Loani the loan financing of sector i, GHGi the emission of pollutants and GVAi the added value of the product. Source: Eurostat, MNB

Since 2021, no significant improvement in the energy efficiency of mortgage-financed properties is visible, with the exception of properties financed under the Green Home Programme (GHP). The share of better-than-modern collateral in new residential mortgage lending has been low and stable since 2021 (rated BB or better under the ratings in effect until October 2023 and A or better under the ratings currently in effect), ranging from 10 to 20 per cent, with the share temporarily approaching 50 per cent during the Green Home Programme’s subsidy period (Chart 36). Based on this, there is considerable room for strengthening the contribution of mortgage lending to energy efficiency improvements.

Chart 36: Housing loan disbursement by the energy performance of funded residential real estates

Note: Taking into account the new energy classifications applicable from November 2023. Missing data are explained by potentially unavailable Energy Performance Certificate data at the time of the home purchase, along with data quality reasons. The MNB continuously strives to minimise the proportion of missing data. Source: MNB

Modern real estates are concentrated around low-risk borrowers with above-average incomes. Energy-efficient, modern properties have a significant price premium compared to less modern ones, making them mainly available to borrowers with an above-average income. While among borrowers with an average net income of less than HUF 400,000, the share of modern real estates was more than 3 per cent in the period under review, it reached almost 20 per cent for loans disbursed to borrowers with a net income of more than HUF 1 million between 2021 and 2024 Q2.

Higher energy-efficient properties can be attained with higher down payment and a stronger income stretch. Loans financing properties with unfavourable energy characteristics show an increased LTV-stretch, which may indicate that borrowers with insufficient down payment are less likely to have access to modern properties compared to borrowers with higher savings. In addition, loans financing energy-efficient properties show an increased strain on borrowers’ incomes, which may confirm that borrowers who are able to provide higher down payment and who have access to the loan required for purchasing green properties have a stronger income squeeze due to their higher loan amounts (Chart 37).

Chart 37: The distribution of housing loan disbursement by energy performance and LTV and DSTI values

Note: Distribution by volume. Only housing loans for constructions or purchase, without Green Home Programme loans. Taking into account the new energy classifications of November 2023. Source: MNB

The so-called green hypothesis suggests that financing energy-efficient buildings may have a lower credit risk. Lower maintenance costs allow borrowers to spend a higher share of their income on repayments, which means they carry a lower probability of default (PD). In addition, the housing market demand for green property collateral may be more shock resistant compared to less efficient properties, meaning that these properties may potentially be more value-retaining, which means lower loss given default (LGD) for creditors. The first Hungarian studies on the ”green hypothesis“ are now available, confirming its existence in our country3.

For the above reasons, differentiating the borrower-based measures from a green perspective can support the renewal of the Hungarian housing portfolio without considerably increasing risks. Given that a growing amount of empirical research confirms that mortgage loans financing green real estate can involve lower risks, and that significant clustering around the borrower-based limits can be identified, which is attributable to the energy efficiency of the property and can only be partially explained by the risk of loans, this may provide an opportunity to apply more favourable borrower-based measures to loans financing green real estate or loans for green purposes.

In view of this, the MNB has decided to apply more favourable DSTI and LTV limits for green property purchases and for loans with renovation purposes from 1 January 2025. Under the new rules, the LTV limit will increase to 90 per cent for HUF mortgage loans that meet the conditions for green collateral and loan purposes set under the Green Capital Discount Programme and have fixed interest rates for at least 10 years (regardless of whether the borrower is a first-time home buyer or not). In parallel, for qualifying loans, the applicable DSTI limit is increased to 60 per cent regardless of the income of the customer (for the applicable DSTI and LTV framework, see the Chapter 2 on borrower-based instruments).

