Changes in MNB ICAAP-ILAAP-BMA methodology manuals
In December 2024, Central Bank of Hungary (MNB) according to its regular practice reviewed its expectations and methodologies for the ICAAP1 and ILAAP2 processes and their supervisory review, in addition for BMA3 and issued an updated manual4 for supervised institutions. In addition to the revision of content, the MNB also changed the usual structure in previous years, so some chapters were placed elsewhere. The renewal of the structure was probably necessary due to a more logical structure. Among the more significant content changes, the IRB shortfall related to credit risks, the methodology for determining the capital requirement of the IRRBB, and the part concerning the calculation of the capital requirement for operational risk deserve mention. As usual, the annual review and refinement of the measures for preferential capital requirements for green loans was carried out, and the minimum requirements for the institutions’ internal stress test were supplemented with the expectations of the climate risk stress test. Following the annual update of the MNB, KPMG experts analyze and present the main changes for the sixth year now, and in connection with this and similar topics, we recommend our April 2024, February 2024, March 2023, November 2022, January 2022, and February 2021 newsletters.
Credit risks
For clarification, the MNB highlighted that the concentration risk HHI5 index must be determined at the client group level, and that, with the application of CRR36 , the definition set out in Article 5, point 9 of the CRR becomes the guiding principle for the eligibility of SMEs. Accordingly, a “small and medium-sized enterprise” or “SME” is an enterprise or company whose annual turnover does not exceed EUR 50,000,000 according to its most recent consolidated financial statements.
With regard to the IRB7 shortfall, the MNB highlighted the recent experience and emphasized that the RWA8 limits the amount of surplus that can be taken into account to 0.6%, and sets the amounts in excess of this as the additional Pillar 2 capital requirement. The MNB justified this approach with the following aspects:
- In several cases, the impairment overlays during COVID did not prove to be temporary, and in some cases they also cover risks outside of credit risk models of the banks.
- There were experiences where the impairment was multiple times the credit risk VaR9 estimate, even though the VaR estimation was meant to cover the losses expected every 1000 years, i.e. the two risk measures were inconsistent.
- Several banks failed to adjust the IRB provision excess value with the compensating effect of excess impairment already taken into account in CET110. • At the same time, as a positive example, several banks have already applied the RWA limit
Market risks
With regard to trading book market risks, the MNB expects the banks to take at least 50% of the difference between the FRTB11 and the current capital requirement, if positive, when determining the ICAAP capital.
With regard to bank book interest rate risks (IRRBB), the MNB expects that at least O-SII12 institutions must quantify the basis risk of their bank book portfolio, taking into account the imperfect correlation between the various interest rates and yields, primarily the BUBOR and yield changes of government bonds. The MNB does not impose strict methodological and ICAAP capital requirements but expects risk monitoring in order to increase awareness. There are no specific regulations for the capital requirement either, but the MNB uses the EVE sensitivity indicator in its own calculations, which uses forward interest rates and a correlation matrix determined on the basis of historical data. At the same time, institutions may also need more complex simulations.
The MNB emphasized that it expects the application of the interest floor for liabilities if it is a legal obligation.
Emphasizing the importance of bank book credit spread risk (CSRBB), the MNB describes its expectations in a separate subsection in the new handbook. In addition to strengthening the most important EBA rules, the MNB emphasized that the impact of CSRBB for O-SII institutions must be measured at least in EVE and NII indicators, but it is also recommended to use CS01 (the impact of a 1 basis point change in credit spread), historical simulations and other risk measures. It is also necessary to establish governance processes in order to measure, manage and monitor risks.
In Appendix 2, the MNB modifies the rate of interest shocks used in the benchmark model, based on the July 2024 BCBS 578 standard. We analyzed the consultative version of the BCBS standard in our April 2024 newsletter, together with the supervisory focal points of the EBA. The shocks are presented in Table 1. As a temporary relief, the MNB does not take the increase into account in 2025 in the TSCR13, but in the P2G, and on the other hand, it is possible to calculate the effects of the new shocks through the use of calculations according to the old system and multipliers according to Table 2.
