Financial institutions

The payment moratorium was one of the first economic protection measures of the Covid-19 crisis in Hungary, which can be an effective help for companies and individuals facing liquidity difficulties. At the same time, the moratorium is not mandatory, several analyzes showed that some customers still want to pay their loans. In addition, the relevant portfolio is significant, according to MNB's previous calculations, the payment moratorium can cover HUF 3,600 billion in installments by 2020, if only 80% of debtors use the moratorium, a monthly installment of HUF 320 billion may fall between April and December, which may mean a total deferred payments of HUF 2,900 billion at the sector level.

A payment moratorium can pose challenges for banks not only at the liquidity management, but also because it can hide the customer’s payment difficulties, thus it makes harder to accurately identify and manage credit risks. Due to changing circumstances, new monitoring procedures, methods and new debt management structures may need to be developed in order to maintain effective risk management and reduce risk costs. To support this, MNB called on the financial institutions to prepare for the period following the repayment moratorium by strengthening their business and monitoring processes. The Supervisory Authority specifically emphasized that it will continuously monitor these expectations.

MNB initiated that the stakeholders should review their lending and monitoring processes, internal regulations and analyze the financial position of their customers, and on this basis develop financing schemes, payment offers, business and monitoring processes that can help debtors with possible post-moratorium payment difficulties.

MNB emphasized that in relation to retail customers, financial institutions could ascertain possible future payment problems by analyzing customer behavior and current-account turnover, and even by declaring customers in the last quarter of the moratorium.

In the case of corporate clients, it is also important for financial institutions to assess the future development of solvency, even through continuous monitoring in the sectors most affected by Covid-19. According to MNB's regulations, the analyzes must also cover other members of the group, even if they as standalone companies do not operate in the sectors exposed to the epidemic. The Supervisory Authority initiated that in the case of the corporate segment, lenders also should review the product and business solutions, which they can use to help solve the potential liquidity difficulties of these customers (e.g. contract amendments, special loan products, additional collaterals).

MNB presented several other measures at the executive circular:

• MNB emphasized that it is not acceptable for a financial institution to automatically downgrade a customer just because it uses the payment moratorium.
• Debtors must also be informed on a monthly basis of the amount of principal, interest and fees accrued in connection with their loan during the moratorium. Upon the expiration of the moratorium, the lenders must schedule the payment of unpaid interest and fees in consultation with the debtors.
• MNB expects credit institutions not to increase their fees and commissions during the moratorium on their bank account packages and loans, which depends on the amount of monthly incoming payments to the customer's bank account.
• It is an additional requirement that credit institutions should develop schemes for customers in payment difficulties and inform them in a comprehensible and personal manner.

Credit institution facilities

MNB also decided on prudential easing for the credit institution sector in order to mitigate the negative effects of the Covid-19 crisis and strengthen the role of the banking sector in supporting economic growth.

As a result of one measure, credit institutions may temporarily violate the capital buffer limit. MNB follows a European practice, the national banks of several EU Member States and the European Central Bank have already indicated that they will be lenient in times of crisis if a credit institution supervised by them breaches the limits in the case of capital conservation buffer or even the combined capital buffer. According to MNB's calculations, this measure represents a relief of almost HUF 700 billion for institutions and may further increase the lending potential of the domestic credit institution sector by up to HUF 5,000 billion in total. However, after the transition period following the crisis period, MNB expects the institutions to fully comply with this capital requirement again.

According to MNB, the use of consumer loans as own funds for mortgage loans should still be avoided, but it has eased the scope of control tasks required of credit institutions in this regard. A significant relief here is, among other things, the fact that credit institutions must carry out a much narrower range of ex-ante controls on the source of own funds than before.

According to MNB, it will also issue an executive circular about the submission of an application for registration of a mortgage and the simplified requirements applicable to valuations of commercial real estate in the event of an epidemic in order to minimize personal administration, speed up the processing of loan applications and business continuity:

• According to the central bank's expectation, a digital version of the real estate registration application received by the land office and its annexes may be accepted to prove the submission of the application for registration of the mortgage right to the competent land office.
• As an example, the Supervisory Authority emphasized that instead of conducting a full on-site inspection of collateral valuation procedures for non-residential (commercial) properties, simpler procedures are acceptable. The facilitation of the new valuation is, for example, that an external on-site inspection is an appropriate solution, supplemented by new, non-modifiable, dated photo documentation and other digitally documented real estate presentations (e.g. video conferencing).

Insurance

Regarding the payment of dividends by insurers and the remuneration of employees, in accordance with EIOPA's announcement of 2 April (on which we have previously prepared an article), MNB requires insurers to temporarily suspend the payment of all discretionary dividends and share repurchases. In addition, MNB required insurers to review their currently applicable remuneration policies and ensure that they are in line with the principle of prudent capital planning and in line with the current economic situation. In MNB’s view, the variable part of the remuneration should be determined in a conservative approach and its payment may be postponed.

The MNB has determined if an insurer nevertheless decides to pay dividends, share repurchases or large amount of variable remuneration, it must explain this in detail and in writing to the Supervisory Authority.