The introduction of the green differentiation of the borrower-based measures can support the energy renewal of the domestic housing portfolio through several channels:

• By improving the availability of green home loans, it can increase borrower demand for green real estates and, on the banks’ side, support the development of dedicated green home loan products.
• It can have the highest effect on borrowers’ home purchase and construction loan purposes. In the case of loan schemes for modernisation, given the low loan amount and consequently the low DSTI and LTV income stretch, the use of increased limits is less likely, so they may primarily support purchase and construction loan purposes with higher loan amounts and repayments, or the renovation of properties previously purchased with a housing loan.
• The development of dedicated green standards will also promote climate awareness on the part of banks and borrowers. The green standards support the development of bank monitoring systems, the improvement of data availability and quality, the development of dedicated green financial products and the development of green awareness among borrowers.

However, the growth in green loan demand for the overall housing and credit market may remain limited due to the low share of eligible properties, so no significant housing market effects are expected. Green home loans currently account for 10–20 per cent of lending. An increase in the LTV limit could result in a 12.5 per cent increase in the loan amount when the allowance is fully used, whereas the increase of the DSTI limit could result in a 20 per cent increase  of the loan amount respectively. Overall, given the still limited scope for collateral and limited additional lending, an increase in demand for green real estate at the sector level is not expected to lead to a significant increase in house prices and credit risks.

In view of the abovementioned considerations and the hypothetical fulfilment of the green hypothesis, a green differentiation of the borrower-based measures by introducing risk-proportionate standards that better take into account the credit risk of collateral and borrowers, could support the energy renewal of the Hungarian residential real estates without substantially increasing the risks in the housing and credit markets.

Further strengthening the green aspects of the Certified Consumer-Friendly Framework can contribute to energy-efficient lending and increased energy efficiency of the domestic building stock

The MNB is continuously developing the Certified Consumer-Friendly Housing Loan (CCHL) framework in line with emerging trends in the housing loan market. Accordingly, in order to promote the energy renewal of the Hungarian housing portfolio and to encourage the banking sector to finance green loan purposes, the MNB decided to introduce dedicated green CCHL loan purposes from 1 April 2023. Accordingly, CCHL loans granted to finance a specific green loan purpose defined in line with the MNB’s Green Preferential Capital Requirement Programme cannot be subject to disbursement fees, or charges and other costs related to the verification of the green loan purpose. Moreover, the creditor is obliged to assume the cost of the Energy Efficiency Certificate on one single occasion. Furthermore, the creditor may grant a green interest rate discount if the fulfilment of green loan purpose has been verified.

To further encourage the development of dedicated green home loan products, the MNB will make it mandatory for creditors to offer their CCHL product as a green loan to potential borrowers from the spring of 2025, when applying for a loan to attain green credit objectives, which will continue to be defined in line with the MNB’s Green Preferential Capital Requirement Programme, provided that the CCHL product is available for the given credit objective. Creditors will be required to provide an interest rate discount of at least 0.5 percentage points on the undiscounted initial interest rate if the green credit objective is verified to have been met, for which the potentially lower credit risk of green properties and the lower cost of capital resulting from the green preferential capital requirement provided by the MNB may provide sufficient leeway.

Personal loans can also support the promotion of green financing by banks and improve the efficiency of the housing portfolio. This is why the MNB has also decided to include green aspects in the Certified Consumer-Friendly Personal Loan (CCPL) Framework. Accordingly, from spring 2025, banks will be able to offer borrowers a dedicated green interest rate discount of at least 3 percentage points, subject to the proven fulfilment of the loan purposes for housing renovation set out in the Certification Framework. Following the amendment, green CCHL products can be used alongside green CPL products to help the energy-efficient modernisation of outdated properties through a simpler and faster borrowing process.

With the rise of digitalisation, technological advances and geopolitical risks, cyber incidents are becoming more frequent and more serious and could pose a growing threat to the stability of the financial system. The growing use of digital channels has significantly increased the exposure of institutions and customers in the financial sector. Institutions face a greater number and complexity of information security risks and threats. The financial stability dimension of cyber risks and the related regulatory options are also being closely monitored by international organisations. In Hungary, cyber attacks and fraud are also becoming more frequent. For this reason, the MNB considers it necessary to improve banking security systems, fraud prevention processes, to modernise out-of-date IT solutions and train customers on digital financial awareness.

