In the Republic of Hungary, financial market control is exercised exclusively by its main financial regulator, the MNB. Besides, the regulator’s sphere of control also is the management and mitigation of systemic risks in the sector of financial services in Hungary. Moreover, the MNB has duties to protect consumers, control capital and insurance markets.
What is bank regulation in Hungary? It includes:
- Governmental control;
- Deposit insurance;
- Ensuring the fulfillment of risk and capital management requirements;
- Guaranteeing monetary and fiscal stability;
- Safeguarding protection of consumer rights and banking secrets.
If a banking institution violates the regulation, the MNB is entitled to:
- Make a statement about a violation;
- Require a bank to obey banking and prudential regulations;
- Request an urgent report from a bank;
- Demand preparation and application of an action plan.
If a violation is considered serious, the MNB might delegate a supervisory commissioner. In addition, some of the bank’s transactions could be prohibited completely or partly limited. For those new to Hungarian banking regulations, it might be worth knowing that the MNB has a right to demand rectification of the situation from a bank or its subsidiary. If this urge is not fulfilled, the MNB requests initiation of disciplinary action against that banking institution by contacting other financial regulators in the EU countries. Furthermore, if the bank’s approach does not change, the situation can be passed to the EBA.
Governmental takeovers
When a systematic crisis takes place, a minister of monetary regulations must be notified. Afterwards, the minister decides how to proceed: to increase the capital of a financial institution or to nationalize the shares for a period of time. In case of a second option, the government is entitled to take control of financial institutions with registered office on Hungarian territory.
Bankruptcy cases
If a bank happens to become bankrupt, a supervisory commissioner is probably to be appointed to take over the rights and duties of the Board of directors. For the whole period of the commissioner’s appointment members of BoD are not able to exercise their rights.
The task for banking institutions then is to invent a recovery plan that always depends on several factors such as the seriousness of risks connected to their financial services and business model.
Capital adequacy conditions
Primarily, to set up a bank in Hungary, it is necessary to have available a minimum of 2 billion Hungarian forints (the equivalent of $6,3 m). When it comes to foreign subsidiaries, the rules are the same. A minimum level of capital is required from banking institutions in order to ensure that they would be able to fulfill requirements for solvency, liquidity, and offset risks related to banking activities. As compensation for the banks’ operational losses, a portion of 10% from yearly profits is supposed to be put in general reserve. Violators of capital adequacy conditions will face penalties.
Additionally, there are cases when a BoD must inform the MNB within 48 hours:
- Changing a bank’s subscribed capital;
- Suspending or ending activities of a bank.
Insolvency
Before initiating a bankruptcy procedure, the MNB rather request taking emergency measures such as:
- Suspending certain transactions;
- Creating a schedule for calculating a structure of capital;
- Setting a maximum interest rate;
- Demanding a BoD to hold a GM;
- Withdrawing consent to appoint personnel;
- Urge the owners of banking institutions to take the requested steps.
In case of insolvency, a BoD is obliged to notify the MNB in a written form immediately. Once it is done, a bank or the MNB starts a liquidation process. After it was decided that a bank will undergo a liquidation and a court has published a decision about liquidation, a period of two months is given to creditors of a bank to file their claims.
Future prognosis
In the future, the regulation of banks in Hungary is expected to take more steps towards wider supervisory control, better risk management, and improved liquidity of banking institutions. Also, the country’s financial regulators are likely to enhance the protection of bank clients and fair competition.
Are you not feeling confident about banking sector regulation in Hungary and looking for advice? Contact our specialists in COREDO.