Hungary incentivizes banks to sell their non-performing commercial real estate project loans

01 December 2015 | newsletters

The Hungarian National Bank would like to incentivize the country's banks to clean their portfolios, since the banks still hold over HUF 700 billion (approx. EUR 2.25 billion) of non-performing commercial real estate project loans, – a volume which represents a significant stability risk for the Hungarian financial system. Moreover, this significant volume of the non-performing commercial real estate project loans limits the banks' willingness to provide loans, which in turn slows down economic growth in the country. In order to address this risk, the Hungarian National Bank decided this October to introduce additional capital requirements for credit institutions by implementing a systemic risk buffer.

Applicable as of 1 January 2017, the systemic risk buffer will be set between 0% and 2% of the individual bank's entire risk weighted exposure. Only CET1 instruments will be eligible as additional capital. The Hungarian National Bank will individually determine the applicable rate of the systemic risk buffer for each bank struggling with a problematic portfolio exceeding a threshold of HUF 5 billion (approx. EUR 16 million). The rate set by the Hungarian National Bank will be set in the last quarter of 2016, with the individual rate for each bank proportional to the bank's contribution to the overall systemic risk in the domestic banking sector.

A bank can only avoid falling under the scope of the additional capital requirement if it reduces the rate of the non-performing commercial real estate project loans until the end of 2016. Therefore, the additional capital requirement may motivate the country's banks to deal more drastically with their non-performing project loans (ie restructuring may not be sufficient) and simply sell them. If the banks do not succeed at selling such portfolios, the measure – according to the Hungarian National Bank – will nevertheless strengthen the stability of the Hungarian financial system.

This Hungarian National Bank measure also enhances the position of MARK Zrt. as a potential buyer, because it forces the banks to sell their problematic assets even at prices below their book value. This provision may cause the Hungarian banks to suffer further NPL-related losses before a sector-wide recovery takes hold. MARK Zrt. was established by the Hungarian National Bank in 2014 with the aim of purchasing domestic banks' problematic NPL portfolios, thereby reducing the systemic risks in the country's financial system.