Cyber risks can threaten the stability of the financial system through a number of channels. Operational, financial and confidence channels can amplify the impact of cyberattacks to the extent that they can impair the performance of key economic functions, lead to bank runs and deposit outflows (Chart 38). A general loss of confidence in the financial system and considerable financial losses are two key factors that determine whether a cyber incident becomes systemic or not. An increase in anticipation of significant financial losses or a critical mass of rumours in social media can prove sufficient to trigger a bank run. If a critical institution or financial market infrastructure that cannot be easily replaced is affected, this could also lead to arise of financial stability systemic risks. The vulnerability of financial institutions to cyber incidents is further exacerbated by the high concentration of banks vis-à-vis critical financial service providers (e.g. payment systems, clearing houses) and the fact that the operation of financial firms often depend on the same third-party IT service provider. However, it should be stressed that not all cyber incidents pose a threat to financial stability. To date, there have been no cyber incidents in the financial sector that have threatened financial stability: in the past, deposit outflows following cyber-attacks have remained limited and banks’ liquidity and capital requirements have so far been sufficient to deal with potential losses (ESRB (2020), IMF (2024)). Looking ahead, however, the financial stability relevance of exposure to cyber risks may increase significantly as the digital transformation progresses.

Chart 38: Transmission channels between cyber risk and financial stability

Source: based on IMF (2024), ESRB (2022) and ECB (2020)

Cyber risk poses new challenges for macroprudential authorities dealing with potential financial stability risks of cyber incidents. Existing macroprudential toolkit is not specifically designed to address the impact of cyber incidents and is therefore limited in their ability to address the impact of systemic cyber risks. This may require new macroprudential instruments that also address this risk (ESRB, 2022).

For the time being, the priority for market participants and regulators alike is to establish a system for monitoring risks and the associated risk management procedures before applying macroprudential tools. There are several approaches to measuring cyber risk:

• CyRST (Cyber Resilience Scenario Testing) assesses whether the financial system can respond quickly and effectively to a severe but plausible cyber scenario and recover from it.
• Systemic Impact Tolerance Objective (SITO) can help identify and measure the impact of cyber incidents on the financial system and assess when they may breach tolerance levels, causing significant disruption.
• The Systemic Cyber Resilience Scenario Stress Testing provides a tool to assess the impact of a cyber incident and analyse whether it may potentially escalate into a systemic event.
• The Macroprudential Tolerance for Disruption Levels aims to quantify the maximum acceptable level of disruption to critical economic functions that does not yet pose a risk to financial stability in a severe, but still plausible scenario.
• The identification of systemically important nodes can assist authorities in several ways, such as predicting contagion channels and determining which institutions and the third-party service providers serving them should be included in a systemic cyber resilience scenario stress testing.

In addition, cross-border coordination is crucial, given the borderless nature of cyber risks. For this reason, the development of international cooperation protocols and cross-border information sharing is essential, which requires the harmonisation of cyber incident reporting between countries. At present, cybersecurity cooperation is hampered, fragmented and is often limited to the smallest circle of trust because it touches on sensitive national security interests. Based on the ESRB’s macroprudential strategy, the macroprudential framework may need to be developed in a number of ways. Companies may not fully anticipate the systemic impact of cyber incidents, that is why state intervention is required, including cybersecurity laws and a national cybersecurity strategy, and setting minimum cybersecurity standards. This is particularly true for the financial sector, where disruptions of critical services or loss of confidence in the system can have far-reaching consequences. A cybersecurity strategy for the financial sector, with effective regulation and supervisory capacity, can help build resilience:

• Supervisors should encourage cyber ”maturity“6 in the financial sector.
• Reporting of cyber incidents to supervisory and regulatory authorities should be strengthened to ensure the effective monitoring of cybersecurity.
• Financial corporations should develop and test response and recovery procedures to remain operational in the face of cyber incidents.
• Monitoring of the associated liquidity risk is also justified despite the low deposit outflows following cyber-attacks in the past.
• Further training is also needed on the part of financial institutions and customers. While some regulations explicitly require cybersecurity training for senior management and employees, there are surprisingly no widespread references to training for the growing number of digital customers of financial services, who are the primary target of actual cyber-attacks.

