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2016
Annual Report
2016 BUSINESS REPORT AND FINANCIAL STATEMENTS OF
THE MAGYAR NEMZETI BANK
Annual Report
Kiadja:MagyarNemzetiBank
Felelőskiadó:HergárEszter
1054Budapest,Szabadságtér9.
www.mnb.hu
ISSN1216-6197(print)
ISSN1585-4604(on-line)
ANNUAL REPORT • 2016 3
Kiadja:MagyarNemzetiBank
Felelőskiadó:HergárEszter
1054Budapest,Szabadságtér9.
www.mnb.hu
ISSN1216-6197(print)
ISSN1585-4604(on-line)
Contents
Part A) 2016 Business report of the Magyar Nemzeti Bank 5
1 The Governor’s foreword 7
2 A brief overview of the Magyar Nemzeti Bank 122.1Objectives,basicandothertasksoftheMNB 122.2BodiesandmanagementoftheMNB 132.3OrganisationoftheMNB 162.4TheMNBasamemberoftheEuropeanSystemofCentralBanks 16
3 Review of the MNB’s performance in 2016 223.1MonetaryPolicy 223.2Stabilityofthefinancialintermediarysystem 293.3Supervisionandconsumerprotection 333.4Resolution 403.5Paymentandsecuritiessettlementsystems 413.6Foreignexchangereservesmanagement 453.7Cashlogisticsactivity 493.8Statisticalservices 533.9TheMNB’sactivityintheareaofsocialresponsibility 563.10FactorsshapingthecommunicationoftheMNB 583.11TheMNB’sincomein2016 583.12FinancialperformanceoftheMNB 603.13IntroductionoftheESCBCommittees 663.14TheMNB’sresearchactivitiesin2016 683.15PublicationsandconferencesorganisedbytheMNBin2016 68
4 Additional information on the supervisory activity of the MNB in 2016 764.1Institutionoversight 764.2Inspectionscompleted 764.3Licensingandlegalenforcement 774.4Marketsurveillance 804.5Consumerprotection 814.6Administrativerepresentationatproceedings 83
5 Explanation of abbreviations and terms specific to central banking 84
MAGYAR NEMZETI BANK
ANNUAL REPORT • 2016 4
Part B Audited financial statements of the Magyar Nemzeti Bank 87
1 Independent auditor’s report 89
2 Balance sheet of the Magyar Nemzeti Bank 92
3 Income statement of the Magyar Nemzeti Bank 93
4 Notes to the financial statements 944.1TheMNB’saccountingpolicy 944.2Effectsofmacroeconomictrendsonthe2016balancesheetandincomestatement
oftheMagyarNemzetiBank 994.3Forintreceivablesfromthecentralgovernment 1004.4Foreigncurrencyreceivablesfromthecentralgovernment 1004.5Forintandforeigncurrencyliabilitiesofthecentralgovernment 1004.6Netpositionsvis-à-visthecentralgovernment 1014.7Forintreceivablesfromandliabilitiestocreditinstitutions 1014.8Netpositionsvis-à-viscreditinstitutions 1024.9Goldandforeignexchangereservesofthecentralbank 1034.10Otherforintandforeigncurrencyreceivables 1054.11Otherdepositsandliabilities 1064.12Investedassets 1074.13Impairmentlossesandprovisions 1134.14Prepaidexpenses/accruedincomeandaccruedexpenses/deferredincome 1144.15Changesinequity 1154.16Revaluationreserves 1154.17Off-balancesheetliabilitiesandothersignificantoff-balancesheetitemsoftheMNB 1164.18Netinterestincomeandrealisednetincomeoffinancialoperations 1184.19Componentsofincomefromtherevaluationofforeignexchangeholdings 1214.20Costofissuingbanknotesandcoins 1224.21Otherincome/expenses 1224.22Incomeotherthanfeesandcommissions 1234.23Incomefromsupervisoryactivities 1234.24Operatingincomeandexpenses 1244.25Informationonwagesandnumberofstaff 126
ANNUAL REPORT • 2016 5
Part A) 2016 Business report of the Magyar Nemzeti Bank
ANNUAL REPORT • 2016 7
1 The Governor’s foreword
Thedomesticrealeconomicenvironmentcontinuedtohaveadisinflationaryimpactin2016,andtheannualaveragerateofinflationwas0.4percent.In2016,theMonetaryCounciloftheMNBdeployedadditional,targeted monetary policy instruments along withtraditional interest rate policy to respond to thechallengesposedby the low inflationenvironmentandthecountry’sexternalvulnerability,withaviewto achieving themedium-term inflation target in asustainablemannerandadequatelystimulatingtherealeconomy.
AstheFundingforGrowthScheme(FGS),whichwasintroducedasatemporary instrument,successfullyachievedthemarketbuildingandgrowthobjectivessetuponitsannouncement,theGrowthSupportingProgramme(GSP)was launchedon1January2016withaviewtograduallyphasingouttheFGS.Partofthis involvesthethirdstageoftheFGS,comprisingtwopillars,whichallowsmorerestrictedandtargetedfinancingthanbefore,whileanotherpartconsistsoftheMarket-BasedLendingScheme(MLS),apackageofinstrumentscontainingpositiveincentivestosupportbanks’lendingactivityinotherways.
TheMNB’sobjectivewiththeMLS,whichformspartoftheGSP,wastoensurethat–evenwiththegradualphase-outoftheFGS–thecreditmarketfunctionssmoothly and lending increases in a sustainablemanner,whilebeing lessdependentonthecentralbank.WithintheframeworkoftheMLS,inthefirstquarter of 2016 theMNBorganised a total of fiveLIRStenders.Atthesetenders,banksconcludedLIRStransactionswith a total value of HUF 780 billion,therebyundertakingtoincreasetheirnetSMEloanportfoliobyuptoonequarterof theiroutstandingLIRSportfolioannually, inthenextthreeyears.Thegrowth in the portfolio amounted to almost HUF200billionannually,representingroughly5percentgrowthintheSMEloanportfolioin2016.
As regards the FGS, the decision by theMonetaryCouncilintheautumnpermittedthecreditinstitutionstoregrouptheirallocatedcreditlinesbetweenthetwopillarsandprolongedthecontractingdeadlineuntilendofMarch2017.Untiltheendof2016,thecredit
institutionsprovideddatatotheMNBoncontractsinthetotalamountofHUF473billion.Withthis,inallofthephasesoftheFGSmorethan37,000enterpriseshadaccesstofinancinginthetotalamountofalmostHUF 2,600 billion since 2013. In recent years, theschemehasmadeamajorcontributiontoeconomicgrowthandhigheremployment.
The change in the MNB’s set of monetary policyinstrumentscontinued in2016.Aspartof this, thelimited2-weekdepositinstrumentwasphasedoutbyend-April2016,andon7July2016thecentralbankended the conditional interest rate swap tenders,introducedaspartoftheSelf-financingProgramme.The Monetary Council’s decisions on 12 July and20September2016 restrictedbanks’access to the3-month central bank deposit instrument. FromAugust 2016, the tender for the 3-month centralbankdepositinstrumentwasorganisedonceamonth,instead of the earlier weekly tenders, and it wasstipulatedthatthetotaldepositportfolioofthebanksthatmaybeplacedthroughthe2016Q4tenderson3-monthdepositsmustnotexceedHUF900billion.On20September,theMNBalsodecidedtointroducefine-tuninginstrumentswithaviewtooffsettingthepotentiallypersistingandmaterial liquidity shocks:theseinstrumentsincludedtheEURswapprovidingforintliquidityontheassetside,andthepossibilityofplacingdepositswiththecentralbankontheliabilityside.
Thenewoperativemonetarypolicyframeworkwassuccessfulin2016.Thequantitativelimitationofthe3-monthdepositefficientlysupportedthetargeted,unconventional easing of monetary conditions, asa substantial, lasting fall occurred in yields in therelevantmarkets.Atthesametime,theMLSfacilitatedthesustainableexpansionofmarket-basedlendingtosmallandmedium-sizedenterprisesthroughbanks’quantifiedlendingcommitments.
In2016,thevulnerabilityoftheHungarianfinancialsystem continued to decrease. The Hungarianbankingsystem’sshock-absorbingcapacityisrobustboth in termsof liquidity and capital stock.Banks’lendingactivityrecoveredbothinthehouseholdand
MAGYAR NEMZETI BANK
ANNUAL REPORT • 2016 8
the corporate segment,while annual SME lendinggrowthreachedthelevelof5-10percent,whichisdeemed necessary for sustainable growth (growthin the outstanding borrowing of the SME sector,including the self-employed, was close to 12 percent).However, external risks roseduring2016. Inaddition to the severe consequences of the crisis,geopolitical developments and challenges posedby the persistently low interest rate environmentrepresent themain risks in the European bankingsector.Despitethepersistentlypoorperformanceoftheeuroareaeconomyinpastyears,theHungarianeconomyisstillonagrowthpathandsystemicriskscontinuedtodecrease,asaresultofwhichHungarywasupgradedbytheratingagencies.
Asaresultofthecentralbank’sactiveparticipation,theratioofnon-performingloansdecreasedfurther.Thedeclineachieved todate ismostlyattributableto regulatory measures, in particular the activerole played by the central bank. The change inlending practices also helps resolve the issue ofnon-performingloans,andthecentralbank’sactiveinvolvementcontinuestoencouragebankstoreducetheirnon-performingportfolios.
The focusof theMNB’smacroprudentialactivity in2016wasonfine tuning thepreviously introducedmacroprudentialinstruments,andmonitoringmarketparticipants’ adjustmentand riskdevelopments. InJanuary2016,thecentralbankpublisheditsstrategyentitled“Stabilitytoday–Stabilitytomorrow”,whichdesignates the fundamental aspects of the centralbank’s operation as macroprudential authority, inlinewiththeMNB’sStatute.Aspartofthefollow-upofthemacroprudentialinstruments,inOctober2016theMNB issued itsMacroprudential Report for thefirsttime,whichcanberegardedasanovelinitiativeevenbyinternationalstandards.Thepurposeofthereport,whichwillbepublishedannuallyinthefuture,istopresenttothepublicthemeasuresappliedbytheMNBtopreventandaddresstheidentifiedandcommunicatedsystemicrisks,aswellastheeffectsofthoseandtheadjustmentofmarketparticipants.TheMNB’snewmacroprudentialinstrument,themortgagefunding adequacy ratio (MFAR), will reduce forintmaturitymismatchinthebankingsystemfrom2017.Asaresultoftheintroductionofthenewindicator,several new mortgage banks were established in2016andnewmortgagebondissuancestookplace.In connection with the fine-tuning of the set ofmacroprudential instruments, in2016–taking into
consideration the increasingmortgage lendingandpropertymarketactivity–minorchangesweremadetothedebtcaprules.Thecentralbankalsoreviewedthebanks’preliminaryarrangementsfortheSystemicRiskBuffer(SRB),whichismeanttoreducetherisksoftheproblemprojectloanportfolios,andperformedtheannualreviewoftheOtherSystemicallyImportantInstitutions(O-SII).
Theperformanceofsupervisorydutiesin2016wascharacterisedbyforward-lookingstrategicapproachandfastresponse.Applyingitsrevisedmethodologyin practice, the MNB performed the oversight ofthe financial intermediary system, enforcing therequirementofproactiveapproach.
Theregulatorysystem,whichwasrevisedinrespectofseveralsectors,andthemarketambitionsgeneratednew challenges for the MNB. Measures fosteringstabilityandsoundgrowthincludedtheintegrationof cooperativecredit institutionsand theoversightstrategy adjusted to the integration in the area ofcreditinstitutions,thesupervisionofoperationsinlinewithSolvencyIIintheareaofinsurance,themeasurestaken to gain investors’ confidenceandestablish asafelyfunctioninginstitutionalsysteminthecapitalmarket,andtheclosingofthesettlementinspectionsintheareaofconsumerprotection.
The regulatory and supervisory measuresimplementedinaccordancewithan“ethical”approachandtheconsumerprotectionmeasuresfacilitatedthemaintenanceoftherelationbetweentheconsumersandsupervisedinstitutionsbasedonequilibriumandfairbusinessconduct.
In close cooperation with the dominant actors inthe domestic market, business model analysesare conducted in an ever broadening range. As aresultof thenewapproach, theMNBcanobtainamore comprehensive picture of the sustainabilityof thesupervised institutions’profitability, strategyand business model. Furthermore, the dialogueconducted during the analyses efficiently supportstheinstitutions’strategydevelopment,planningandriskmanagementprocesses.
OneofthegreatestachievementsoftheMNBin2016wasthesuccessfulclosureofMKBBank’sresolutionprocedure.Inadditiontothis,majormilestoneswerereachedinthefulfilmentofthetasksrelatingtotheresolutionfunctionoftheMNB:theMNBparticipated
THEGOvERNOR’SFOREWORD
ANNUAL REPORT • 2016 9
intheresolutioncollegesledbytheBrussels-basedSingleResolutionBoard,astheresolutionauthorityoftheBankingUnion,initscapacityasahostauthority,aswellasintheworkofthevariousresolutioncollegesand in the process of the resolutionplanning as agroup-levelresolutionauthorityinrespectofabankgroupdomiciledinHungary;inaddition,itplayedanactiveroleinthedevelopmentoftheEUresolutionregulatorychangesandintheintroductionthereofinHungary.OnemajorachievementduringtheyearwasthattheMNBliaisedwiththeresolutionauthoritiesof 46 non-EU countrieswith a view to developingprofessionalcooperation.TheMNBalsoassumedakeyroleinthefulfilmentofthefinancialstabilitytasksrelatedtocollectivefundsin2016.
In2016,theMNBissued29resolutionsandexpertopinionsonpayments,andwithintheframeworkofpaymentauditsitlaunched19newproceedingsandclosed5inspectionslaunchedearlier.Asaresultoftheinspections,administrativepenaltieswereimposedinthetotalamountofHUF61.1million.
The MNB once again paid special attention toenhancing the efficiency of the payment systemsin 2016. The MNB launched a project for theimplementation of the instant payment servicesin Hungary. It elaborated the final developmentconcept for instant payments after processing theexpert opinions provided to it as a result of thecomprehensive consultation process conductedduring the project. The MNB’s Financial StabilityBoardapprovedtherulesofinstantpaymentson13December2016,whichcontainthebasicrequirementsprescribed for the rendering of instant paymentservices inHungary. In addition, as a result of thedevelopmentperformedattheMNB’sinitiative,from1 January 2016 all forint credit transfers requiringinterbankclearing,submittedtothecreditinstitutionsonpaper,areprocessed in the intradaysettlementsystemoftheInterbankClearingSystem,insteadoftheformerlyusedovernightsettlement.
Since the accession of the forint to the CLSinternationalforeigncurrencysettlementsystemattheendof2015,theinfrastructureworkedsmoothlyand in 2016 the number of direct members andthe volume of settled forint turnover increaseddynamically inthesystem.Asaresultofaccession,representatives of the MNB participated in theCLS Oversight Committee’s meetings, where theyreported,amongstotherthings,ontheexperiences
gained since the accession of the forint. In 2016,under the MNB’s supervision, domestic paymentserviceproviderscontinuedtoprepareforcompliancewiththeprovisionsoftheSEPAfinaldateregulationapplicabletoEURcredittransfersanddirectdebits.Theserviceprovidersofnon-euroareacountrieshadto complete the changeover by 31 October 2016,whichwascompletedbyHungarysmoothly.
Inaddition to thevarietyofMNBpublications, theMNB’spublicationentitledPayment Systems Report 2016,analysingtherecentdevelopmentsinthecentralbankmoneycirculationandsecuritiessettlement,waspublishedinJune2016forthefifthtime.
TheMNB’s foreign exchange reserves dropped byEUR5.94billionduringtheyear,andthusattheendof December 2016 the foreign exchange reservesamountedtoEUR24.4billion.Duringtheyear,thefallinthelevelofforeignexchangereserveswasmostlyattributabletorepaymentofdebt,theconversionofthehouseholdforeigncurrencyloansintoforint,andthepaymentsrelatedtotheforeigncurrencypillarofphasethreeoftheFGS.TheseeffectswerepartiallyoffsetbytheEUtransfersreceivedfromtheEuropeanCommission, and the volume of foreign currencyreceivedduringtheforintliquidityprovidingforeigncurrencyswaptendersannouncedfromOctober.
On31December2016, the total valueof currencyin circulation amounted to HUF 4,580 billion,representinga6percentyear-on-yearincreaseofHUF275.7billion.Theextremelyintensivegrowthinforintcashholdingsseensince2012easedoffsubstantiallyin2016.
