Hungary will grant banks a six-month extension on the deadline for lenders to meet new regulations on mortgage bonds, the Magyar Nemzeti Bank announced on February 23.

The new rules, which were announced in June, are part of the central bank's efforts to reduce the vulnerability of the banking sector. It originally said banks should have at least 15% of their mortgage portfolio financed by long-term forint mortgage bonds by October 1.

"In order to ensure adequate time to adapt to the anticipated regulatory changes," the Financial Stability Council has added six months to the deadline, the MNB reports in a statement. Lenders will now have until April 1, 2017 to issue the bonds. The central bank also says the delay is driven by the need for some regulations governing mortgages to be reviewed and amended by parliament.

Mortgage bonds should improve the quality of bank balance sheets by introducing longer-term financing, according to the central bank. The MNB is also about to launch purchases of toxic commercial real estate assets from lenders via bad bank MARK with the same aim.

All these measures are intended to convince banks to return to commercial lending. Lenders have pulled in their heads since Fidesz came to power in 2010 and embarked on a series of tough policy measures that  pushed them into losses. While the MNB is now "using more carrot than stick", deputy Governor Marton Nagy told bne IntelliNews recently, lenders insist that there is little demand in the market.

The government and MNB reject that claim. However, analysts in Budapest say that is a clear political necessity. "If the MNB or government admit there's no demand in the economy, then they're clearly admitting weakness," said one. 

Following the forced conversion of foreign currency mortgage loans into forints in late 2014, the maturity mismatch between the banking sector’s forint assets and liabilities has increased significantly, the MNB said in the summer. The new obligations are expected to stir up the mortgage market. 

According to preliminary estimates, the move should encourage the establishment of a number of mortgage banks and the issuance of around HUF300bn (€960mn) of bonds. Erste - which signed off on a peace deal with the government and EBRD in February 2015 - recieved permission from the MNB to launch a mortgage bank in November. It will be followed by state-owned MKB and K&H. Previously, the only lenders in the country with mortgage banks were OTP, UniCredit and FHB.