Cyberattacks and fraud are also becoming more frequent in Hungary (Chart 39). For this reason, the MNB considers it necessary to improve banking security systems, fraud prevention processes, modernise outdated IT solutions and train customers on digital financial awareness. According to the MNB’s Threat Map, the majority of service disruptions in Hungarian banking are caused by failures and malfunctions, while more recently, there have also been fraud events exploiting the weaknesses in these infrastructures (MNB 2022). It is worth noting, however, that the Hungarian financial institutions sector is not one of the most prominent targets for fraudsters, which may be due to the relatively small size of the sector compared to other European countries.

Chart 39: Evolution of the number of cyber fraud reports at the MNB customer relations information centre

Source: MNB

To curb fraudulent events in the long term, it is necessary to develop the appropriate legal environment, analyse and enhance the processes of authorities and the market, and collect national and international best practices. In addition to strengthening the campaign to raise security awareness among customers, the CyberShield programme also expects institutions to take clear prevention steps against fraud. The MNB is also working with the NMHH (National Media and Infocommunications Authority), ORFK (the National Police Headquarters) and the NBSZ NKI (National Security Special Service - National Cybersecurity Center) to mitigate risks. In its Recommendation issued at the end of June 2023, it summarised its expectations regarding the prevention, detection, deterrence and treatment of fraud through payment services. Within the framework of close cooperation between the MNB and GIRO Zrt., the implementation of the Central Fraud Detection System (CFDS) has started, which will assess the fraud risk of transactions in real time with the help of artificial intelligence. The MNB also monitors the development of innovative technological solutions (e.g. blockchain, artificial intelligence, machine learning) and the related risk management trends, Hungarian and international financial technology and innovation trends as well as technologies and digital strategies adopted by institutions.

In recent years, the coronavirus pandemic, the Russo-Ukrainian war and the subsequent energy crisis and inflation shock had severe financial and economic consequences. However, the Hungarian banking system has been well prepared to face new challenges, thanks to a decade of increasing regulatory requirements and tightening supervisory practices. The recent build-up of reserves, balance sheet cleaning, safer banking models and adequate risk-taking, in line with the MNB’s capital and funding requirements, have enabled the banking system to function reliably, so that it can support economic convergence through sustainable lending in an efficient way without excessive risk-taking.

Since the global financial crisis of 2008/09, the domestic financial system has experienced all phases of the financial cycle, along with a number of unconventional shocks. Following the crisis of 2008/09, the preceding excessive borrowing and indebtedness necessitated a sustained deleveraging process, exacerbated by a macroeconomic situation that was also negatively affected by the euro area debt crisis. Following the downturn caused by the global economic crisis, central banks pursued loose monetary policy to restore economic growth and support lending in the absence of meaningful inflationary pressures, thus creating a persistently low interest rate environment. In this favourable financing environment, the financing of the economy was strengthened by government and central bank lending programmes and liquidity expansion measures, entering an upward phase of the financial cycle. This favourable trend was interrupted first by the outbreak of the coronavirus pandemic in early 2020, then by the outbreak of the Russo-Ukrainian war in February 2022 and the subsequent energy crisis and inflation shock (Chart 40).

Chart 40: The evolution of private sector credit and nominal GDP

Note: The additional credit, which takes into account the national specificities and is used for the calibration of the countercyclical capital buffer. The vertical colouring is based on the level of financial stress indicated by the Factor-Based Stress Index. Source: MNB

Following the outbreak of the Russo-Ukrainian war, Hungary has seen a sharp increase in inflation, accompanied by the weakening of growth prospects. The energy crisis in the wake of the Russo-Ukrainian war, the associated sanctions policy and the dynamic economic growth before the war led to a sharp rise in domestic inflation, which peaked at 25 per cent year-on-year in early 2023. The Bank’s effective interest rate reached 18 per cent following a sharp monetary tightening to curb inflation, while the unfavourable external business environment led to a strong deterioration in growth prospects.