Thetwolargestbanknotedenominationsstillplayadominantroleincashturnover:attheendoflastyeartheyjointlyaccountedfor65percentofthevolumeofbanknotesincirculation.
In2016,theMNBperformedcashtransactionsforitscustomers,creditinstitutionsandtheHungarianPostinavalueofHUF4,130billion.
In 2016, 1,549 forint banknote counterfeits wereidentified and withdrawn from circulation; thisrepresentsa furtherdeclineevencomparedto thepreviousyear,andthusitcanbestatedthatthedegreeofthecounterfeitingofforintbanknotesisfavourable.In 2016, counterfeiting of higher denominations(mainly10,000-forint and20,000-forintbanknotes)
MAGYAR NEMZETI BANK
ANNUAL REPORT • 2016 10
remainedmosttypical,accountingfor87percentofcounterfeitforintbanknotes.
Intheperiodbetween2014and2018,inthecontextof “Progress and tradition”, theMNB is poised toredesignthebanknoteseriespresentlyincirculation.Oftheseriescomprisingsixdenominations,thefirstbanknotewhichwasredesignedwasthe10,000-forintbillin2014,followedbythe20,000-forintbanknotein2015.Thenexttwodenominationsarethe2,000-forintand 5,000-forint banknotes, which became legaltenderfrom15November2016;theywillappearinthecirculationgradually,fromMarch2017,aftertheproper preparation of the participants of the cashsupplychain.
PursuanttotheMNBAct,andinthespiritofthesalespolicy–aimedatfosteringcoincollection–validsince2014, the central bank issued 19 commemorativecoins on nine topics in 2016. Three of theseweregold coins, sevenwere silver coins and ninewerenon-ferrous metal collector coins. The securityfeatureappearinginthemintmarkfeaturinginthecoinsisatechnologicalinnovationintroducedinthecommemorativecoinprogramme in2016. In2016,theMNBalsoputintocirculationthecommemorativeversionofanew50-forintcirculationcoin.
In 2016, the MNB made preparations for theacceptance and processing of harmonised datareportingbycreditinstitutionsapplyingtheHungarianand international accounting standards (IFRS),satisfyingbothsupervisoryandstatisticalobjectives.TheMNBDecreeondatareporting,whichiseffectivefrom2017andcontainsthecreditinstitutions’datareportinginanewstructure,withmoredetailsthanbefore,waspromulgatedinthefirsthalfof2016.
TheMNBdevelopedtheconsolidatedriskmonitoringsystem for bank groups employing both the newuniform European-level data supply standard andthedatacontentorderedbytheMNBDecree,intheframeworkofwhichaquarterlyriskevaluationoftheactivitiesofallbankgroupsispreparedstartingfrom2016. The statistics prepared from the supervisorydatareporting,consolidatedatthesectorlevel,arealsopublishedontheMNB’swebsiteintheformoftimeseries.
In2016,theMNBalsosuccessfullyimplementedtheinsurers’newsupervisorydatareportingconnectedtotheintroductionofthestandardSolvencyIIrulesoftheEuropeanUnion.
In2016,theMNBrealisedaprofitofHUF54.3billion.Bothnetinterestincomeandincomefromfinancialtransactionsdevelopedfavourably,whichwasmostlyattributabletothefallininterestexpensesresultingfromthebaseratecuttingcycleandthecentralbank’sself-financingprogramme.
Actual operating costs amounted to HUF 35,395millionin2016,whichexceededtheexpensesincurredinthepreviousyearby7.3percent.
The increase in expenses compared to 2015 waspartiallyduetopersonnelcosts,primarilyowingtotheriseintheaverageheadcountprimarilythroughthefillingofvacancies,andalsototheperformancenewtasks(e.g.resolutionandreorganisationactivity,andextradutiesoftheFinancialArbitrationBoard,asmandatoryenforcementforum).
Thegeneral operatingexpenses,mostlywithin theexpensesofupkeep,alsorose,which isdueto theriseinthecostsofarmedguardingandprotection,asthecostsofsecurityguardingoutsourcedin2015wereincurredinrespectofthefullyearin2016.
The financially realised value of investmentsimplemented in 2016 was HUF 4,910 million –includingadvancepaymentsforinvestmentpurposes– themajorityofwhichwerecapitalexpenditures,mostlyIT,relatedtotheusualcourseofbusiness.
In 2016, the environmental activity of the MNBwasonceagaindeterminedbythe implementationof the medium-term (2014-2016) environmentalstrategyadoptedbytheExecutiveBoard.Thefocusof the strategywas on the environmentally sounddevelopment of the MNB’s buildings and furtherimprovement intheenvironmentalperformanceofthecashsupplychain.
In the medium-term strategy, theMNBmade thecommitmentinrespectofitsbuildingsthatwithin3yearsitwouldobtainaone-gradehigherratingoftheinternationalenvironmentalassessmentmethodandratingsystem(BREEAMIn-Use)fortheheadquartersbuilding,classifiedasanationalmonument.At theendof2016itmanagedtoobtainthe“veryGood”assessmentrating,whichisuniquebyinternationalstandardsaswell.
In relation to improving the environmentalperformance of the cash supply chain, based onthe detailed environmental review of the MNB’s
THEGOvERNOR’SFOREWORD
ANNUAL REPORT • 2016 11
subsidiaries involved in cash production, in 2016Pénzjegynyomda Zrt. and Diósgyőri Papírgyár Zrt.started preparing for the implementation of theMNB’senvironmentalmanagementsystem(KÖvHIR).Preparationsareproceedingonschedule,andin2017thesubsidiarieswillobtaintheEMAScertificate–theinternationalaccreditationrecognisingenvironmental-friendlyoperation.
Compliancewiththelawsintheareaofenvironmentalprotection was ensured in 2016, and the MNBreneweditsEMAScertificatein2016.
ThereviewandupdatingoftheMNB’smedium-termenvironmentalstrategyisduein2017.ThereviewwillcovertheMNB’senvironmentalmanagementsystem,andparticularlytheassessmentofitsenvironmentalperformance, the identification of the significantenvironmental factors and, as a result of this, thereview of the Environmental Policy, aswell as thedefinitionoftheobjectivestobeachievedin2017-2019.
TheMNBregardsitasitsmissiontoservethepublicgood by utilising its sustainable positive financialresult, without jeopardising its primary objectiveandbasictasks,andbysupporting,asfaraspossible,therealisationofprofessionalandsocialgoals thatreflectcredibility,createvalueandstrengthensocialcohesion. Themainpillarsof theMNB’sCorporate
SocialResponsibilityStrategy–i.e.theimprovementof financial literacy, the development of economiceducationand research infrastructure, the supportfor national cultural and contribution to charitableactivities–reflecttheseprinciples.Theresultsoftheprogrammein2016contributedtotherealisationofthegoalssetoutintheCorporateSocialResponsibilityStrategytoasubstantialdegree.
Inordertosupplythegeneralpublicwithcontinuousandprofessionalinformation,in2016theMNBissuedatotalof413pressreleases,held48pressconferencesandpublished93professionalarticlesintheprintedpressandonline,aswellonitsownwebsite.
Within the framework of statements and pressconferences,theMNBpresentedthemostimportantcentralbankdecisions,theoutcomesoftheMonetaryCouncil’s meetings, the decisions and informationregarding monetary policy and the stability ofthe financial system, the findings of supervisoryinspections and the related resolutions, aswell asessentialstatisticaldataandnewsoncashcirculationand the issuance of commemorative coins. Thepresentationandintroductionofthetargetedcentralbank programmes and measures supporting theeconomicpolicyof thegovernmentandHungarianeconomicgrowth,alongwiththedemonstrationofactivitiesservingwholesocietygoalswasonceagainakeyobjectivein2016.
ANNUAL REPORT • 2016 12
2 A brief overview of the Magyar Nemzeti Bank
Company name: MagyarNemzetiBank
Registered Office: 1054Budapest,Szabadságtér8–9.
Form of operation: companylimitedbyshares.Theformofoperation,i.e.the‘companylimitedbyshares’designationoritsabbreviationneednotbeincludedinthecompanynameoftheMagyarNemzetiBank.
Year of foundation: 1924
Owner (shareholder):theHungarianState,represented bytheministerinchargeofpublicfinances
Scope of activities:asdefinedbyActCXXXIXof2013ontheMagyarNemzetiBank(hereinafter:MNBAct).
Subscribed capital:HUF10billion
2.1 OBJECTIVES, BASIC AND OTHER TASKS OF THE MNB
TheMagyar Nemzeti Bank (hereinafter: MNB, thecentralbank) isa legalentityoperatingasaspecialcompany limited by shares, which conducts itsoperationsinaccordancewiththeprovisionsoftheMNBAct.
InaccordancewithArticle127oftheTreatyontheFunctioningoftheEuropeanUnion,theMNBAct–whichestablishestheMNB’sprimaryobjectivesandbasic tasks aswell as its institutional, operational,personnelandfinancialindependenceandoperation–stipulates that theprimaryobjectiveof theMNBis to achieve andmaintain price stability.Withoutprejudicetoitsprimaryobjective,theMNBsupportsthe maintenance of the stability of the system offinancial intermediation, the enhancement of itsresilienceanditssustainablecontributiontoeconomicgrowth,andtheMNBsupportstheeconomicpolicyofthegovernmentusingtheinstrumentsatitsdisposal.
The MNB Act also stipulates the independence ofthe central bank in accordance with Article 130
of the Treaty on the Functioning of the EuropeanUnion.On thebasisof central bank independence,the MNB and the members of its bodies shall beindependentincarryingouttheirtasksandmeetingtheirobligations conferredupon themby theMNBAct,andshallneitherseeknortakeinstructionsfromtheGovernment,theinstitutions,bodiesandofficesoftheEuropeanUnion,thegovernmentsofitsMemberStatesoranyotherorganisationsorpoliticalparties,exceptfromtheEuropeanCentralBankandasrequiredbasedonitsmembershipintheEuropeanSystemofFinancialSupervision.TheGovernmentoranyotherorganisationshalladheretothisprinciple,andshallnotattempttoinfluencetheMNBoranymemberofitsbodiesinthecourseofperformanceoftheirtasks.
ThebasictasksoftheMNBarethefollowing:
–itdefinesandimplementsmonetarypolicy;
–it has the exclusive right to issue banknotes andcoins, including commemorative banknotes andcoins,whichshallbethelegaltenderofHungary;
–ithastheexclusiverighttoholdandmanageofficialforeign exchange and gold reserves, in order topreserve the external stability of the Hungarianeconomy;
–ithastheexclusiverighttoconductforeignexchangeoperationsinrelationtothemanagementofforeignexchangereservesandtheimplementationoftheexchangeratepolicy;
–ithastheexclusiverighttooverseepaymentandsecuritiessettlementsystems,includingoverseeingtheoperationofthesystemandtheoperationoftheorganisationperforming central counterpartyactivitiesinordertoensurethesoundandefficientoperation of these systems and the smoothcirculationofmoney.Withinthescopeofitspowersset forth in the MNB Act, it participates in thedevelopmentofpaymentandsecuritiessettlementsystems;
ABRIEFOvERvIEWOFTHEMAGyARNEMZETIBANK
ANNUAL REPORT • 2016 13
–itcollectsandpublishesthestatisticalinformationrequiredforcarryingoutitstasksandfulfillingitsstatisticalreportingobligationstowardtheEuropeanCentralBankasdefinedinArticle5ofProtocol(No.4)ontheStatuteoftheEuropeanSystemofCentralBanksandoftheEuropeanCentralBankattachedtotheTreatyontheFunctioningoftheEuropeanUnion;
–it establishes the macroprudential policy forthe stability of the entire system of financialintermediationandwiththeobjectivetoenhancetheresilienceofthesystemoffinancialintermediationand to ensure its sustainable contribution toeconomicgrowth.Tothatendandwithinthelimitsspecified in theMNB Act, theMNB explores thebusinessandeconomicrisksthreateningthesystemof financial intermediation as awhole, promotesthepreventionofthedevelopmentofsystemicrisksandthereductionoreliminationofevolvingsystemicrisks;furthermore,intheeventofdisturbancestothe credit market it contributes to the balancedfunctioning of the system of intermediation infinancing the economy by stimulating lendingand–intheeventofexcessivecreditoutflow–byrestraininglending.
TasksoftheMNBaboveandbeyonditsbasictasksarethefollowing:
–itactsasaresolutionauthority;
–it acts as the sole supervisor of the financialintermediarysystem,inorderto
a) ensure the smooth, transparent and efficientfunctioning of the system of financialintermediation;
b) facilitate theprudentoperationof thepersonsand organisations forming part of the systemoffinancial intermediationandsupervisiontheprudentexerciseofowners’rights;
c) discoverundesirablebusinessandeconomicriskstoindividualfinancialorganisationsorindividualsectorsthereof,reducingoreliminatingspecificorsectoralriskswhichhaveevolved,andtakingpreventive measures to ensure the prudentoperationofindividualfinancialorganisations;
d) protect the interests of users the servicesprovidedbyfinancial organisations in order to
strengthen public confidence in the financialintermediarysystem;
–it performs, via the Financial Arbitration Board,the out-of-court resolution of disputes relatedto the establishment and fulfilment of contractsfor services, established between the consumerand the entities or persons covered by the actsdefined in Article 39 of the MNB Act relatingto the establishment and performance of legalrelationshipsfortheuseofservices.
AnyfurthertasksoftheMNBshallbedefinedbyactsand, inrelationtothesupervisionofthesystemoffinancialintermediation,bylegalregulationsadoptedpursuant to theauthorisationofanact.Suchtasksof theMNB shall complywith the basic tasks andresponsibilitiesoftheMNBasdefinedintheMNBAct.
2.2 BODIES AND MANAGEMENT OF THE MNB
TheMNBoperatesasalegalpersonfunctioningintheformofasingle-membercompanylimitedbyshares.ThegeneralrulespertainingtocompanieslimitedbysharesandtherelevantprovisionsofActvof2013ontheCivilCodeareapplicabletotheMNB,withtheexceptionslaiddownbytheMNBAct.
TheHungarianStateastheshareholderisrepresentedbytheministerinchargeofpublicfinances.TheMNBoperateswithoutaGeneralMeeting.
Theshareholder isentitledtopassdecisions,bywayofashareholder’sresolution,ontheestablishmentandontheamendmentoftheStatutesaswellasontheappointment,dismissalandremunerationoftheauditor.
As a guarantee of independence, in contrast to thepractice of other companies limited by shares, theremunerationoftheMNB’sGovernor,DeputyGovernorsandothermembersoftheMonetaryCouncilaswellasthemembersoftheSupervisoryBoardaredeterminedbytheMNBActratherthanbytheshareholder.
Likewise, the bodies of theMNB are specified bytheMNBActasfollows:theMonetaryCouncil,theFinancialStabilityCouncil,theExecutiveBoard,andtheSupervisoryBoard.
The MNB’s supreme decision-making body is theMonetary Council.
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ANNUAL REPORT • 2016 14
Thescopeofcompetenceof theMonetaryCouncilincludes:
–strategicdecisionsconcerningmonetarypolicy,theissueoflegaltender,theholdingandmanagementof foreignexchangeandgold reserves, aswell asstrategic decisions relating to foreign exchangetransactions in the context of foreign exchangereserve management and implementation ofexchangeratepolicyincludingandstrategicdecisionsconcerningstatisticaltasks, inparticular,decisionsregardingthelevelofthereserveratio,interestratepayable on the minimum central bank reserves,decisionsrelatedtodefinetheexchangerateregimeanddeterminingthecentralbankbaserate;
–inrelationtomacroprudentialtasks,theoversight,thesupervisionofthefinancialintermediarysystemand the MNB’s role as a resolution authority,decisiononthestrategicframeworkwithinwhichtheFinancialStabilityCouncilmakesitsdecisions;
–establishingtherulesofprocedure;
–decisions on any other matter in the exclusivecompetenceoftheMonetaryCouncilasdefinedbylaw.
MembersoftheMonetaryCouncilare:theGovernorof theMNBasChairmanof theMonetaryCouncil,theDeputyGovernorsoftheMNBandthememberselected by Parliament for six years. TheMonetaryCouncilhasatleastfiveandatmostninemembers.
At the first meeting of each year, the MonetaryCouncilelectsaDeputyChairman fromamong theDeputyGovernorsoftheMNB,whosubstitutesforthegovernoroftheMNBintheeventofhisabsence–withtheexceptionoftheissuanceofdecrees.In2016,theMonetaryCouncilelectedMártonNagy,DeputyGovernor,asdeputychairman.
