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Ensuring financial stability

Ensuring financial stability

The government's HUF 150 bn bond program to mitigate the economic impact of the Covid-19.

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Ágnes Rakó

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KPMG Tanácsadó Kft.

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The long-term economic impact of the coronavirus epidemic is being additionally mitigated by the government's HUF 150 billion bond program, that has been announced last week. The government measure - similarly to the previous National Bank programs - supports maintaining lending practices of financial institutions, thus emphasizing the supervisory expectation on government level that the role of credit institutions in relaunching the economy is crucial.

To participate, there are strict government conditions: the Central Bank will examine the proposal for a one-off bond issue, the decision on the purchase is the responsibility of the Minister of Finance. The amount of the issued bond can be either the amount of the capital shortfall revealed in stress tests or asset quality tests; or the minimum CRR capital requirement of 25% and the SREP capital requirement together; but not more than HUF 50 billion per bank (lowest from these 3). The purpose of the program is the mitigation of the damage caused by the coronavirus, so it is not possible to finance losses that previously incurred.

The minimum interest rate on the bond must be the addition of:

·        the average of the previous 20 working days of the 5-year reference yield set by the European Central Bank,

·        the average of the difference between the 5-year government bond reference yield published by the Government Debt Management Agency (AKK) and the 5-year reference yield set by the European Central Bank between 1 January 2019 and 31 January 2020,

·        the median 5-year CDS spread for credit institutions with an ‘A’ credit rating in the European Union, and

·        200 basis points.

There are number of additional conditions for granting support all of which must be met: an institution with a probable solvency for 12 months; issuing a bond to address the coronavirus capital shortfall identified by stress tests or asset quality tests, backed up by a capital raising plan, and all necessary measures taken to minimize the capital shortfall; in addition to highlighting that the purpose of the aid is the sustainability of lending to companies established in Hungary.

The government also has expectations about the credit institution's remuneration policy:

  • performance rewards are set by the credit institution as a percentage of net income if it is not in line with the credit institution's compliance with prudential requirements and timely repayment of the aid,
  • provide an adjustment of the credit institution's remuneration policy in line with effective risk management and long-term growth, including a reduction in the total remuneration of senior executives,
  • the total remuneration of the persons covered by the remuneration policy shall not exceed fifteen times the average annual wage in the national economy or ten times the average wage of the employees at the given credit institution,
  • a senior person of a credit institution may receive performance rewards only in the case specified in the agreement concluded with the state in connection with the purchase of bonds.

In general, the capital adequacy of the Hungarian banking system is strong, which the Banking Association confirmed in its response to the measure, but also emphasized that if liquidity in global financial markets would become more expensive, the measure could help credit institutions with more limited access to capital.

The Funding for Growth Scheme and the Bond Funding for Growth scheme as well as the government bond program announced last week are a call for maintaining lending practices, and are highlighting the role of the banking system in relaunching the economy. In addition to subsidies, however, the sector will also face new difficulties: due to the payment moratorium, banks will have much less data on hand to measure credit risk, and stronger competition can also be expected in the market thanks to new schemes supporting lending. It is an evident goal of each market player to keep off from that current bond program, thus it is especially important to avoid capital shortages. Regarding the uncertain economic situation and the changing circumstances, it is more important to review credit assessment and monitoring, as well as capital calculation methodologies, and to continuously update and monitor the capital and / or liquidity situation and plan of financial institutions. 

© 2021 KPMG Hungária Kft./ KPMG Tanácsadó Kft. / KPMG Global Services Hungary Kft., a magyar jog alapján bejegyzett korlátolt felelősségű társaság, és egyben a KPMG International Limited („KPMG International”) angol „private company limited by guarantee” társasághoz kapcsolódó független tagtársaságokból álló KPMG globális szervezet tagtársasága. Minden jog fenntartva.

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