The shocks of recent years and their economic and financial consequences have also posed significant challenges for the domestic financial system. It is therefore worth taking into account the financial stability risks associated with the high inflation environment and weak growth (stagflationary economic environment), whether they have been adequately addressed by the Hungarian macroprudential policy within the given regulatory framework, and what directions can be identified in the domestic macroprudential framework in view of the current resurgence of credit growth and the potential new challenges that may arise in the longer term.

The deterioration in the macroeconomic environment, high inflation and the tight monetary conditions to contain it have led to a sharp slowdown in lending activity. The annual growth in new retail lending slowed gradually from 2022 H2 and, after a 50 per cent decline, reached its trough in mid-2023. In 2023, corporate lending stagnated at an annual average inflation rate of 17.6 per cent, implying a real decline of almost the same magnitude (Chart 41). The persistence of weak lending activity could have led to a slowdown in credit growth and a surge in nominal GDP, resulting in a decline in credit-to-GDP ratios, a permanent deleveraging, limited real financing and thus a permanent decline in economic growth. However, both inflation and the related real economic developments have improved rapidly since the normalisation of energy shocks after the war, so that no significant and lasting recession has developed.

Chart 41: Household and non-financial corporation lending of credit institutions

Note: An increase compared to the same period of the previous year. Corporate loans without money market transactions. Source: MNB

The deterioration of the macroeconomic environment and the negative impact on credit risk and portfolio quality of high inflation and monetary tightening aimed at curbing it remained moderate. The rise in interest rates may increase the repayment burden and the risk of default for borrowers, depending on the speed of the repricing of loans. This may be mitigated by the proportion of fixed-rate and longer-tenor loan structures in the loan portfolio, i.e. the degree of hedging against interest rate risk. In addition, inflation may increase nominal incomes and, in the case of companies, nominal revenues, so the increase in the ratio of income to revenues and the increase in the ratio of revenues to repayments may remain moderate, depending on the pace of wage and product price indexation and the macroeconomic environment. In addition, the potential loss on default may also be reduced due to the inflation of exposures and the reduction in the encumbrance on collateral. In addition, the value of mainly commercial real estates, which is recovered from rental income, may even decrease due to rising yields and the possible inflation of fixed rents. Finally, the inflation of the amount of exposure at default reduces the real value of the potential impairment loss requirement, i.e. the potential credit loss of banks.

The inflation shock also increased funding and hedging costs and asset price volatility, but did not materially increase liquidity risks at the sectoral level. The increase in the interest rate environment may be reflected in an immediate rise in interbank funding costs, but may also have a significant lag in deposit pricing, depending on banks’ liquidity and funding positions and the intensity of competition in the deposit market. Correspondingly, in Hungary too, transmission is more efficient for corporate deposits and new lending, but much slower and only to a lesser extent for retail deposits (Hajnal et al. 2024). Regarding bank assets, securities held for trading purposes are held by banks at market value, and therefore the potential loss from an increase in yields is immediate. By contrast, banks hold securities held to maturity at gross book value, so that any ”hidden” loss resulting from a difference between book value and market value is only realised in the event of a sale of the securities, i.e. a deterioration in the funding and liquidity position following a shock. It should be stressed, however, that in the calculation of the LCR ratio, securities held to maturity are also taken into account at market value, so that the liquidity effects of yield changes can be well monitored in terms of liquidity monitoring. In addition, based on the yield curve and due to rising volatility in capital and financial markets, interbank hedging costs, and hedging and margin requirements in derivatives markets can also increase.

The inflation shock temporarily increases profitability and the ability to accumulate capital through higher interest income. Banks’ assets tend to reprice faster than their liabilities, and the resulting interest rate differential leads to a rapid increase in net interest income, which is mitigated by other risks only in the medium term. The surge in net interest income, depending on banks’ dividend policies, leads to a strong capital position of banks. However, in the longer term, the slow growth of bank lending, the possible pick-up in prepayment activity, the increase in borrowing costs and the possible deterioration in portfolio quality could have a negative impact on profitability. For this reason, in line with the MNB’s supervisory expectations and the significant macroeconomic uncertainty, banks should develop a prudent dividend payment policy that takes into account the potential risks they may face.