In2016,themembersoftheMonetaryCouncilwere:
–Dr György Matolcsy, Governor, Chairman of theMonetaryCouncilfrom4March2013,
–MártonNagy,DeputyGovernorfrom1September2015,
–DrFerencGerhardt,DeputyGovernorfrom22April2013,
–DrLászlóWindisch,DeputyGovernorfrom2October2013,
–DrGusztávBáger,from6July2015,
–AndreaBártfai-Mager,from21March2011to6July2016,
–DrJánosBélaCinkotai,from22March2011,
–DrKolosKardkovács,from12September2016,
–DrGyörgyKocziszky,from5April2011,
–GyulaPleschinger,from5March2013.
TheFinancial Stability Councilactsasthedecision-making body of theMNB in relation to oversight,macroprudentialtasksandresolutionauthorityduties,aswellasprudentialsupervisionwithintheframeworkdefinedbytheMonetaryCouncil.Inrelationtotheseresponsibilities, the Financial Stability Council actsonbehalfoftheMNBinadministrativeproceedings.Within this scope of competence, the FinancialStabilityCouncil
–continuouslymonitors the stabilityof the systemoffinancial intermediationasawholeandof thefinancialmarkets,inordertomaintainthestabilityofthesystemoffinancialintermediationasawhole;
–takesaccountofriskfactorsthreateningthesystemoffinancialintermediationasawhole;
–analyses the risks related to certain types ofinstitutionsorproductsortothespreadofthesewhich may represent a threat to the system offinancialintermediationasawhole;
–monitors developments on international andEuropeanmarketsandriskswhichmayrepresentathreattothestabilityofthesystemoffinancialintermediation as a whole, andmakes decisionson the necessary measures within the strategicframeworkdefinedbytheMonetaryCouncil;
–discussesstrategic,regulatoryandrisk-relatedissuesaffectingthesystemoffinancialintermediationasawholeandissuesopinionsifnecessary;
–insituationsthreateningthestabilityofthesystemoffinancialintermediation,assessessystemicrisks
ABRIEFOvERvIEWOFTHEMAGyARNEMZETIBANK
ANNUAL REPORT • 2016 15
anddecidesonthemeasuresrequiredtomitigateoreliminatesuchrisks;
–places on its agenda, as necessary, therecommendations,opinionsandriskwarningsoftheEuropeanSystemicRiskBoardrelevanttothesystemoffinancialintermediationasawhole;
–discusses the recommendations and decisionsissuedbytheEuropeanSupervisoryAuthoritiesasneeded,includingdecisionsaddressedtonationalsupervisoryauthoritiescallingforspecificmeasuresintheeventofseriousriskstothestabilityoftheEuropeanfinancialsystemandexpressesitsopiniononthetasksarisingfromsuchdecisions;
–publishesnon-bindingrecommendationsforpersonsandorganisationssupervisedbytheMNBdescribingthe basic principles of the legal enforcementpracticesoftheMNB;
–annually defines the priority target areas of theMNB’scontrolactivities;and
–makes decisions in administrative proceedingsrelating to the exercise of supervision over thesystem of financial intermediation and to theperformanceofresolutiontasks.
MembersoftheFinancialStabilityCouncil:
–theGovernoroftheMNBasitschairman,
–the Deputy Governor responsible for monetarypolicy,financialstabilityandlendingincentives,andtheDeputyGovernorresponsibleforthefinancialsupervisionandconsumerprotection,and
–asanexecutiveappointedbytheGovernoroftheMNB,theDeputyGovernorresponsibleforstatistics,cashlogisticsandthefinancialinfrastructures,
–as an executive appointed by the Governor oftheMNB,theExecutiveDirectorMonetaryPolicy,FinancialStabilityandLendingIncentive,
–asanexecutiveappointedbytheGovernoroftheMNB,theExecutiveDirectorFinancial InstitutionsSupervision,and
–from28February2016,theDirectorGeneral.
Inaccordancewith theMNBAct, responsibility forimplementingthedecisionsoftheMonetaryCounciland the Financial Stability Council, as well as formanagingtheoperationof theMNBrestswiththeExecutive Board.
The scope of competence of the Executive Boardincludes:
–managingtheimplementationofthedecisionsoftheMonetaryCouncilandtheFinancialStabilityCouncil;
–approving theaccountingreportof theMNBandadoptingdecisionsonthepaymentofdividends;
–approving the draft report to be sent to theshareholderonthemanagementandassetsoftheMNB;
–approvingmattersrelatedtotheorganisationandinternalmanagementoftheMNB;
–approvingstudyplansandprogrammesrelatingtotheoperationoftheMNBandtheperformanceofitstasks,includingthecostsofthedevelopmentandoperationalplan;
–managing the MNB’s internal audit organisationin respect of tasks falling outside the scopeof competence of the Supervisory Board, anddiscussingtheobservationsandplansoftheinternalaudit;
–amending the collective agreement in respect ofemploymentrightsandobligations,theexerciseandperformanceoftheserightsandobligations,andtheassociatedprocedures;and
–adoptingdecisionsinrespectofthecentralbank’spowerstomanageaccountsandotherfinancialandauxiliaryfinancialservices,aswellascertainauxiliaryservicessupplementinginvestmentserviceactivities.
Themembersof theExecutiveBoard,which is theexecutivebodyoftheMNB,aretheGovernor,astheChairmanoftheBoard,andtheDeputyGovernorsoftheMNB.
Provisionsrelatingtothefunctionsandoperationalprocedures of theMonetary Council, the FinancialStabilityCouncilandtheExecutiveBoardaresetforthintheMNBAct,theMNB’sStatutes,Organisational
MAGYAR NEMZETI BANK
ANNUAL REPORT • 2016 16
andOperationalRulesaswellastherulesofprocedureformulatedbythesebodies.
In addition to the auditor appointed by theshareholder, theMNB is also audited by the StateAuditOfficeandtheSupervisoryBoard.
ThesupervisorycompetenceoftheState Audit Office overtheMNBissetforthintheActontheStateAuditOffice.TheStateAuditOfficesupervisesthefinancialmanagement of theMagyar Nemzeti Bank and itsactivitiesthatarenot included in itsbasic tasks. Inthisregard,theStateAuditOfficeexaminesiftheMNBoperates inaccordancewith theapplicable law, itsStatutesandtheshareholder’sresolutions.
The auditor of the MNB can be appointed for amaximum of 5 years. The shareholder decides onthe appointment, dismissal and remuneration oftheauditorbywayofashareholderresolution.PriortotheappointmentorproposalfordismissaloftheMNB’sauditor,theGovernoroftheMNBconsultsthePresidentoftheStateAuditOffice.
AssetforthintheMNBAct,theSupervisory Boardisthe body responsible for the continuous supervisionof theMNBonbehalfof theowner.ThesupervisorycompetenceoftheSupervisoryBoarddefinedbytheMNBActdoesnotcoverthesupervisionoftheMNB’sperformanceofitsbasictasks,itsactionsasaresolutionauthorityanditssupervisoryactivityinrespectofthefinancial intermediarysystem,or their impactontheMNB’sprofitandloss.Accordingly,theSupervisoryBoardcompilesthereportontheannualaccountsasspecifiedintheActonAccountingwithintheabovelimitations.
MembersoftheSupervisoryBoardasdefinedintheMNB Act are its Chairman elected by Parliament,three additional members elected by Parliament,therepresentativeoftheministerinchargeofpublicfinances and an expert appointed by thisminister.The Chairman of the Supervisory Board electedby Parliament is nominated by the parliamentarypanelsof thegoverningparties,whereastheothermembers elected by Parliament are nominated byparliamentarypanels.Themandateofthemembersof theSupervisoryBoard is for thedurationof themandateoftheParliament,andlastsuntiltheendofthemandateoftheParliament.
ParliamentelectedthemembersoftheSupervisoryBoardon6July2015,asthemandateofthepreviousSupervisoryBoardexpired.
MembersoftheSupervisoryBoardin2016:
–DrFerencPapcsák,Chairman,–LászlóMadarász,–DrGáborAndrásSzényei,–DrLászlóNyikos,–IstvánMolnár,and–DrAttilaSimonTóth.
2.3 ORGANISATION OF THE MNB
TheorganisationoftheMNBisbasedontheoperatingand operational governance model introducedon 1 July 2013 and, in respect of the integratedorganisation, on 1 October 2013. Although theorganisational structurehas changed several timessincethen,thesechangesdidnotfundamentallyaltertheorganisationalstructuredevelopedin2013.
FulfilmentofthestatutoryandoperationaltasksoftheMNBiscontrolledandsupervisedby,inadditiontotheExecutiveBoardandthemembersthereof,theDirectorGeneral,and,intheircapacityasthetoplevelexecutorsofthedecisions,theexecutivedirectors.
In2016,modificationsof theMNB’sorganisationalstructure were introduced in relation to areascontrolled by the Governor, the Deputy GovernorMonetary Policy Financial Stability and LendingIncentives,theDeputyGovernorFinancialInstitutionsSupervisionandConsumerProtection,aswellasbytheDirectorGeneral. Theprimaryobjectiveof themodificationswastoenhanceefficiency.
The work organisation as at 31 December 2016,developedasaresultoftheorganisationalchangesand destined for the fulfilment of the tasks, isillustratedbytheorganisation chart.
2.4 THE MNB AS A MEMBER OF THE EUROPEAN SYSTEM OF CENTRAL BANKS
Hungary’s accession to the European Union alsoentailed the MNB’s membership in the EuropeanSystemofCentralBanks(ESCB).TheESCBcomprisesthe European Central Bank (ECB), which wasestablished in June1998with its seat inFrankfurt,and the national central banks of the EUMemberStates.ItsgoverningbodiesaretheExecutiveBoardand theGoverningCouncil, the latter consistingofthemembersoftheECB’sExecutiveBoardandthegovernors of the central banks of the euro area
ABRIEFOvERvIEWOFTHEMAGyARNEMZETIBANK
ANNUAL REPORT • 2016 17
MemberStates.The thirddecision-makingbodyoftheECBistheGeneralCouncil,whichisresponsibleformaintaininganinstitutionalrelationshipbetweentheEurosystemand the central banksofnon-euroareaMemberStates.TheGeneralCouncilholds itsmeetings quarterly and consists of the Presidentandthevice-PresidentoftheECBandthegovernorsof the central banksof all EUMember States. Thekey responsibilities of the General Council includeconsultancyconcerningpreparationsforaccessiontotheeuroarea,approvaloftheconvergencereportsoftheECBandmonitoringthefunctioningofERMII.Withintheframeworkofthelatteractivity,itassessesthesustainabilityofthebilateralexchangerateofnon-eurocurrenciesparticipatinginERMIIagainsttheeuroandprovidesaforumforthealignmentofmonetaryand exchange rate policies and the managementof intervention and financingmechanisms in ERMII. In addition, the General Council is involved inverifyingwhetherthecentralbanksofEUMemberStates and theECB complywith theprohibitionofmonetary financing of the budget and privilegedaccessof thepublic sector tofinancial institutions.The General Council also contributes to the ECB’sadvisoryfunctionsandtothecollectionofstatisticalinformation; itmustbeconsulted inrespectofanychangesintherulesofaccountingandfinancialdatareporting,aswellasissuesrelatedtotheadjustmentofthekeysforsubscriptionstotheECB’scapital.Themandateof theGeneral Councilwill expire on thedatewhenalloftheMemberStateshaveadoptedthe euro.
ThenumberofESCBmembersdidnotchangein2016.
TheESCBmembersarealsotheownersoftheECB.TherespectiveownershipsharesofMemberStatesaredeterminedaccordingtotheirsharesintheGDPandtotalpopulationoftheEU(onthebasisofstatisticaldatacompiledbytheEuropeanCommission).Since1July2013,thepaid-upcapitaloftheECBamountstoEUR10.825billion.
Currently,euroareacentralbankssubscribeto70percentoftheECB’scapital,whiletheremaining30percent isdividedamongthecentralbanksofnon-euroareaMemberStates.Theselattercentralbankspayapre-definedminimumpercentageof their respectivesubscriptionstotheECB’scapitalasacontributiontotheoperational costsof theECBwhich are incurredin connection with their ESCB membership. Witheffectfrom29December2010,thiscontributionwasdefinedas3.75percentoftherespectivesubscriptions(previouslyithadbeen7percent).AssetforthintheStatuteoftheESCBandoftheECB,thecapitalkeysareadjustedeveryfiveyears,orwheneveranewMemberStatejoinstheEU.Thelastadjustmentofthecapitalkeyswasmadeinthesecondhalfof2013.Consequently,on1January2014,theshareoftheMNBintheECB’spaid-upcapitalincreasedfrom1.3740percentto1.3798percentandremainedunchangedin2015-2016.
TheESCBCommitteesplayan important role in theworkoftheECB’sdecision-makingbodies.Thebasicroleofthesecommitteesistopreparedecisionsandfacilitatecoordinationasperthehorizontaldivisionofvariouscentralbankduties,coveringallareasofcentralbanking operations from monetary policy throughcommunication to statisticaldata reporting. Expertsfrom the central banks of non-euro area MemberStatesattendthosecommitteemeetingswhoseagendaincludesitemsaffectingtheESCBasawholeandwhichfallwithinthecompetenceoftheGeneralCouncil.(ForadetaileddescriptionoftheESCBCommitteesandtheactivitiesofthevariousforaassistingthem,seeChapter3.13.)ThecommitteesmeetanddiscusscurrentissuesrelevanttotheirprofessionalareasinESCBcomposition,4–5timesayearonaverage;accordingtoascheduledeterminedforayearinadvance.
TheseniorexecutivesandrelevantexpertsoftheMNBcontinuetoplayanactiveroleintheactivitiesofthesecommitteesandtheirworkinggroups. In2016, theESCBcommitteescontinuedtobeveryusefulforafortheexchangeofprofessionalexperience.
