27 March 2012 – The Magyar Nemzeti Bank is introducing a two-year lending facility from 3 April 2012 to support corporate lending. Parallelly the Bank has broadened the range of securities it accepts as collateral and changed the acceptance ratios for eligible assets. The changes will take effect from 16 April 2012.
Since the outset of the financial crisis, there has been a steady reduction in bank lending to the Hungarian corporate and household sectors. Subdued lending has been mainly driven by a decline in willingness to lend. However, the build-up of foreign currency liquidity strains and the decline in banks’ capital buffers, reflecting the effects of the early repayment scheme and deteriorating loan quality, have also led to a steady decline in the banking sector’s capacity to lend. In these circumstances, the MNB can best contribute to an improvement in lending activity by supporting the liquidity of credit institutions. The Bank’s new facilities are designed to provide a safety net for the banking sector through enhancing credit institutions’ capacity to lend; however, the facilities cannot, and are not meant to, exert a material influence on banks’ willingness to lend.
Two-year loan tender to support corporate lending from 3 April 2012
The MNB is introducing a two-year, collateralized, base rate-indexed loan facility to be operated on the first Tuesday of each calendar month from 3 April 2012. The interest cost of the loan for counterparties will be equal to the central bank base rate prevailing during the term of the loan. After one year, counterparties will have the opportunity to prepay their loans. Credit institutions undertaking that they will not reduce their outstanding loans to the corporate sector, adjusted for the amount of write-offs and impaired loans sold, to below December 2011 levels during the term of the loan will be invited to place bids at the auctions. The detailed announcement is available on the Bank’s website, via the following link.
The new facility will help banks to have access to long-term funding without the need to pay a term premium, which in turn may counterbalance the recent shortening of maturities on the liabilities side of their balance sheets. The improvement in the maturity match between assets and liabilities through the use of the facility may contribute to a strengthening in banks’ balance sheets, which may offset the decline in capacity to lend.
The MNB has broadened the range of securities it accepts as collateral and changed the acceptance ratios for eligible assets. As a result of these changes, the Bank expects to contribute to a reduction in the level of liquidity constraints on banks’ ability to lend while taking low risks. The changes will take effect from 16 April 2012.
Increased volatility of the forint exchange rate and the country risk premium has prompted banks to build up increasingly larger forint liquidity buffers, which they can exchange to foreign currency via FX swaps if necessary. Although at system level there is ample forint funding and the banking sector has a strong resilience to shocks, it may happen that forint liquidity available for individual banks becomes limited to increase lending in the event of an adverse liquidity shock.
In order to support credit institutions build up their liquidity buffers, from 16 April 2012 the Magyar Nemzeti Bank will introduce the following changes:
- The range of collateral eligible in central bank lending operations will be extended to include:
- Foreign currency-denominated government bonds issued by the Hungarian State and the MNB,
- Foreign currency-denominated corporate bonds meeting certain eligibility criteria.
- The acceptance criteria for corporate bonds will be relaxed:
- Securities issued in any regulated market or non-regulated markets accepted by the MNB, in addition to the Budapest Stock Exchange (BSE), will be eligible for acceptance.
- Issuers rated at least equally to Hungarian government securities (currently ‘BB+’) by one of the rating agencies accepted by the MNB, instead of the current ‘BBB-’ rating, will also be eligible for the MNB’s lending operations.
- Forint-denominated mortgage bonds issued in regulated markets other than the BSE and non-regulated markets accepted by the MNB will also be accepted as collateral in its lending operations.
In line with the above, the ‘Terms and Conditions of the Operations of the Central Bank in Forint and Foreign Currency Markets’ will be amended with effect from 16 April 2012.
In order to keep the risks taken by the MNB as low as possible, the acceptance ratios applied to securities taken as collateral in the daily revaluation of collateral will also be changed with effect from 16 April 2012. (The detailed announcement is available on the Bank’s website, via the following link).
MAGYAR NEMZETI BANK