The first major test of the macroprudential framework built up after the 2008/09 crisis was the economic shocks caused by the coronavirus outbreak and the subsequent Russo-Ukrainian war. The banking sector has remained stable and sustainable thanks to the EU and Hungarian financial stability regulatory architecture in place and the financial stability measures taken by the MNB, which has strong prudential powers.

Since 2015, the MNB has been using the borrower-based measures as a preventive measure to limit the re-emergence of over-indebtedness among the population. The legally binding standards, which are based on a comprehensive set of criteria, are effective at the credit transaction level, effectively mitigating the risks of excessive lending, thereby strengthening financial stability. The introduction in October 2018 of differentiated debt-service-to-income ratio (DSTI) limits by interest periods has significantly contributed to the generalisation of fixed-rate and longer-period mortgage lending and thus to reducing household exposure to interest rate risk. By June 2024, banks had granted almost 92 per cent of total household loans after the entry into force of the borrower-based measures in 2015 and in compliance with them. This significantly increased the monetary policy room for manoeuvre required to deal with rising inflation from 2022 onwards, as the potential negative side effects of interest rate hikes on households affected a much smaller group of consumers (Chart 42), for whom the Government prevented the rise in repayments by introducing an interest rate cap.

Chart 42: New lending to households by denomination and interest rate fixation

Source: MNB

In addition to prudent lending practices, the liquidity and funding situation has also improved significantly compared to 2008, partly due to MNB regulations. From 2012 on, the MNB’s macroprudential toolkit expects to build and maintain adequate liquidity buffers and build a more stable, longer-term, sustainable funding structure through EU and targeted domestic expectations and requirements. The Basel-type requirements (LCRs setting short-term liquidity requirements from 2015 and NSFRs requiring longer-term stable funding from 2021), which have meanwhile also been introduced at EU level, have also supported risk mitigation. As a result, the Hungarian banking system faced the liquidity and funding effects of the coronavirus pandemic and the war-induced inflation shock with substantial reserves (Chart 43).

Chart 43: The evolution of selected liquidity and funding indicators (30 June 2024)

Note: The vertical colouring is based on the level of financial stress indicated by the Factor-Based Stress Index. LCR before December 2015 and FECR before December 2016 are based on estimates. Source: MNB

The capital position of the Hungarian banking system is strong, owing to the macro-prudential capital buffer requirements introduced over the past decade and the favourable bank profitability of recent years. Since 2015, the banking system’s free capital buffer levels above Pillar 1, Pillar 2 and domestic macroprudential capital requirements have ranged between 2.5 and 6.4 per cent of TREA, averaging 4.8 per cent. The capital tied up by the combined capital buffer requirements rose to nearly 4 per cent of TREA by 2020, which the MNB partially released by unwinding the O-SII buffer during COVID-19. By 2024, the O-SII buffer has been rebuilt after the pandemic and by the end of 2024 Q2, the combined capital buffer requirement reached 4.35 per cent of TREA, of which 1.85 percentage points was macroprudential capital, of which 0.35 percentage points was a CCyB requirement to smooth the impact of cyclical systemic risks. In the past, the resilience and lending capacity of banks was also supported by a substantive cleaning of balance sheets. In addition to favourable market developments, the reduction of non-performing loans was also encouraged by the use of the SyRB for high-risk project loans. Also as a result of the measures taken by the MNB, the share of non-performing loans in the total portfolio of both corporate and household loans fell below 4 per cent of the total stock by the beginning of 2020. After 1 July 2024, the MNB will also be strengthening the resilience of banks to shocks by activating the countercyclical capital buffer requirement at 0.5 per cent and by applying a positive neutral CCyB rate of 1 per cent from 1 July 2025. As a result of the measures, banks held a free capital buffer of HUF 1,853 billion and a free capital buffer of HUF 1,968 billion at the end of June 2024, and including the part of the interim profit that cannot be included in capital a free capital of HUF 2,389 billion (Chart 44).