MAGYAR NEMZETI BANK
ANNUAL REPORT • 2016 18
Dr György MatolcsyGovernor,
ChairmanoftheMonetaryCouncil
Márton NagyDeputyGovernor,
DeputyChairmanoftheMonetaryCouncil
Dr Ferenc GerhardtDeputyGovernor,
MemberoftheMonetaryCouncil
Dr László WindischDeputyGovernor,
MemberoftheMonetaryCouncil
Members of the Executive Board and the Monetary Council of the Magyar Nemzeti Bank
ABRIEFOvERvIEWOFTHEMAGyARNEMZETIBANK
ANNUAL REPORT • 2016 19
Members of the Monetary Council of the Magyar Nemzeti Bank
Andrea Bártfai-MagerMemberoftheMonetaryCouncil
Dr Gusztáv BágerMemberoftheMonetaryCouncil
Dr György KocziszkyMemberoftheMonetaryCouncil
Gyula PleschingerMemberoftheMonetaryCouncil
Dr János Béla CinkotaiMemberoftheMonetaryCouncil
Dr Kolos KardkovácsMemberoftheMonetaryCouncil
MAGYAR NEMZETI BANK
ANNUAL REPORT • 2016 20
Members of the Supervisory Board of the Magyar Nemzeti Bank
Lefttoright:DrAttilaSimonTóth,DrLászlóNyikos,LászlóMadarász,DrFerencPapcsák(Chairman),DrGáborAndrásSzényei,IstvánMolnár
ABRIEFOvERvIEWOFTHEMAGyARNEMZETIBANK
ANNUAL REPORT • 2016 21
Organisation Chart
Org
anis
atio
n Ch
art o
f Mag
yar N
emze
ti Ba
nk –
31
Dec
embe
r, 20
16
GOVER
NOR
Supe
rviso
ry B
oard
Shar
ehol
der
Exec
utive
Boa
rdM
onet
ary C
ounc
il
Inte
rnal
Audi
t Dep
artm
ent
Reso
lutio
n Pl
anni
ng an
d Re
orga
niza
tion
Depa
rtmen
t
Depa
rtmen
t of L
egal
Repr
esen
tatio
n in
Aut
horit
y Cas
es
Fore
ign
Exch
ange
Re
serv
es M
anag
emen
t St
rate
gy D
epar
tmen
t
Risk
Man
agem
ent
Depa
rtmen
t
Mon
etar
y Pol
icy
Instr
umen
ts an
d Res
erve
St
rate
gy D
epar
tmen
t
Dire
ctor
ate M
onet
ary
Polic
y Ins
trum
ents,
Fore
ign
Exch
ange
Res
erve
s and
Risk
M
anag
emen
t
Fisca
l Ana
lysis
Depa
rtmen
t
Fisca
l Res
earch
Dep
artm
ent
Com
petit
ivene
ss an
d St
ruct
ural
Analy
sis
Depa
rtmen
t
Dire
ctor
ate f
or Fi
scal
and
Com
petit
ivene
ss A
nalys
is
Mon
etar
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tegy
Dep
artm
ent
Mac
ro Fi
nanc
e and
Exte
rnal
Balan
ce D
epar
tmen
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Finan
cial M
arke
t Ana
lysis
Depa
rtmen
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Dire
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ate M
onet
ary
Polic
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Fin
ancia
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ket A
nalys
is
Econ
omic
Analy
sis
Depa
rtmen
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Econ
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Mod
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partm
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Micr
oana
lysis
and
Appl
ied Ec
onom
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sear
ch
Depa
rtmen
t
Dire
ctor
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cono
mic
Fore
cast
and A
nalys
is
Finan
cial G
roup
s Sup
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Depa
rtmen
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Cred
it In
stitu
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n De
partm
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Dire
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Cred
it In
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Supe
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Insu
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Pens
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Capi
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Mar
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vider
s and
In
term
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Depa
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Prov
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Rela
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, Da
ta Q
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t
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ncial
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s Dep
artm
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partm
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partm
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frastr
uctu
re
Depa
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IT Ap
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De
partm
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ancia
l Man
agem
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Depa
rtmen
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Dire
ctor
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T Ser
vices
Oper
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aw an
d Int
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l Re
gulat
ion
Depa
rtmen
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ral B
ankin
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Fina
ncial
La
w D
epar
tmen
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Coor
dina
tion
Depa
rtmen
t
Dire
ctor
ate L
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Serv
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Inte
rnat
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l Insti
tutio
nal
Relat
ions
Dep
artm
ent
Inte
rnat
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l Rela
tions
De
partm
ent
Inte
rnat
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l Rela
tions
Di
rect
orat
e
Cent
ral P
rocu
rem
ent
Depa
rtmen
t
Facil
ities
Man
agem
ent
Depa
rtmen
t
Dire
ctor
ate C
entra
l Pro
cure
men
t an
d Ope
ratio
n
Depa
rtmen
t of S
ecur
ity R
isk
Man
agem
ent
Depa
rtmen
t of G
uard
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and S
afet
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Dire
ctor
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Back
Offi
ce D
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tmen
t
Acco
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ervic
es D
epar
tmen
t
Dire
ctor
ate
Bank
ing
Oper
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ns
Acco
untin
g Rep
ort
Com
pilin
g an
d Ana
lysin
g Dep
arm
tent
Cost
Acco
untin
g an
d Fin
ance
De
partm
ent
Dire
ctor
ate A
ccou
ntin
g
Cash
issu
ance
and S
trate
gic
Man
agem
ent D
epar
tmen
t
Natio
nal C
ount
erfe
it Ce
ntre
Cont
rol a
nd Te
chno
logy
Su
ppor
t Dep
artm
ent
Cash
Supp
ly De
partm
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Dire
ctor
ate C
ash
Logi
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Over
sight
and P
aym
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Serv
ices S
uper
visio
n De
partm
ent
Paym
ent S
ervic
es
Deve
lopm
ent a
nd R
egul
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n De
partm
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Dire
ctor
ate
Finan
cial In
frastr
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Depa
rtmen
t of M
arke
t Su
rveil
lance
and S
uper
visio
n
Depa
rtmen
t of L
egal
Enfo
rcem
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of Is
suer
s and
Mar
ket S
urve
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ce
Depa
rtmen
t of C
apita
l Mar
kets
Supe
rvisi
on
Mar
ket M
onito
ring a
nd A
nti-m
oney
La
unde
ring S
uper
vision
Dep
artm
ent
Dire
ctor
ate f
or Ca
pita
l Mar
kets
and
Mar
ket S
uper
visio
n
Supe
rviso
ry M
etho
dolo
gy
Depa
rtmen
t
Supe
rviso
ry Co
ordi
natio
n De
partm
ent
Regu
latio
n De
partm
ent
Com
plian
ce an
d Reg
ulat
ory
Train
ing D
epar
tmen
t
Dire
ctor
ate M
etho
dolo
gy
Cons
umer
Prot
ectio
n Co
mm
unica
tion
and I
nfor
mat
ion
Depa
rtmen
t
Cons
umer
Serv
ice D
epar
tmen
t
Finan
cial C
onsu
mer
Prot
ectio
n Ce
nter
Mon
ey an
d Cap
ital M
arke
ts Lic
ensin
g Dep
artm
ent
Mon
ey an
d Cap
ital M
arke
ts Le
gal E
nfor
cem
ent
Depa
rtmen
t
Insu
ranc
e and
Pens
ion
Fund
s Lice
nsin
g and
Lega
l En
force
men
t Dep
artm
ent
Dire
ctor
ate f
or Li
cens
ing
and L
egal
Enfo
rcem
ent
Busin
ess M
odel
Depa
rtmen
t
Valid
atio
n an
d SRE
P De
partm
ent
Info
rmat
ion T
echn
olog
y Su
perv
ision
Dep
artm
ent
Spec
ial Su
perv
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Co
mpe
tenc
ies D
irect
orat
e
Insu
ranc
e Sup
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Depa
rtmen
t
Pens
ion
Fund
s and
In
term
ediar
ies Su
perv
ision
De
partm
ent
Dire
ctor
ate I
nsur
ance
, Pen
sion
Fund
s and
Inte
rmed
iaries
Su
perv
ision
Mac
ropr
uden
tial A
nalys
is De
partm
ent
Appl
ied R
esea
rch an
d Stre
ss
Testi
ng D
epar
tmen
t
Lend
ing I
ncen
tives
De
partm
ent
Dire
ctor
ate
Finan
cial S
yste
m A
nalys
is
Mac
ropr
uden
tial P
olicy
De
partm
ent
Mac
ropr
uden
tial
Met
hodo
logy
Dep
artm
ent
Mac
ropr
uden
tial D
irect
orat
e
Dom
estic
and F
oreig
n Cu
rrenc
y Ope
ratio
ns
Depa
rtmen
t
Fore
ign
Rese
rves
M
anag
emen
t De
partm
ent
Dire
ctor
ate M
oney
and F
oreig
n Ex
chan
ge M
arke
ts
Acad
emic
Rese
arch
De
partm
ent
Appl
ied R
esea
rchDe
partm
ent
Rese
arch
Dire
ctor
ate
Depa
rtmen
t of O
rgan
isatio
n an
d Pe
rsonn
el De
velo
pmen
t Re
solu
tion
Law
and R
egul
atio
n De
partm
ent
Perso
nnel
and R
emun
erat
ion
Depa
rtmen
t
IT Se
curit
y Dep
artm
ent
Com
mun
icatio
ns an
d Fin
ancia
l Lit
erac
y Dep
artm
ent
Depa
rtmen
t of P
rofe
ssio
nal
Lear
ning
and D
evelo
pmen
t
Inte
rnat
iona
l Dep
artm
ent
for E
duca
tion
Finan
cial A
rbitr
atio
n Bo
ard
Finan
cial S
tabi
lity C
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ANNUAL REPORT • 2016 22
3 Review of the MNB’s performance in 2016
3.1 MONETARY POLICY
In2016,theMonetaryCounciloftheMNBdeployedadditional, targeted monetary policy instrumentsalong with the traditional interest rate policy torespondtothechallengesposedbythelowinflationenvironmentandthecountry’sexternalvulnerability,withaviewtoachievingthemedium-terminflationtarget in a sustainable manner and adequatelystimulatingtherealeconomy.Overthelongterm,thecentralbankcancontributetoeconomicgrowthandapredictablemacroeconomicenvironmentbyachievingandmaintainingpricestabilityandbyensuringthestabilityofthefinancialsystem.
International financial market developments
Global financial market sentiment was volatile inthe first half of the year. At the beginning of thehalf-year, global investor sentimentdeteriorated inconnectionwithconcernsaboutglobalgrowthdueto the deceleration of the Chinese economy andthefuturepathofoilprices.Ontheotherhand,themacroeconomic releases by the United States inthefirsthalfoftheperiodhadafavourable impacton global risk appetite, which was also bolsteredby the ECB’s comprehensive easing programmethat was announced in March. At the end of thehalf-year, international market sentiment wasinfluencedbynewsrelatedtothereferendumontheUnitedKingdom’sEUmembership.Globalfinancialmarket sentiment was also volatile in the thirdquarter of 2016,whichwasmostly shaped by themacroeconomic releases of the USA and the euroarea,theexpectationswithregardtothenextstepsof developed-country central banks and the newsabout the European banking system. By the endof theyear, the focuswasonoilmarketnews, theexpectationsrelatedtotheUSpresidentialelectionsandthemonetarypolicyofthedevelopedcountries.ThemonetarypolicydecisionsbytheFedandtheECBinDecemberreflecteddifferentstances.TheFed,inlinewithexpectations,decidedtoraisetheinterest
rate, and shifted to a tighter path looking forwardaswell.Bycontrast,theECBdecidedtoprolong itsassetpurchaseprogrammeandthustocontinuewithfurthereasing.
Domestic economic environment
Thedomesticrealeconomicenvironmentcontinuedtohaveadisinflationaryimpactin2016,andtheannualaveragerateofinflationwas0.4percent.Consumerprices in 2016 showed historically low dynamics,whichfellshortofthecentralbank’starget.Underlyinginflation indicators capturing the medium-termoutlookindicatedamoderateinflationaryenvironmentthroughouttheyear.Followingatemporaryslowdownearly in the year, the pick-up in the Hungarianeconomy continued during the rest of the year.Hungary’sstrongexternalfinancingcapacityandthedeclineinexternaldebtcontributedtothesustainedreductioninthevulnerabilityoftheeconomy.Thesealsomadeamajorcontribution to the fact thatallof the three leading international credit agenciesupgradedtheratingofHungariangovernmentdebtto investment grade. According to the perceptionoftheMonetaryCouncil, there isstillsomedegreeof unused capacity in the economy, but lookingahead, the disinflationary impact of the domesticrealeconomicenvironment isgraduallydissipating.Inflationwillriseovertheforecastperiodandreachthe central bank target in the first half of 2018.
Traditional monetary policy measures
Withintheframeworkoftraditionalmonetarypolicyinstruments, in the first half of 2016 theMonetaryCouncilrestarteditseasingcycle,duringwhichitfurtherreducedthecentralbankbaserateinprudentsteps.FromMarch2016,theMonetaryCouncilreducedthecentralbankbaserateby45basispointsinthreesteps,eachofwhichwas15basispoints,briningthebaserateto0.9percent.Withthismeasure,theMonetaryCouncil intended to respond to the underlyingprocesseswhichwerefarbelowthe levelconsistentwiththeinflationtarget,totheactualinflationwhich
REvIEWOFTHEMNB’SPERFORMANCEIN2016
ANNUAL REPORT • 2016 23
Chart 2Underlying inflation indicators
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2005 2007 2009 2011 2013 2015
Per cent Per cent
Demand sensitive inflationSticky Price Inflation
Core inflation excluding indirect tax effect
Source: MNB
wasfallingsignificantlyshortofthetargetandtothemonetaryconditionswhichonthewholemaystillbedeemed accommodating at the global and regionallevel.SincetheendofMay2016thecentralbankbaseratehadbeenatahistoric lowlevel, i.e.at0.90percent. At the endof the year, theMonetary Councilwasoftheopinionthatiftheassumptionsunderlyingthe centralbank’sprojectionshold,maintaining thecurrentlevelofthebaserateforanextendedperiodand looseningmonetaryconditionsbychanging themonetarypolicyinstrumentswasconsistentwiththemedium-termachievementoftheinflationtargetandacorrespondingdegreeofsupportfortheeconomy.Thecredibilityof thepersistentmaintenanceof thecentralbankbaseratebytheMNBatthepresentlevelisalsoconfirmedbythemarketexpectations,astheyieldexpectationsareatalowlevel.
Unconventional monetary policy measures
Alongwithgradualinterestratecuts,theMNBalsoappliedother,targetedmonetarypolicyinstrumentstoaddressthemonetarypolicytransmissiondifficultiescaused by the crisis, to reduce Hungary’s externalvulnerability and to ease monetary conditions.The Funding for Growth Scheme, introduced as atemporary instrument, achieved the objectives setout upon announcement of the programme, andthus, pursuant to the decision of the MonetaryCouncil, it was gradually phased out by 31March2017. The Self-financing Programme and thecorrespondingtransformationofthesetofmonetarypolicy instrumentsprovidedsubstantialsupportforthedecline in yieldson the long-termgovernmentsecurities and the decrease in Hungary’s externalvulnerability. With a view to mitigating extreme
fluctuations in interbank interest rates, the MNBmaintains an asymmetric interest rate corridor forthe overnightmaturity, the asymmetry ofwhich ithaschangedinseveralsteps.InaccordancewiththeannouncementmadeinJuly2016,atitsSeptemberrate-settingmeetingtheMonetaryCouncillimitedthevolumeofthe3-monthdepositfacilityoutstandingattheendof2016totheamountofHUF900billion.TheMonetaryCouncilconsidersthelimitonthe3-monthdepositstockand itspotential futurechangeasanintegralcomponentofitsmonetarypolicyinstrumentsandwilldecideonthelimitquarterly.AtitsDecember2016meeting,theMonetaryCouncilsetaHUF750billionupper limiton the stockof3-monthcentralbank deposits outstanding at the end of the firstquarter2017.Theprogrammeoperatedsuccessfullyand achieved the expected results in the moneymarkets,sincetheliquiditythatcouldnotbeinvestedinthedepositfacilityasaresultofthelimit,pusheddown yields. By the end of the year, the 3-monthBUBOR fell to 0.37 per cent, while the 3-monthdiscountTreasuryBillyieldwasdownto0.06percent.
Inflation developments in 2016
Theconsumerpriceindexcontinuedtoremainbelow3percent, thevaluesetasapricestability target;however, in the pastmonths an upward drift wasobserved,inlinewithexpectations.Averageannualinflationin2016was0.4percent,whileinDecember2016itwas1.8percent.
Underlyinginflationdevelopmentsarestillrestrained,whichismostlyattributabletolowimportedinflationand inflation expectations which stabilised at amoderatelevel.
Chart 1Inflation target and inflation developments since the adoption of continuous inflation targeting
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Source: HCSO and MNB.
MAGYAR NEMZETI BANK
ANNUAL REPORT • 2016 24
Changes in monetary policy instruments
Funding for Growth Scheme
AstheFundingforGrowthScheme(FGS),whichwasintroducedasatemporary instrument,successfullyachievedthemarketbuildingandgrowthobjectivesset out upon its announcement, in autumn 2015theMonetaryCouncildecidedonitsgradualphase-out.TheGrowthSupportingProgramme(GSP)waslaunchedinthespiritofthison1January2016.PartofthisinvolvesthethirdstageoftheFGS,comprisingtwopillars,whichfacilitatesmorerestrictedandtargetedfinancingthanbefore;anotherpartofitconsistsoftheMarket-BasedLendingScheme(MLS),whichisapackageofinstrumentscontainingpositiveincentives,whichsupportbanks’lendingactivityinotherways.
In the third, phase-out stage of the FGS only newinvestmentloanandfinancialleasetransactionsmaybe concluded. Pillar I (forint)was launchedwith afacilityamountofHUF300billion,which theMNBraised, in line with market demand, to HUF 400billioninJune2016.ThefacilityamountofHUF300billionunderPillarII(foreigncurrency)wasavailablein the formof foreign currencyfinancing for smallandmedium-sized enterprises (SMEs)with naturalforeigncurrencycover.Inordertoensurethemoreefficientabsorptionofthefullfacilityamount,on11October 2016 theMonetary Council provided thecredit institutionswithHUF60billion in the forintpillarfromtheunutilisedfacilityamountoftheforeigncurrency pillar, andwith its decision passed on 22November,itpermittedtheuseoftheunutilisedpartofthefacilitiesallocatedintheforeigncurrencypillarineitherpillar,buttheaggregatefacilityamountofthetwopillarsremainedHUF700billion.Inaddition,on
22November2016theMonetaryCouncilalsodecidedonextendingthecontractingperiodofphasethreeuntil31March2017.
In2016,thecreditinstitutionsparticipatinginphasethreeoftheprogrammereporteddatatotheMNBoncontractsintheamountofHUF473billion,relatedto roughly16,600contractsandmore than11,000enterprises.Theloanseffectivelyoutstandingattheendoftheyear–notincludingalreadyrepaidloansand the undrawn loans (tranches) – amounted toHUF359billion(Chart3).Todate,inthethreephasesoftheFGSaltogethermorethan37,000enterprisesreceivedfinancinginanamountofroughlyHUF2,600billion. As a result, the scheme not only reversedthe previous downward trend in the outstandingborrowingofSMEs(basedontransactions),butalsomadeamajorcontributiontoeconomicgrowthandtheexpansionofemploymentinrecentyears.
