The liquidity and capital positions of Hungarian banks have remained adequate and have not changed significantly over the past six months, the central bank said in its latest Stability Report published on May 21. The vast majority of banks would have sufficient liquidity buffers even in the event of the extreme shocks simulated in the bank's stress tests. Just three big banks would need capital injections in an adverse macroeconomic and financial market scenario, but the foreign owners of these banks have already proved their commitment to their Hungarian subsidiaries through capital injections to offset losses.
The procyclicality of the financial system has declined in the past six months, mainly due to the policy rate cuts of the central bank. The Financial Conditions Index (FCI), gauging the aggregate impact of the financial sector on annual GDP growth, remained neutral.
The central bank has identified several risks for the local financial system, which may weaken the current adequate level of resilience to shocks in the future. Among external factors, protracted euro-area sovereign debt crisis weighs on the domestic economic recovery through direct spill-over and the challenges faced by the parent institutions of banks active in Hungary. In this regards, maintaining prudent fiscal policy and supporting sustainable economic growth in Hungary remain a priority to mitigate the impact of potential adverse shocks
Regarding domestic risks, the credit supply constraints on companies, exchange rate exposure and the reliance on external funding remain key challenges. The central bank expects that the launch of the Funding for Growth Scheme would help mitigate these risks. The ratio of non-performing loans in the domestic financial sector is seen as high, which reduces its willingness to lend. The central bank believes that, the planned introduction of the personal bankruptcy process could help the management of non-performing loans. In addition, increasing participation in the exchange rate cap scheme could slow the deterioration in household portfolio quality. Finally, the central bank sees lack of competition among banks in mortgage lending.
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