Chart 44: The evolution of free and releasable capital buffers and the NPL ratio of banks

Note: TREA – Total Risk Exposure Amount. Combined capital buffer: Capital conversation buffer (CCoB), countercyclical capital buffer (CCyB), capital buffer of other systemically important institutions (O-SIIB), systemic risk buffer (SyRB). Source: MNB

Macroprudential instruments (borrower-based measures, capital buffers, liquidity and funding requirements) have successfully sustained and strengthened financial stability over the economic cycles of recent years. Since the introduction of these instruments, there has been both economic prosperity and downturn, so it is worth examining the effectiveness of each type of instrument and identifying new directions regarding their use as we enter a new phase of the financial and business cycle.

By holding back excessively high-risk loans, the borrower-based measures ensured from 2015 onwards that a stable, high-quality lending portfolio was built up in the upstream phase of the financial cycle, which prevented a significant increase in the non-performing loan ratio after the economic shocks. In addition, we do not see that the requirements would significantly constrain lending and we believe that they represent adequate upper limits to excessive lending, regardless of the interest rate environment trends, while minimising negative social impacts. However, continuous fine-tuning of the regulations is essential to make them work as efficiently as possible and to minimise unintended side effects. For this reason, the MNB is constantly monitoring the different options, such as the first-home buyers’ allowance and green differentiation already introduced.

The proactive design of macroprudential capital buffer requirements can ensure that the banking system can deal with shocks without severe economic and social repercussions through the release of reserves built up during the economic prosperity, without deleveraging during times of crisis. It can be argued, however, that the build-up of capital buffer requirements was slow in most EU countries, despite a sustained favourable economic environment following the global economic crisis, due to the specificities of the monitoring frameworks previously in place, which limited the scope for macroprudential crisis management during the outbreak of the coronavirus pandemic and the Russo-Ukrainian war. In order to build up the releasable macroprudential capital buffer requirements as early as possible and to improve the efficiency of macroprudential crisis management, the MNB decided to apply a positive neutral CCyB rate of 1 per cent from July 2025, taking into account international examples.

Owing to the liquidity and funding requirements, the liquidity and funding position of the Hungarian banking system has been adequate since the requirements were introduced. Owing to these instruments, banks would not face any material risk in the event of significant liquidity and funding shocks. With the accelerating flow of information and easier and faster deposit withdrawals, meeting liquidity and funding requirements and prudent banking risk management are of paramount importance, as the international banking bankruptcies in early 2023 point out. Also in view of this, there may be room to further improve and, if necessary, the strengthening of funding requirements (for example, in the case of mortgage bond funding requirements) to further increase resilience to shocks as inflation as well as capital and financial market uncertainty normalise.

1 For more on this, see Choi et al. (2023), Contagion Effects of the Silicon Valley Bank Run, NBER Working Paper No. 31772; Adrian et al. (2024), The US Banking Sector since the March 2023 Turmoil: Navigating the Aftermath, IMF Note/2024/001.

2 For example Alessi and Battiston (2022) consider almost 100 per cent of the fossil and transport sector, 70 per cent of the construction sector, 50–100 per cent of energy intensive industries (depending on the sector), and 39 per cent of the utilities and mainly electricity sector (depending on the share of renewable energy generation) as those with higher risk exposures.

3 See the studies of Hajnal et al. (2022) and Ertl et al. (2021) on the price premium associated with energy efficiency improvements in detached houses. For a Hungarian study on the lower default probability of loans with better energy-efficiency property collateral, see MNB Green Finance Report (2022) pp. 86-88, for international research see the summaries of EC-EEFIG (2022), Billio et al. (2022).

4 The analysis did not cover the still very important individual entrepreneurs and primary producers.

5 The statistically estimated indicator includes only turnover, material and personnel costs to exclude the effects of possible insurance payments, state compensation and stock accumulation. The operating profit margin was calculated from this estimated indicator.

6 This includes access to expertise, a three-lines-of-defence approach (enterprise-level risk management, risk management, control levels), cyber hygiene to maintain cyber security and a well-functioning system, and cyber training and awareness.

7https://www.statista.com/statistics/1457711/banking-sector-estimated-gen-ai-spending-forecast/; https://www.juniperresearch.com/press/generative-ai-spending-from-banking-industry-to-grow-by-over-1-400-by-2030-as-banks-seek-to-scale-ai-to-revolutionise-business-models/