Table 1Consumer price index and its components(percentage change, year-on-year)
2014 2015 20162016
Q1 Q2 Q3 Q4
Coreinflation 2.2 1.2 1.4 1.4 1.3 1.3 1.6
Unprocessedfood –3.7 4.8 0.4 4.2 –0.4 –0.7 –1.6
Fuelandmarketenergy –2.1 –11.0 –6.3 –9.5 –10.0 –8.5 2.7
Regulatedprices –6.6 –0.7 0.2 0.2 0.2 0.1 0.3
Inflation –0.2 –0.1 0.4 0.3 –0.1 0.1 1.3
Inflationwithconstanttaxrate –0.2 –0.2 0.6 0.5 0.1 0.3 1.3
Note: In the case of price indices with constant tax rate, the HCSO adjusts the consumer price index for the technical effect of changes in indirect taxes. The time series of certain inflation groups may differ, even retroactively, from those published in earlier years due to the reclassification of some partial items at the beginning of 2012.Source: HCSO
Chart 3Utilisation of the third phase of the FGS
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Note: Amount of the contracts concluded until the end of 2016 and submitted to the MNB.Source: MNB.
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ANNUAL REPORT • 2016 25
The MNB’s set of monetary policy instruments
On12January2016,theMonetaryCouncildecidedon the gradual phase-out of the 2-week depositfacility, serving liquidity management purposes,endinginApril2016.Thisphase-outwasinlinewiththe2014-2015transformationofthecentralbank’ssetofmonetarypolicyinstruments,andthepurposeof itwas toprovideadditional support to theSelf-financingProgramme,easethemonetaryconditionsandfurthermitigateexternalvulnerability.The2-weekdepositfacilitywasavailableforbanksfromDecember2015subjecttoavolumelimitofHUF1,000billion,andbetweenMarchandend-April2016theauctionedportfoliograduallydecreasedtozero.Thereafter,i.e.fromMay2016,the3-monthdepositfacilitybecametheMNB’sonlylonger-termsterilisationinstrument.
Thecentralbank’sinterestrateswap(IRS)instrument,diverting the banks’ funds,was key to the successof the Self-financing Programme, the added valueofwhichfellsignificantlywiththephase-outofthe2-weekdepositinApril2016.Accordingly,on10May2016 theMonetary Council decided to phase outtheIRSfromitssetofmonetarypolicyinstruments,andtheMNBheldthelasttenderforthisfacilityon7 July2016.Thebanks’obligationarising fromtheIRSportfolioisvaliduntilthematurityoftheswaps.Attheendoftheyear,theoutstandingIRSportfolioamounted toHUF 1,731billion, ofwhichHUF 652
billion was of 3-year maturity, HUF 904 billion of5-yearmaturityandHUF175billionof10-yearagreedmaturity.Inaddition,theMNB’stotalIRSportfolioissupplementedwith the 3-year interest rate swapsconditionalonlendingactivity(LIRS)concludedwithintheframeworkoftheMLSintheamountofHUF780billion in the first quarter of 2016,whichwas stilloutstandingattheendof2016.
In2016,theMonetaryCouncilcutthebaserateandreduced thewidth of the interest rate corridor onseveraloccasions.On22March2016,inadditiontoreducingthebaserateto1.20percent,theinterestontheovernightcentralbankloanchangedfrombaserate+75basispointstobaserate+25basispoints,i.e.to1.45percent(equallingacutof50basispoints).Meanwhile, simultaneously with the interest ratecut inMarch,theO/Ndepositratefellto-0.05percent,asaresultofwhichbank liquidityheld intheovernightdepositfacilitydeclinedsubstantially.From27 April and 25May, after additional interest ratecuts,thebaseratedeclinedto1.05and0.9percent,respectively,andsimultaneouslytheupperboundoftheinterestratecorridorfrom27Apriland25Maywas 1.3 per cent and 1.15 per cent, respectively,whilethe lowerboundofthe interestratecorridorremained-0.05percent.Atitsmeetingsheldon25October2016and22November2016,theMonetaryCouncilreducedtheupperboundoftheinterestratecorridorfrom1.15to1.05percentandto0.90percent,respectively.Thus,bytheendof2016thelowerboundoftheinterestratecorridorbecame-0.05percentandtheupperboundthereof0.90percent.
TheMonetary Council’s decisions passed on 12 Julyand 20 September 2016, restricted banks’ access tothe 3-month central bank deposit instrument. FromAugust2016,thetenderforthe3-monthcentralbankdeposit instrumentwasorganisedonce amonth, ontheWednesdaythatfollowedthemonthlyrate-settingmeeting,insteadofthepreviousweeklytenders,anditwaslaiddownthatthetotal3-monthdepositportfolioofthebanksthatmaybeplacedinthelastquarterof2016mustnotexceedHUF900billion.Limitingthe3-monthsdeposit gives room formonetaryeasing through theexcess liquidityremaining inthebankingsystem.Theliquiditysqueezedoutfromthe3-monthdepositreducestheyields in the relevantmarkets,particularly in theinterbankmarket,andmayfacilitateadditionallending,therebysupportingeconomicgrowth.
On 20 September 2016, the MNB also decidedto develop fine-tuning instruments to offset the
Central bank interest rate swap tenders in 2016
Atthe14self-financingIRStendershelduntilthephase-outon7July2016,theMNBplacedHUF263billion,HUF184billionandHUF50billionIRSwithitscounterpartiesat 3-year, 5-year and 10-year maturities, respectively.WithintheframeworkofMLS,inthefirstquarterof2016the MNB announced five LIRS tenders in total. Thetenderswereattendedby17credit institutions in total,andtheMNBconcludedLIRStransactionsintheamountofHUF780billion.Inaccordancewiththeconditionstheprogramme, thebanksundertook to increase theirSMEloan portfolio by one-quarter of their concluded LIRStransactions, i.e. by almost HUF 200 billion, whichmayachieve the 5 to 10 per cent annual growth in theoutstandingborrowingbySMEs,setbytheMNB.Withaviewtosupportingthebanks’liquiditymanagement,theMNBalsoprovidedthecreditinstitutionsparticipatinginthe MLS with the opportunity to rely on overnight,preferentialcentralbankdeposit,earninginterestatthebaserate,uptohalfoftheirconcludedLIRSportfolio.
MAGYAR NEMZETI BANK
ANNUAL REPORT • 2016 26
potentiallylastingandmaterialliquidityshocks;inthecaseofpositiveliquidityshocksitmayintervenewith1-weekdeposits,whileinthecaseofnegativeshockswithforintprovidingFXswap,tooffsetthechangeintheliquiditypath.Inthefourthquarterof2016,theMNBheldaltogetherfive1-monthfine-tuningswaptenders:on17and24October,14and21November,andon19December. TheMNBprovidedHUF150billiontothebankingsystematthetenderheldon21November,whileateachoftheotheronesHUF200billion.Inaddition,on23December2016theMNBalsohelda1-weekswaptender,where itallocatedHUF201billiontotheparticipatingbanks.Nofine-tuningdeposittenderwasheldin2016.
Inordertoensurequantityadjustmenttothelimitingofthe3-monthdepositandharmonisationwiththepracticeoftheEuropeanCentralBank,atitsmeetingheld on 25 October 2016, the Monetary Councilreduced the reserve requirement from 2 per centto1percentwitheffectfrom1December2016.On27October2016,theMNBsuspendedthe3-monthcentralbank loan tender facilitywitheffect from7November2016.
Forint liquidity management of the banking system
Itemsaffectingtheliabilitiessideforintliquidityofthecentralbank’sbalancesheet(3-monthdeposit,2-weekdeposit,balanceonpaymentaccounts,overnightandpreferentialdeposits)declinedbyatotalofHUF2,400billionduringtheyear.Whileat31December2015thebalancewasHUF4,628billion,theaggregatelevelat theendof the followingyearamounted toHUF2,228billion.TheforintliquidityofthebankingsystemwasreducedbyHUF1,475billionbythechange inthe Single Treasury Account (STA) allocable to thebanking system, including the refinancing of theforeigncurrencybondsbyforintbondsissuedbytheGovernmentDebtManagementAgency.ThegrowthinthecashincirculationandtheMNBinstrumentsalso reduced liquidity (byHUF276billionandHUF745billion,respectively).Ofthelatter, it is justifiedto highlight the central bank swaps related to theconversionofthehouseholds’foreigncurrencyloanintoforints,ofwhichassetsinthetotalamountofEUR4.76billionexpired(EUR914millionofconditionalassetsandEUR3.852billionofunconditionalassets),reducing the liquidityof thecredit institutionsdueto the forint legpayable.Meanwhile, liquiditywasexpandedinthelastquarterbythefine-tuningswaptenders, within the framework of which theMNB
providedthebankingsystem,atseveraltenders,withliquidityofvariableamounts,intheamountofHUF150-201 billion. FromDecember 2016 the reserveadequacy requirement changed, and the requiredreserveratiowasreducedfrom2percentto1percent.
Theovernight (O/N)depositportfoliofluctuated intherangeofHUF50-100billion,apartfromthevaluesrecordedinthefirsthalfofJanuaryandbetweenmid-Novemberandtheyear-end.AftertheamendmentoftheinterestratecorridorinMarch,newdepositspracticallyceasedduetothenegativedepositrate,andthenduringJuneitreturnedtothelevelsrecordedin the first quarter. The average deposit balanceduringtheyearwasHUF55billion,butitstemporaldistributionwasuneven,withmajorincreaseinthelastquarter.Thesurge inO/Ndepositsatyear-endwas attributable to the limitation of the 3-monthdeposits,asthebanksplacedtheirsurplusliquidityin otherMNB instruments, amongst others, in theO/Ndepositsavailable tobankswithout limitation.UntilthebeginningofJune,andduringSeptember-OctoberthemonthlyaverageofpreferentialdepositswasaroundHUF30-80billion,whileinthesummermonthsitreachedaHUF100-160billionvolumeonaverage. By the last twomonths of the year,withthe restriction of the 3-month deposit facility, thepreferentialdeposit facilityappreciatedstrongly, inparallelwithwhichbanks’ averageholding rose toHUF250-310billion.
Atthefifteentendersofthe2-weekdepositfacility,after the restriction thereof, from early 2016 untilits phase-out at the end of April, overbiddingwasregisteredonsixoccasions,threeofwhichoccurredinthefirsthalfofJanuary.Theaverageacceptedinterestratesatthetenderswereclosetothebaserateallthetime.Thisimpliesthatthegradualdecreasein2-weekdepositsdidnotpose liquidityproblemsforbanks.Themoreactiveuseofthecentralbankloantendersand the preferential deposit facility available fromFebruaryalsocontributedtothis.
Atthelast3-monthdeposittenderon27July2016,before making the 3-month deposit tenders lessfrequent, banks’ demand amounted to HUF 222billion,inparallelwithwhichaportfolioofHUF506billionintotalexpireduntilthetenderheldinAugust.Thisshowsthatthebankstypicallydidnotrollforwardthematuritiesoftheinterimtenders,i.e.theydidnotborrowlargervolumesoffundstobridgetheinterimperiods.Thusthebankingsysteminitiallyplacedthe
REvIEWOFTHEMNB’SPERFORMANCEIN2016
ANNUAL REPORT • 2016 27
3-monthdepositsexpiringbeforetheAugusttenderongiroandpreferentialdepositaccounts,andlatertheO/Ndepositsalsoincreased.AttheAugustandSeptember 3-month deposit tenders, still availablewithout volume limits, the banks typically alsorenewedpartofthe3-monthportfoliosduetoexpirefrom borrowed funds. Thus, the 3-month depositportfoliotemporarilyincreased:risingfromHUF1,276billionon23AugusttoHUF1,837billionandfromHUF1,629billionon21SeptembertoHUF1,976billion.The increase in August represented new depositsplacedbythebanksintheamountofHUF637billionandHUF437billioninSeptember.Bytheendofthefourthquarterof2016,theMonetaryCouncilsetthevalueof the3-monthdepositportfolio toHUF900billion.Atthetenderheldon26October,theMNBacceptednew3-monthdepositsintheamountofHUF100billionunderanaggregatebidofHUF314billionandexpiringdepositsofHUF222billion.Thebanks’totaldemandfor3-monthdepositsinNovemberandDecemberwasHUF696billionandHUF521billion,respectively, compared to theallocatedamountofHUF400-400billion.
Asregardstoovernightloans,345loantransactionswereregisteredin2016,withaverageholdingsofHUF20billion.ThelargestutilisationtookplaceinthelastthirdofSeptember2016(90transactionsbetween21and30September,withaveragetransactionsizeofHUF39billion).
In2016,11banks took1-weekcollateralised loansfromtheMNB,withanaveragetransactionsizeofHUF90billion.Utilisationofthe1-weekcollateralisedloanswasthehighestatabouttheendofMarchandendofSeptember2016.Theaverageoutstandingborrowingbetween16Marchand12AprilwasHUF435billionwith15loanapplicationsfrom8credit institutions,while between 21 September and 4 October theMNBregisteredanaveragestockofHUF530billion,comprising10loanapplicationsfrom6banks.
The portfolio of 3-month collateralised loans wasrelativelystable.FromJanuaryuntilearlyNovember,theMNB financed an average portfolio of HUF 51billion, with the largest drawdown being HUF 110billion.After8November2016nonewdrawdownsoccurred, and from 7 December 2016 the MNBsuspendedfurtherdisbursementofthe3-monthloans.
In the last quarter, the MNB held forint liquidityproviding euro swap tenders on six occasions. Ofthese,atfiveone-monthtendersitprovidedliquidity
tothecounterpartiesinvaryingamounts,aroundHUF150-201billion(EUR485-652million),ofwhichthebalanceoutstandingatyear-endwasHUF199billion(EUR639million).TheMNBalsohelda1-weektenderbridgingtheyear-end,wheretheallocatedamountwasHUF201billion(EUR648million).
TheHUFONIA,reflectingO/Ninterestrates,fluctuatedaroundthebaseratefrommid-MarchtoearlyJune,whereas in early January, in February and in Juneitwasclosetothelowerboundoftheinterestratecorridor.Inthesummermonths,itfluctuatedaround40-50basispoints,whileon thedayof theAugust3-monthtenderitroseto79basispoints,leavingthelowrangeof10-25basispointsthatprevailedfromthebeginningofthemonth.Afterthis,untilthe3-monthtenderheldon21September2016,theHUFONIAwasaround68-93basispoints.On21September,whichwasthelasttenderwithoutvolumelimit, itroseto1.34 per cent, exceeding the upper bound of theinterestratecorridor(1.15percent).Fromthenextdayitsvaluedeclinedandonthelasttwodaysofthequarter it fell below the base rate. Thereafter, theHUFONIAremainedclosetothebaserateinOctober.Asaresultofthestronglyexpandinginterbankexcessliquidity,bytheendofNovemberthelevelofinterestrates fell close to 10 basis points and fluctuatedaroundthisvalueinDecemberaswell.
The 3-month benchmark rate, bearing specialsignificance for interest rate transmission, movedcloselytogetherwiththebaserateinthefirstthreequarters.The3-monthgovernmentsecuritiesmarketbenchmarkratestartedtofallaftertheannouncementthat the frequency of the 3-month deposit tenderwould be reduced, then accelerated from the firstlimited 3-month deposit tender, i.e. from end ofOctober,asaresultofwhichthe3-monthdiscountedTreasurybillyielddroppedto6basispointsbytheendofDecember.Untilthebaseratecutof25May,theBUBORmovedstronglytogetherwiththebaserate,butafterthis,untilearlyAugustitwasabovethebaseratebynomorethan12basispointsandthereafterbelow itbynomore than6basispoints.After thevolumelimitationonthe3-monthdeposit,theBUBORalsostartedtofallstrongly,droppingto41basispointsbyearlyDecemberandto34basispointsbytheendoftheyear.Inthefirstninemonthsof2016,thespotyieldderivedfromtheFRAswasclosetothebaserateorbelowitmostofthetime,whilefrommid-Octoberitbrokeaway,togetherwiththediscountTreasurybillyieldandtheBUBOR,fromthebaserateandbymid-Decemberitfellcloseto30basispoints.
MAGYAR NEMZETI BANK
ANNUAL REPORT • 2016 28
Inthecourseoftheyear, interestratesonvariableinterestloansanddepositswithshort-termmaturitiesdeclined both in the corporate and the householdsegments(betweenDecember2015andNovember2016). In thecorporatesector, the interest rateonsight deposits fell by 10 basis points, while thoseon termdepositswith amaturity of less thanoneyeardroppedby53basispoints. Inthecaseofthehouseholddeposits,thefallwithrespecttothesameitems was 4 and 51 basis points, respectively. Asregardscorporateloans,overdraftfacilitiesregisteredafallof61basispoints,whileinterestratesonshort-termfixedrateloansandvariablerateloansdroppedby161basispoints.Inthesectorthesevaluesshowedadeclineof170and327basispoints,respectively.
Instruments providing foreign exchange liquidity
On2Marchand31March2016,EUR200millionandEUR714million,respectively,ofthesettlementandforintconversionconditionaleuroswapswasclosed,as a result of which this portfolio expired. Of theunconditionalswapinstruments,expiredtransactionsamounted toEUR2,082billionon16March2016,EUR784millionon15June,EUR373millionon21SeptemberandEUR613millionon21December.Thusin2016,withtheexpiryofEUR3,852million,thestockofunconditionalswapsdroppedtoEUR1,082million.At the beginning of the year the outstanding CHFswapsconcludedinrelationtotheforintconversionoftheconsumerforeigncurrencyloansamountedtoCHF12.8million,whichexpiredinfullon13April2016.
During2016,therewasnodrawingagainsttheMNB’sovernightand3-monthEURswapfacility.Thus,afterthe tender held on 7 November 2016, the MNBsuspendedthe3-monthEURswapfacility.ThevolumeofthecentralbankFXswapsrelatedtothePillarIIIofphaseoneoftheFGSfelltozerofromEUR473millionrecordedatthebeginningoftheyear:on31MarchitdroppedtoEUR200million,on6ApriltoEUR150million,while theremainingpartwasrepaidon29April.
HUF/EURforeigncurrencyswapspreadsdevelopedsimilarly as in the previous period; some extremevalues,bothpositiveandnegative,wereobserved.Theannualaverageofthespreadswasaround0inallterms,takingapositivevalueof5-7basispointsattheovernightandtomnextperiods,andslightlynegativevaluesof(-9)-(-20)basispointsatthelongerperiods.
Comparedtothelastquarterof2015theovernightspreadwasmorevolatile:inthefirstfivemonthsofthehalf-year,themid-quotestypicallyvariedbetween-50and+125basispoints,whilefrommid-Maythepositiveswingsdecreasedand,withsomeexceptions,fellbelow50basispoints.Atthetomnexttransactionsthetypicalspread is lower(within50basispoints),withlargerswings:thespreadattheend-March2016unconditionalswapmaturitywas-439basispoints.Apart from this,notmore thanoneor two swingspermonthscouldbeobservedintheentireperiod.Apartfromthelargestswingsatthestart/endoftheyear,themaximumswingsintheovernightandtomnextspreadsvariedonthenegativesidearound-200to-300basispointsandonthepositivesidearound100to200basispoints.Theremainingquotesfromtheendof theyearandthe1-weekspreads,apartfromthelocalminimumof-184basispointsaround21 September, did not exceed 63 basis points inabsolutevalue.Duringthethreeworkingdaysaroundtheendof2016theovernightspreadsfellfrom+229basispointsto-1,178basispoints,whilethesimilartomnextvaluesdroppedfrom+436basispointsto+72 basis points. At the end the second and thirdquartersonlyaminorswapmarkettensioncouldbeobserved,inbothcaseswithovernightspreadsaround-150basispoints.ThisimpliesthatthedependenceoftheHungarianbankingsystemonforeigncurrencyliquiditymayhavedecreased.
Chart 4Recourse to the central bank’s monetary policy instruments
1 Ja
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Note: Net of the loan and swap transactions granted under the Funding for Growth Scheme.Source: MNB.
REvIEWOFTHEMNB’SPERFORMANCEIN2016
ANNUAL REPORT • 2016 29
3.2 STABILITY OF THE FINANCIAL INTERMEDIARY SYSTEM
PursuanttotheMNBAct,theprimaryobjectiveoftheMNBistoachieveandmaintainpricestability.Withoutprejudicetoitsprimaryobjective,theMNBsupportsthe maintenance of the stability of the financialintermediarysystem,theenhancementofitsresilienceanditssustainablecontributiontoeconomicgrowth;furthermore,theMNBsupportstheeconomicpolicyofthegovernmentusingtheinstrumentsatitsdisposal.As amember of the European System of FinancialSupervision,theMNBperformsthetasksimposedonitarisingoutof thescopeof theEuropeanBankingAuthority,theEuropeanInsuranceandOccupationalPensions Authority, the European Securities andMarkets Authority and the European Systemic RiskBoard,supervisestheHungarianfinancialintermediarysystem,andactsasaresolutionauthority.
Key developments in the financial system
The Hungarian banking system’s shock-absorbingcapacity is robust both in terms of liquidity andcapitalstock(Chart5).In2016,banks’lendingactivityintensified,asannualSMEcreditgrowthreachedthelevel of 5-10 per cent,which is deemed necessaryfor sustainable growth. The previously very strongprocyclicaloperationoftheHungarianfinancialsystemeasedsubstantially,whichwasgreatlysupportedbytheMNB’screditincentiveschemes(FGS,MLS)andtheself-financingprogramme.However,externalrisksrose.Inadditiontothesevereconsequencesofthecrisis,geopoliticaldevelopmentsandchallengesposedbythepersistentlylowinterestrateenvironmentrepresentthemainrisksintheEuropeanbankingsector.
The Financial Stability Reports provide a regularandcomprehensiveassessmentofriskstofinancialstability, presenting the main risks including themanagement of those risks. Possible marketturbulencesevolvingontheweakfundamentalsoftheEuropeanbankingsystemmayaffecttheHungarianbankingsectoraswell throughvariouschannelsofcontagion. Despite the lasting poor performanceoftheeuroareaeconomyseeninrecentyears,theHungarianeconomyisstillonagrowthpathandthesystemicriskscontinuedtodecrease,asaresultofwhichHungarywasupgradedbytheratingagencies.
Asregardstrendsindomesticlending,in2016therewasa turnaround incorporate lendinggrowthandparticularlyinSMElendinggrowth,withthelending
incentivesprogrammesofthecentralbank(FGS,MLS)playinganimportantroleinthisregard.Asaresult,SMElendingenteredtheexpansionbandof5to10percent,whichisnecessaryforsustainablegrowth(Chart6).ThegrowthrateoflendingtoSMEsincludingtheself-employedwascloseto12percent.In2016,thecreditinstitutionsparticipatinginthethirdphaseoftheFundingforGrowthSchemelentHUF473billion
Chart 6Annual growth rate of the outstanding borrowings of the corporate and SME sector
–10 –8 –6 –4 –2 0 2 4 6 8 10 12 14
–5 –4 –3 –2 –1
0 1 2 3 4 5 6 7
Per cent Per cent
2010
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Corporate sector (MFI, Quarter-on-quarter)
SME sector (banking sector, Year-on-year, right-hand scale)SME sector with self-employed (banking sector, Year-on-year, right-hand scale)
Corporate sector (MFI, Year-on-year, right-hand scale)
Note: Based on transactions; the SME sector is estimated on the basis of banking sector data before 2015 Q4.Source: MNB
Chart 5Developments in the Solvency Stress Index
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1,600 HUF Billion Per cent
Capital need to meet regulatory requirementCapital buffer above the regulatory requirementSolvency Stress Index (right-hand scale)
2008
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Q1
Note: In the case of stress index, the lower the value of the index, the lower the ratio of banks below the regulatory minimum in the event of a stress scenario.Source: MNB.
MAGYAR NEMZETI BANK
ANNUAL REPORT • 2016 30
totheSMEsector,inroughly16,600transactionstomorethan11,000enterprises.SincethelaunchoftheschemeinJune2013,morethan37,000enterpriseshadaccesstofinancinginanamountofroughlyHUF2,600billion,ofwhichtheoutstandingborrowingattheendof2016wasHUF1,415billion.Asaresultofthescheme,thedecliningtrend intheoutstandingborrowingofSMEsobservedforseveralyearsbefore2013 not only halted, but turned to growth ontransactionbasisfrom2015.
OfthecontractsconcludedintheamountofaboutHUF 473 billion until 30 December 2016 in thethird phase of the FGS, 76.5 per cent were newinvestmentloanswithanaveragematurityofaround9years,while23.5percentofthemwerenewleasetransactionswithanaveragematurityof4to5years.Theaveragesizeofthe loanandleasetransactionsconcludedintheamountofHUF320billioninPillarIwasHUF21.3million(mediantransactionsize:HUF6.4million),whiletheaveragesizeofthetransactionsconcludedintheamountofHUF152billioninPillarIIwasHUF96.3million(mediantransactionsize:HUF20.7million).Asregardsthedistributionbysectors,inPillarIagriculture,trade&repairandmanufacturingindustrieshadoutstandingshare,withmorethan60percentoftheloansflowingtothesethreesectors,whilePillar II isdominatedbyrealestateactivities,manufacturing and transport& storage,with theiraggregateratiobeingaround64percent.
The segmented recovery of the property marketcontinued in 2016. Housing market represents akey area at the level of the individual economicagents (households, financial institutions), as wellasatthelevelofnationaleconomy.Housingmarketdevelopments are closely related not only to thefinancialstabilitydilemmas,butalsofundamentallydetermine the short-termand long-termprospectsofeconomicactivity.Housingmarketdevelopmentsand in particular the volatility of housing pricesinfluence the sector’s savings and consumptiondecisions through the households’ wealth, whiletheyinfluencetheportfolio,profitabilityandlendingactivityoffinancialinstitutionsthroughthemortgageloan collateral. In order to monitor the propertyprice developments and the impacts of those onfinancialstability,theMNBdevelopeditsownhousingpriceindex,whichisabletocapturethechangesindomestichousingpricesmoreaccurately,particularlytheheterogeneity inpricesand theirdevelopmentcompared to the fundamentally justified level. In
viewofthekeyroleofthepropertymarket,inMay2016theMNBpublishedthefirstissueoftheHousing Market Report, tobefollowedbysemi-annualnewpublications.Thereportspublishedso farhighlightthe fact that even though there was substantialappreciationinhousingpricesinBudapest,housingprices still cannotbedeemedexaggerated.On theother hand, price increase is not so typical in lessfrequentedareasorsmallersettlements.
Inparallelwiththehousingmarketdevelopments,aturnaroundtookplaceinhouseholdlendingaswell.Forthefirsttimesince2008,disbursementsexceededrepayments from June 2016, which is primarilyattributable to the almost 50 per cent increase inhousingloans.Sofar,thecentralbank’sdebtcapruleshavekeptnew lendingatasound level,butashifttofixedrateloanswouldbedesirable,particularlyatlongermaturities,inthecaseofcustomerswithhigherpayment-to-income(PTI)ratios.However,thisrequiresstrongerpricecompetitionbetweenthebanks,asthespreadondomesticfixed-rateloansisextremelyhighbyinternationalstandards.
Formanyyears, thehigh ratioandvolumeofnon-performinghouseholdmortgage loanshavebeenamajorproblemofthefinancialintermediarysystem,whichneedstoberesolved.Inadditiontofinancialstabilityrisks,thepoliticalandsocialaspectsoftheproblem justified the governmentmeasures takeninthepastsixtosevenyearstofostertheequitablesettlement of the situation. 2016 represented aturnaround in several respects, as the foreclosureand evictionmoratoriumendedon 1March; thus,itonceagainbecamepossibleforlenderstoenforcecollateral.ItwasforeseeableatthestartoftheyearthatthenumberofpropertiesofferedtotheNationalAssetManagementAgency(NAMA)wouldreachthepermittedlimitandthatthepropertymarketboomand the low yield environment togethermake thesalesofthereceivablesattractiveforthelenders.
Recognisingthenewsituation,inMarch2016theMNBpublishedarecommendationwithregardtothelastingrecovery of the solvency of household mortgageloandebtorswith payments in arrears. TheMNB’sobjectivewiththerecommendationwastoencouragetheconsensualsettlementofdebtservicing, in linewith the newmarket and regulatory environment,simultaneouslyminimisingthestabilityandsocietalrisks.Withintheframeworkoftherecommendation,untiltheendofNovember2016,lendersattemptedto
REvIEWOFTHEMNB’SPERFORMANCEIN2016
ANNUAL REPORT • 2016 31
liaisewiththedebtorofalmost68,000transactions,withsuccessinalargepartofthecases.Inalmostonequarteroftherespectivetransactionsthedebtorwasdemonstrablyuncooperative,andhenceinthecaseoftheseclientsthelendermayapplyothersolutionsaswell,notstipulatedintherecommendation.BytheendofNovemberalmost3,500compromiseswereconcludedintotal:inthevastmajority–almostthreequarters – of the accepted solutions the propertyremained in thepossessionof thedebtor,while inaboutonefifthof the cases itwas included in theprogrammeofNAMAandin8percentofthecasesthepropertywassoldjointly.BasedontheproceduraldeadlineoftheMNBrecommendation,thenumberof compromises may increase in the first half of 2017.
Compared to previous years, the banking sectorrealisedanoutstandingprofitin2016.Partlyduetoone-offeffects,suchasthereleaseofimpairments,thereturnonequity rose toabove10percent.Atthesametime, inthepersistently lowinterestrateenvironment, banks’ structural profitability willbeunderpressure in themediumtermdue to thenarrowinginterestmargins.Despitethestreamliningefforts of past years, there was no substantialimprovement in the sector’s cost effectivenessand management of the non-performing portfoliocontinuestotiedownsignificantcapacities.
Improved cost efficiency is key to managing thechallenges posed by the persistently low interestenvironmentandtechnologicalprogress.Thiscouldbefosteredbytheconsolidationofthebankingsector,the exploitation of the opportunities inherent indigitalisationandthereductionofthenon-performingloan portfolio. The improvement in cost efficiencycouldbeboostedbycompetitionwithinthebankingsector,particularlythepricecompetitionin lendingtohouseholds,whichwouldforcebankstotakethenecessarymeasures.
The MNB conducted a Market Intelligence Survey in2016aswell, in the contextofwhichMNBstaffmembersvisited10creditinstitutionstodiscusswithrepresentativesoftheinstitutionsthestrategyofthespecificinstitutionandtheconditionoftheHungarianbankingsector,expectedtrendsinlending,andthefactors determining the future of the sector. TheresultsofthesurveywerepresentedintheMayissueoftheFinancial Stability Report.
Macroprudential regulatory activity of the MNB
In2016,theMNB’smacroprudentialactivityfocusedonmonitoringtheadjustmentofmarketparticipantsand the trends in lending, and on fine tuning thepreviously elaborated set of macroprudentialinstruments. In line with its macroprudentialmandate, in 2016 the central bank published itsmacroprudential strategy, enhanced its systemfor identifying and monitoring systemic risks anddevelopeditsmacroprudentialinstrumentsnecessaryforefficient riskmanagement.During theyear, thecentralbankmonitoredmarketdevelopmentscloselyandconsultedwithmarketparticipantsintheinterestsofassessingtheimpactoftheregulationsintroducedanddulycalibratingsuch.
The principles pertaining to the use of themacroprudential instruments are summarised andpresentedtothepublicintheMNB’sstrategyentitled“Stability today – Stability tomorrow”, elaboratedin accordance with the recommendations of theEuropeanSystemicRiskBoard(ESRB)1andpublishedinJanuary2016.InlinewiththeMNB’sStatute,thestrategicmaterialdesignatesthebasicprinciplesofthe central bank’s operation as amacroprudentialauthority: the targets of macroprudential riskassessment,interventionandfollow-up,themethodofapplyingmacroprudentialinstrumentsandthemainprinciplesfosteringtransparentoperations.
Havingconsultedwithmarketparticipants,theMNBrevised thedebt cap rules in force since1 January2015,basedontheexperiencesofthepastperiod.Asaresult,itmadeanumberofamendmentswhichservetoreduceborrowers’administrativeburdensandeaseborrowing,whileatthesametimecontinuingtoensure responsible lending. Amongst other things,theamendmentsmayhelp tomitigate the interestrate risks borne by consumers, by the preferentialmanagementofinstalmentsonmortgageloanswithlonger interestfixationperiods. Inparallelwiththeamendments, the answers given to the questionsaimedat interpreting the regulationsand fosteringstandard market practices were published on theMNB’s website in the form of “Frequently AskedQuestions–FAQ”.
As a result of the reviewof themortgage fundingadequacy ratio (MFAR) regulation, which will be
1ESRB/2013/1:http://www.esrb.europa.eu/pub/pdf/recommendations/2013/ESRB_2013_1.en.pdf.
MAGYAR NEMZETI BANK
ANNUAL REPORT • 2016 32
introduced in 2017, the new guidelines for therequirement prescribing stable forint financingwerealsodesignated.Asaresultoftheregulation,two new mortgage banks were established bytheendof2016,and thefirstnewmortgagebondissues also occurred. Due to the expected changein the regulation pertaining tomortgages and thelegislativeenvironmentformortgagefinancing,theMNB’sFinancialStabilityCouncilmodifiedthedateofintroducingtheMFARregulationfrom1October2016to1April2017.Asaresultoftheupturninhousingloansandafterestablishingthemortgagebankandrefinancing infrastructure, it became necessary totightentheMFARregulation.Definingthedirectionoftighteningwasprecededbyadetailedsurveybythe MNB, which assessed the preparation of themortgagebanks.PursuanttothedecisionoftheFSB,theminimumexpected level of theMFARand theexpectedmaturityofthefundingwillincreasefrom1 October 2018.With a view to encouraging real,external financing, themortgage bonds purchasedbybankswillbepartially“netted”againsttheeligiblefunds as determined by the decree. Finally, themortgagebondssubscribedbybuildingsocietiescanbetakenintoaccountasreal,stablefinancingfrom1October2018.Asaresultoftheamendments,thesystemic maturity mismatch will decrease furtherand–duetotheexpectedmortgagebondissuances–themortgagebondmarketmaycontinuetodeepen.In relation to the changing regulation, the MNBconsultedwithawiderangeofstakeholders,includingmarket participants and the European Central Bank.
The MNB’s experts surveyed the concernedinstitutions’ portfolio cleaning practices related toproblem project loans and reviewed the status ofpreparationsforintroducingtheSystemicRiskBuffer(SRB). Based on the experiences, with a view toensuringthestandardinterpretationoftheregulationanddevelopingauniformmarketpractice,theMNBalsopublishedasummaryonitswebsite(FrequentlyAskedQuestions–FAQ).On20September2016,theFinancial StabilityCouncildecided topostpone theintroductionofthesystemicriskbufferbysixmonths.Accordingly,thecapitalbuffermustbeaccumulatedfrom1July2017,basedontheportfoliooutstandingat the end of the first quarter of 2017. Since theannouncementofthecapitalbuffer,thebankshaveperformedsubstantialcleaningintheirbalancesheet:theproblemportfoliofellfromroughlyHUF820billionin2014Q3toHUF247billionbytheendof2016Q3.Intheadjustmentperiod,whichwasextendedbythe
MNB’sdecision,thebankscanreducetheirproblemexposures and hence may be exempted from theaccumulationofthesystemicriskbuffer.
BasedonthemethodologyapprovedbytheFinancialStability Council, in 2016 theMNB performed theannual review of other systemically importantinstitutions (O-SII). Considering the consolidatedbalance sheet data of 31 December 2015, eightdomestic banks were identified as systemicallyimportant. Based on their position in the financialsystem, these institutions are considered to be ofoutstandingimportance;henceinordertoincreasetheirshock-absorbingcapacity,theMNBprescribedforthemtoaccumulateadditionalcapitalbufferfrom1January2017.Theidentifiedinstitutionsmustsatisfythe capital requirementsof0.5 to2per cent, as aproportionoftheexposure,infouryearsatagraduallyincreasinglevel.Theadjustmentperiodlastinguntil2020supportsthecontinuedupturninlending,whilesimultaneouslystrengtheningfinancialstability,andisalsoinlinewithinternationalregulatorypractice.
Inaccordancewithitsstatutoryobligation,theMNBquarterlyrevisesthecountercyclicalcapitalbufferrate(CCB),whichmaybeappliedforthemitigationoftherisksof excessive lending.Atpresent,noexcessivelendingcanbeobservedinthebankingsystem,andhence the Financial Stability Council left the CCBrate,whichisapplicabletodomesticexposures,at0percentthroughouttheyearinordertoencouragelending.ThemethodologyofdeterminingtheCCBratewasalsoenhanced,supplementingthemethodologyfor determining the build-up of the CCB with theconditions applicable to the release of the capitalrequirement.
As part of the follow-up of the macroprudentialinstruments, in October 2016 the MNB issued itsMacroprudential Reportforthefirsttime,whichmayberegardedasanovelinitiativeevenbyinternationalstandards.Thepurposeofthereport,whichwillbepublishedannuallyinthefuture,istopresenttothepublicthemeasuresappliedbytheMNBtopreventandaddressthesystemicriskswhichitidentifiesandcommunicates,aswellastheeffectsofsuchrisksandtheadjustmentofmarketparticipants.
The central bank’s experts continued to monitorinternational regulatory developments affectingthe financial intermediary system in 2016, andparticipated in themacroprudentialpolicyworkinggroupsofvariousEuropeaninstitutions.
REvIEWOFTHEMNB’SPERFORMANCEIN2016
ANNUAL REPORT • 2016 33
3.3 SUPERVISION AND CONSUMER PROTECTION
Basedonthedatafrom31December2016,theMNBisresponsiblefortheprudentialsupervisionof1,608institutions;thedistributionoftheinstitutionsbytypeisshowninChart7.The(≈7.8percent)decreaseinthenumberofsupervised institutionscomparedtothepreviousyearisattributabletotheconcentrationprocesses takingplace in themarket,ofwhich theintegrationofcooperativecreditinstitutionsshouldbehighlightedbothintermsofitstopicalityandweight.In2016, theMNB launched126prudentialand36marketsurveillanceinspections,andcompleted129prudentialand50marketsurveillanceinspections.Inthereviewperiod,theMNBissuedatotalof1,736prudentiallegalenforcementandlicensingresolutions,whileinthemarketsurveillanceandissueroversightareas86legalenforcementresolutionwerepassedintotal.ThemeasurestakenincludedtheimpositionofprudentialinstitutionalfinesamountingtoHUF1,168million,prudentialpersonalfinesamountingtoHUF221millionandmarketsurveillanceandsupervisoryfinesofHUF3,889million.
TheMNB continued the practical application of theenhancedmethodsalsointheareaofITsupervision;inthespiritofwhichitcompletedthesurveyofdataflows,theauditoftheadequacyoftheconfidentialitycontrols and the assessment of the fraud risks atseveralinstitutions.Inordertoensurehighercertainty–insteadofthetraditionalsampling-basedaudit–the
supervisoryauthorityintroducedanauditmethodologybased data analysis covering the entire dataset andindependent recalculation. In relation to the quickspread of cloud services, regarded as one themostsignificantinformationtechnologyinnovationsinthelasttwentyyears,theMNBelaborateditsrecommendationregardingtheuseofsocialandpubliccloudservices.
Supervision of credit institutions
The MNB’s functional area responsible forthe supervision of credit institutions initiated42 inspections in total in 2016, and closed 28comprehensive, 11 targeted, 1 thematic and 8follow-up inspections. As regards the institutions’capitaladequacy,11ICAAPinspections(aimedattheinternalcapitaladequacyassessmentprocess)werecompleted.Asa resultof theproceduresclosed inrespectofthecreditinstitutions,in2016prudentialinstitutionalpenaltiesinthetotalamountofHUF709millionwereimposed,underliningthattheMNBtakesfirmmeasuresagainstinfringingformsofconductandinstitutionsfailingtocomplywiththeprovisionsofitsearlierresolutions.
In accordance with international trends and therecommendationoftheEuropeanBankingAuthority(EBA),thebusinessmodel-basedapproachisgainingincreasing importance in domestic supervisoryactivities as well. The central bank pays specialattentiontomakingthesupervisedinstitutionsawareofthebusinessmodelanalysesperformedonthebasisofthecontinuouslydevelopingframeworkandoftheidentifiedrisksandthisdialogueefficientlysupportsthebanks’strategydevelopment,planningandriskmanagementprocesses.
The supervisory review and internal evaluationprocess of the large banks’ capital adequacyassessmentprocess(ICAAP-SREP)andthevalidationoftheinternalmodelsnecessaryforcalculatingthecapital requirement, bear the utmost importanceforthestabilityofthefinancialintermediarysystem.During theyear, theMNBconducted the review inrespectofall complexbanksandat thesametimelaunchedvalidationprocesses,atthebanks’request,in the case of several riskmodels.With a view tosupplementing theMLS,which supports economicgrowth, and making it more efficient, the centralbank – in its capacity as supervisory authority –providedthecreditinstitutionswithanallowanceinthecapitalrequirementinproportiontothegrowthcommitmentstheymade.
Chart 7Number of supervised entities by type on 31 December 2016
Insurance companiesIntermediaries (non-financial institutions)Credit institutionsFinancial enterprisesPension, health and mutual aid fundsOther non-financial institutionsCapital market institutions
45
1,05593
253
698 85
Source: MNB.
MAGYAR NEMZETI BANK
ANNUAL REPORT • 2016 34
In April 2016, a prudential thematic inspectionassessingtheefficiencyofthelargebanks’householdmortgageloancollectionprocesswaslaunched,whichcoveredboththeoperativestructureofthecollectionareaandtheadequacyofriskmanagementmethodsrelatedtothecategorisationofoverduetransactions.The procedure analysing the efficiency of the NPLreduction strategymay also serve as an additionalincentivetofosterportfoliocleaning,andithelpedthebanks,havingreviewedtheirownprocesses,paymoreattentiontoexpandingtherestructuringfacilities.TheMNBactivelyapplied itsoperativeprocedureswitha short lead-in time and typically launched thesewithoutadvancenoticetothecredit institutionsaswell,inthecourseofwhichitformulatedfindingsinrespectofthedatasupplyandthecalculationoftheMFAR.
During the reporting period, the MNB activelyparticipated in the riskassessmentof internationalbanking groups both as home and host authority.Aspart of the collegework,within the frameworkof joint decisions, the central bank promoted theformulationofrequirementsapplyingtoinstitutionsalsoactiveintheHungarianmarket,ensuringthattheoperationofdomesticactorswasriskconsciousandefficientinmicroprudentialtermsaswell.Asaresultoftheintensivecooperation,therecoveryplanswereaccepted,basedonwhich–inacrisissituation–aninstitutionwouldabletocontinueitsoperationandrestorethenormalcourseofbusinesswithoutpublicassistanceaswell.
The largest change in the regulatory environmentof thefinancial sectorwasdue to themodificationof theActon the integrationof cooperative creditinstitutionsandtheMNBAct2in2016,asaresultof
which it became necessary to revise the oversightstrategy and the instruments related to theIntegration. The amendments extended theMNB’soversightcompetencetotheIntegrationOrganisationas well, and established the opportunity for risk-based oversight. The purpose of the increasinglycentralised Integration is to ensure that withcentralised institutions (Integration of CooperativeCreditInstitutions–ICCIandTakarékbank)itoperatesinaframeworksimilartothatoflargebanksandthemember cooperative credit institutions practicallyfunction as branches. When reaching the level ofoperationof largebanks, theMNBwishestoapplytheoversightprinciplesand instrumentsappliedtolargebanks;however,thebasicrequirementofthisis to have a homogenous group operating on thebasis of uniform regulations, efficiently managedand controlled by the central institution. In ordertoensurestability,theMNBdoesnotyetsupervisetheIntegrationusingthelargebankapproachinfull,and thus a transitional period was introduced, inthecourseofwhichfortheinstitutionswithhighestweightand/orrisk,itappliescustomtreatment,andforcooperativecredit institutions itapplies jointorintensive joint treatment, depending on their riskprofile.
Withthecompletionoftheprocessescommencedinpastyears,thefocusoffinancialinstitutionlicensingactivitywasontheacquisitionofcontrollinginterests,themergers of cooperative credit institutions, thetransfer of payment service general agreementportfolios,aswellasthetransferofloan,credit,leaseand receivable portfolios. In 2016, two specialisedcredit institutions–ERSTEMortgageBankLtd.andK&HMortgageBankLtd.–obtainedactivitylicencesandenteredthemarket.Additionally,theMNBalso
Table 2Number of inspections conducted at credit institutions, financial enterprises and payment institutions
Type of entity Type of inspectionClosed in 2016
Started in 2016 In progress on 31 Dec 2016Started in 2015 Started in 2016
Creditinstitutions(andbranches)
Comprehensive 11 14 20 6
Targeted 7 4 13 9
Thematic 1 0 1 1
Follow-up 3 5 6 1
validationandSREP 4 7 11 4
Financialenterprises Targeted 4 2 3 1
Paymentserviceproviders Comprehensive 2 1 2 1
2ActCXXCvof2013andActCXXXIXof2013.
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ANNUAL REPORT • 2016 35
authorisedtheestablishmentofanotherspecialisedcreditinstitution,MKBMortgageBankLtd.AXABankEurope SA Hungarian Branch Office terminated itsoperationinHungaryattheendoftheyear,whiletheBanifPlusBankLtd.mergedwiththecreditinstitutionCofidisSAasaresultofacross-bordermerger.Theportfolio of AXAwas taken over by OTP Bank Plc,whiletheportfolioBanifPluswastransferredtotheHungarianBranchOfficeofCofidis.Oftheacquisitionofinterestsincreditinstitutions,themarketsaleofMKBBankLtd.shouldbehighlighted.
Supervision of insurance companies, funds and intermediaries
In the insurance sector,9newinspectionsstartedand11ongoinginspectionswereconcludedin2016.TheprudentialfinesimposedinrespectoftheinsurancemarketamountedtoatotalofHUF247million.
Oneofthemost importantevents inthe insurancesector was the changeover to Solvency II, whichwas successfully completed in 2016. In the past,the MNB had supported this process by issuingrecommendationsandconducting impactanalyses,along with active communication and test datareporting.ThepreparationcanbedeemedsuccessfulbyEuropeanstandards,asthecentralbankforwardedthedataof thedomestic insurers to theEuropeanauthority inamuchhigherqualitythanaverage. Inaddition, the smooth changeover is also reflectedby the stable capital adequacy at the sector level(over200percent),andmoreover,itreachedtheEUaveragecomparedtotheformersituation.Thecentralbank’srecommendation,inwhichitrequiresholdingcapital buffer to eliminate volatility impacts,madeamajor contribution to the stability of the capitalposition.
In the low market yield environment, it is a keyrequirementfortheinsurersthattheyofferavarietyof marketable and cost efficient products whichcomplywiththedecreasedyields,butneverthelessprovidepositivereturnforthecustomers.TheMNBelaboratedtheethicallifeinsuranceconceptalongthe“fair”approachinitsstrategy,theprimaryobjectiveofwhichistoincreasepublictrustandwillingnessofself-provision.Inordertoattainthetargetsset,thecentralbank,incooperationwiththelegislatorandthemarket,initiatedtheamendmentofthelaw,issuedtwoMNBdecreesandarecommendationconsisting
of 120 points, which determine the expectationstowardthe insurers.Asaresultofthemeasures,anewgenerationoflifeinsuranceproductswithsavingsmayappearfrom2017.
In2016, theMNBconductedpilotbusinessmodel-based inspections at four insurers. Although thecentralbankidentifiedminorshortcomingsintheseproceedings, on thewhole it can be said that theinspected insurershavestrategieswhichare in linewiththeexternalenvironment,realistically feasiblewiththeavailableresources,considerthepotentialrisksandguaranteesustainableprofitability fortheinsurer,andtheirbusinessplansareharmonisedwiththestrategy,thefulfilmentofwhichiscontinuouslybacktested.
Inthecoursethecomprehensiveinspections,theMNBinspectedtheproperapplicationofthenewInsuranceAct3issuedinrelationtoSolvencyII,introducedon1January2016andoftheEUrules.Inthespiritofthis,alongthePrudentPersonPrinciplerelatedtoinsurers’investment activity within the Solvency II rules, itinspected theadequacyof the investmentstrategyandregulationwithspecialcareanditassessedtheinvestmentactivity,alsofocusingontheprofitabilityand liquidity aspects. The supervisory authoritytreatedasaprioritytheinspectionofthecompositionandqualityoftheassetsconstitutingtheregulatorycapital and the cover for the insurance technicalreserves,aswellasthematuritymatchofthereservesandunderlying liabilities, and the adequacyof theproceduresthataretoensurethis.The inspectionsrevealed shortcomings in the area of investmentpolicies, theevaluationofcorporatedecisions,andcontinuousmonitoringoftheportfolio.
In the reporting period, the underlying factors ofthe sector-specific findings included infringementsrelatedtothecontractualtermsofthesoldproductsand customer information documents, as wellas to the customer information and complaintmanagement. In addition, irregularities related tooutsourcingcontracts,productdesigns,provisioningandaccountingpolicies,portfoliomanagementandregistrationsystems,werealsoidentified.
The forward-looking approach of the supervisoryauthorityisevidencedbythefactthatitimplementeda number of early interventions in the insurancesector,whichhelpedpreventjeopardisingcustomer
3ActLXXXvIIIof2014.
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fundsasaresultoftheinadequateoperationoftheinstitutionortheerroneousbusinessmodel. InthecaseoftheRomanianinsurerAstra,theMNBplayedaspecial–akindofintermediary–rolebetweentheHungarianandRomanianguaranteefunds,toensurethattheaggrievedcustomersofthebranchofficehaveproperaccesstothedamages.Atthesametime,itprovidedcontinuousinformationtothepublicontheprogressoftheRomanianprocedureandtherelateddeadlines.
In the funds sector,16newinspectionsstartedand17ongoinginspectionswereconcluded,inthecontextofwhichatotalofHUF11.4millionwasimposedinfines,andtheactivitylicencesoftwovoluntaryfundswerewithdrawn.
In several cases, the inspections identifiedshortcomings in the internal control systems andprocesses, irregularities related to theorganisationand documentation of delegate election meeting,theabsenceofregulationupdatesandtheviolationof accounting rules. During the comprehensiveinspections, the focus areas continued to be theproper execution of payments related to servicesprovided to members and to the termination ofmembership,andthecorrectcreditingofmembershipfees to individual accounts in accordancewith theappropriate distribution ratio. The supervisoryauthorityconcentratedontheinspectionofindirectcostsrelatedto investments,asaresultofwhichanumberofassetmanagersreimbursedthefundsforunjustifiedexcesscosts,andthusthosewerecreditedtomembers’individualaccounts.
In December 2016, the MNB issued a revisedrecommendationon the selectableportfolio system,whichmaybeoperatedbythevoluntarypensionfundsandputsmoreemphasisthanbeforeonencouraging
the funds that they should adjust the portfolios tothemembers’lifecyclesandrisk-takingcapacity,andclarifies the regulation of the investment policy ofthose.At the endof the year, the central bank alsopublishedthenoticepresentingthepremiumchargedbythevoluntarypensionfundsbetween2000and2015,which compares themembership fee deduction foroperationalandliquiditypurposes,andthelevelofassetmanagementcoststothemembers’assets.Accordingtothenotice,thevalueofthesector-levelindicatorsisstillbelow1percent,i.e.thedegreeofthedeductionschargedtothememberscanbedeemedlow.
WithintheframeworkofthecooperationagreementconcludedwiththeNationalAssociationofvoluntaryFunds,theMNBconductedseveralnegotiationsonthemarketandregulatoryprocesses,aswellasontheproposalsaimedatfosteringthedevelopmentofthevoluntaryfundssystemandstrengtheningtheself-provisionapproach.
The fact that – due to the amendment of the Acton voluntary fundsandof the relatedgovernmentdecrees – all voluntary pension funds operatingselectableportfoliosystemsmodifiedtheirregulationsrelated to theoperationof theselectableportfoliosystem increased thenumberof casesmanaged intheareaoffundlicensing.
In the intermediary area, the supervisory authorityenhanceditsauditmethodology,extendingthefocusthereoftothe inspectionofthecontentofmediatedcontracts in terms of the insurance trade and theexistence of proper professional care in particularas regards the new contracts recommended forcorresponding needs. All inspections conducted inrespectoftheintermediariesidentifiedshortcomingsinrespectoftheregistrationinthesupervisoryauthority’sregister.
Table 3Number of inspections conducted at insurance companies, funds and intermediaries
Type of entity Type of inspectionClosed in 2016
Started in 2016 In progress on 31 Dec 2016Started in 2015 Started in 2016
InsurancecompaniesComprehensive 5 2 7 5
Targeted 3 1 2 1
Pension,healthandmutualaidfunds
Comprehensive 9 6 14 8
Targeted 2 0 2 2
IntermediariesTargeted 4 0 3 3
Follow-up 0 1 1 0
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During the licensing procedures, new tasks weregeneratedbythemanagementofthe“fit&proper”requirementstowardsthenewlyemployedinsuranceintermediaryactivitycontrollers,asprescribedbytheprovisionsofthenewInsuranceAct.
Supervision of capital market institutions
In2016,theMNBlaunched39newinspectionsandclosed31inspectionsatcapitalmarket institutions,inthecontextofwhichitimposedinstitutionalandpersonalfines in theamountofHUF377.5million.Duringtheyear,severalenterprisesterminatedtheirinvestment services activities andaccording to thedevelopments being seen,market consolidation isexpectedtocontinuein2017aswell.
Abasicelementoftheinspectionofinvestmentfirmswas the audit of the transactions and positions ininstitutions’ record-keeping systems based on thedata of the databases obtained during the on-siteinspections.Thetoolsofcontinuousoversightwereexpandedwiththedatabase logicsenquiriesbasedon the regular data reporting by the supervisedinstitutions. Since February 2016, customers ofinvestment service providers may enquire on themonth-endbalancesof thesecuritiesaccountheldwiththeserviceproviderontheMNB’swebsite.
Thecentralbanktreats theprotectionofcustomerreceivables and compliance with the relatedstatutory provisions as key priorities. Aswidely aspossible,theMNBappliesoperative-typeinspectionmethodsatcapitalmarketactors,whereduringthe
on-site inspections conductedwithoutprior noticeit acquires the data directly from the inspectedinstitution,therebypreventingthepotentialmala fide amendmentofsuchdata.Duringthereportingyear,suchinspectionswerecarriedouton10occasions,inthecourseofwhich–apartfromidentifyingpotentialsectoral infringement and the relatedproportionalmeasures–nosystemicfraudorconductjeopardisingcustomers’assetswasrevealed.
Inthecourseofinspectinginvestmentfundmanagers,in addition to the control of data supplies, thesupervisory authority focused on the inspectionof the institutions’ business processes, particularlyon risk management, liquidity management,investmentdecisions,ordermanagementandtheircapitalposition.Thetargetedauditedclosedin2016resulted in the withdrawal of the activity licenceononeoccasionandthesuspensionthereofinone case.
In relation to theMiFID II regulation (thedirectivespecifying the requirements related to investmentfirms and regulated markets) to be applied fromJanuary 2018 due to the amendment of the EUDirective 2004/39/EC on markets in financialinstruments, the supervisory authority conductedconsultationswiththemarketinstitutions.
After 1 July 2016, the registered status ofintermediaries registered without a principalceasedbyoperationoflaw,asaresultofwhichtheMNB cancelled the data of almost two thousandintermediariesfromitsrecords.
Table 4Number of inspections conducted at capital market institutions
Type of entity Type of inspectionClosed in 2016
Started in 2016 In progress on 31 Dec 2016Started in 2015 Started in 2016
Investmentfundmanagers(exc.venturecapitalfundmanagers)
Comprehensive 1 5 15 10
Targeted 1 0 1 1
venturecapitalfundmanagers Comprehensive 2 0 3 3
Centralcounterparty Comprehensive 0 1 1 0
Centraldepository Comprehensive 0 0 1 1
Investmentfirms
Comprehensive 3 3 10 7
Follow-up 0 2 3 1
Thematic 0 1 1 0
Targeted 10 2 4 2
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Market surveillance and oversight of issuers
In2016,theMNBcompleted50marketsurveillanceinspections,asaresultofwhich it imposedmarketsurveillance penalty amounting to almost HUF 3.9billion.
TheMNBpaysspecialattentiontotheliquidationofunauthorisedactivitiesdistortingthemarketandtotheimmediatesuppressionoftheinitiativeswithouteconomicfoundation,promisingunreasonablyhighyieldsandaimedatdamaginginvestors.Inthespiritoffightingthespreadofunauthorisedactorsinthelow interest and yield environment, in 2016 thesupervisory authority considerably increased thenumber of the temporary measures taken in theearlyphaseofitsmarketsurveillanceprocedures,thecriminalchargesfiledduringtheproceduresandpressreleases informing the public about unauthorisedserviceproviders.
In2016,theseriesofmarketsurveillanceproceduresrelated to the unlicensed purchase of receivablesin Hungary was closed. As a result of the publicauthority’s actions, the central bank also initiatedcriminal proceedings, in addition to the marketsurveillance penalties of several hundred millionforintswhichwereimposedincertaincasesofspecialimportance.
In 2016, theMNB placed the control of the stockexchange issuers’ notification obligation on newfoundations, in the spirit of which it encouragesthe issuersofpubliclytradedsecuritiestofulfilthenotification obligation voluntarily. The supervisoryauthorityissuedresolutions–inadditiontoimposingsupervisorypenaltyintheamountofsomeHUF50million– inabout40casesagainst the issuers thatbreachedthenotificationobligation,andin13casesthetradingoftherespectivesecuritiesatthestockexchangewasalsosuspended.
As part of the new stock exchange strategy, newissuers appeared on the Budapest Stock Exchangeaftertwoyears.
Consumer protection
TheMNB’sconsumerprotectionactivityin2016wasstrongly determined by the fulfilment and closureoftheextraordinarytasksrelatedtothesettlement.During the review of the settlement more than
18,000documentsweregeneratedandaspartoftheinspectionthecentralbankreceivedelectronicdatareportinginmorethan16,000cases.Aspartofthesettlementthematicaudit,inrelationtoinfringementswhichwere identifiedtheMNB imposedconsumerprotection fines in the total amount of HUF 155million, penalties of HUF 6.1million for failure tocomplywiththeprescribedextraordinaryreportingand procedural penalties of HUF 2.3 million forhinderingtheinspection.Onthewhole,theseriesofinspections carriedoutat322financial institutionsdidnotrevealsystemicerrors;mostoftheaffectedparties remedied the shortcomings already duringthe inspection and the fulfilmentof the additionalobligationsprescribedbytheMNBisalsoonschedule.
Withaviewtoassessingandmanagingtheconsumerprotectionrisks,in2016theMNBlaunchedthematicinspectionsrelatedtofairlendingandtocompaniespursuing pawnbroking activity, impacting 18supervisedinstitutionsintotal.
The investigation of suspected infringementswas performed within the framework of targetedinspections aimed at complaint management, thecalculationandcommunicationofannualpercentagerate of charge, and at the identification of unfaircommercialpracticestothedetrimentofconsumers.
In order to survey the sales techniques, conducts,provision of information and the real marketcircumstances,theMNBconcludedtrialtransactionsin26casesin2016.
The consumers’ petitions initiating consumerprotectioninspectionsalsoboreimportantinformationforthecentralbank,whichwereinvestigated–upontheexistenceofthestatutoryconditionsoflaunchingtheprocedure–in222cases.
Due to the infringements identified during theinspections,theMNBimposedconsumerprotectionfines in the total amount of HUF 258.4 million in2016. TheMNBmonitored theactual conductandcommunicationofthesupervisedinstitutionsintheformofcontinuousconsumerprotectionsupervision,and in the course of this it issued a total of 42consumerprotectionwarnings,duetothedetectionofundesirablepractices.
The supervisory authority considers it particularlyimportant to ensure that the general terms andconditionsshouldcomplywithrequirementsofgood
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faithandfairness,asprescribedbycivillaw,andthusin2016itreviewedindetailtherelevantregulationsof nine financial institutions that concluded newconsumercarloansorleasecontractsinautumn2015.Therespectiveinstitutionsmodifiedtheircontractualconditions by eliminating the concerns formulatedbythesupervisoryauthority,andthustheMNBdidnot bring actio popularis claims against them. Atthe request of theMNB, the institutions updatedtheirentireoutstandingcontractportfoliowith thechanges,andthusconditionsthatwereunjustifiedorrepresentedanunfairdisadvantagefortheconsumers,or thatwereunclear,were removed from150,000contracts.
Inrelationtothenationalhomecreationcommunitiesestablished based on the provisions of Act Xv of2016, the MNB fulfilled its obligations related totheregulation,andalsopreparedandpublishedtheinformativeguidelinesbothfortheconsumersandthefutureorganisers.
Financial Consumer Protection Centre
CustomerscanreachthecustomerserviceoperatingintheMNB’sFinancialConsumerProtectionCentrethroughfourchannels,i.e.inperson,overthephone,by e-mail and by petitions submitted on paper. In2016,thecustomerservicereceived37,543enquiriesand3,698petitions.Halfofthecustomerpetitionsandenquiriesrelatedtothefinancialmarketandalmostonequarterrelatedtothe insurancesector.Withinthefinancialmarket,alargepart(36percent)oftheenquiries and complaints related to lending,whilealmostone thirdof the insurancecasesconcernedcompulsorymotorthird-partyliabilityinsurance.Thecauses of problems primarily included settlementsrelatedtocontracts,insufficientinformation,variousadministrative errors, the amount of commissions,
costs and fees, the degree of indemnification andlengthy claim settlements. In 2016, the enquiriesandpetitionsreceivedinconnectionwiththeclaimsrelatedtotheterminationoftheservicesofASTRAInsureraccountedforalmost4percentofallenquiriesreceivedbythecustomerservice.
Duringthecentralbank’sconsumerprotectionactivity,financial consumer protection communication isbecoming increasingly important. The purpose ofthisistoreducethedamagesarisingfromconsumers’erroneous decisions, increase consumers’ financialawarenessandenhancedomesticfinancial literacy.As part of this, in December 2016 the consumerprotection webpage (micro site) available throughtheMNB’swebsitewasrevamped,renderingitevenmore user-friendly with its new structure. On theconsumerprotectionmicrosite,whichattractsroughlytenthousandvisitorspermonth,visitorscansearchforthematiccontentinalmost350articles,coveringalmostthewholerangeoffinancialservices.
Within the framework of the Financial Navigatorinformationpaperseries,whichisalreadyregardedasaclassicpublication,4newFinancialNavigatorpapersand 2 new Financial Navigator EXTRA notificationwerepublished.Theprintedbookletswerepublishedinmorethan4.8millioncopiestofosterfinancially-awaredecision-makingbythegeneralpublic.
TheMNBalsoassiststheprovisionofcomprehensiveinformationtoconsumerswithshortvideos,dealingwiththemostimportantfinancialtopics.Thesearealsoavailableonline;inthisspirit,bytheendoftheyear19shortfilmshadbeenpublished.Thecentralbankalso tries toaccess thewidestpossible rangeof consumers via socialmedia, and thus it sharedalmost400contentsenhancingfinancialawarenessonitsFacebooksite.AsoneelementoftheFinancial
Table 5The MNB’s consumer protection administrative activity, and data related to the settlement thematic audit(HUF Millions)
Type of entity Procedural penaltiesConsumer protection fines
regarding extraordinary data supply
Consumer protection fines regarding infringements revealed
in the course of thematic inspection
Creditinstitutions 0.25 0 126.0
Cooperativecreditinstitutions 0.85 1.1 12.9
Financialenterprisesequivalenttocreditinstitutions 1.2 5 14.3
Debtmanagementinstitutions 0 0 1.9
Total: 2.3 6.1 155
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Navigator information system, the MNB’s productselection applications help collect the informationnecessary for consumers’decisionsmoreeasily.Ofthese,theenhancementofthebankaccount,depositand loan/leaseselector,and thehouseholdbudgetandloancalculatorcommencedduringtheyear,whilethenationalbranchandATMsearchapplicationhelpsorientationfromJuneasanewservice.
In2016,theFinancialAdvisoryNetwork–operatingwith the support of the MNB – was renewed: itprovidesfinancialinformationandadviceat9countyseatsinalmost4,600matters.Asanewservice,twiceamonth,theofficesalsoofferexternaladvisoryservicesinsmallersettlementsaroundthecountyseats,andthustheserviceisavailableat18sitesmonthly.NGOsparticipating in the financial consumer protectionCivil Network organised 91 events, particularly forthepopulation living inthecountryside,toprovideassistance in consumers’ legal enforcement effortsandtoprovideinformation.TheFinancialConsumerProtectionCentreorganised2 forumsand2onlineexaminationsfortheNGOsduringtheyear.
TheMNB places strong emphasis on representingtheinterestsofsocialgroupswithspecialneeds,andthuswithaviewtoprovidingequalopportunitiestocustomerswithimpairedhearing,avideointerpreterservice was introduced at the personal customerservicefrom1December2016.Fromthesameday,thecustomerservicereceivestelephoneenquiresattoll-freetelephonenumbers.
3.4 RESOLUTION
In2016,oneofthegreatestachievementoftheMNBwasthesuccessfulcompletionofresolutionprocedureforMKBBank.
The resolution of MKB Bank was one of the firstresolution procedures in the European Unionconducted on the basis of the new Europeanresolution framework introduced in 2014. Duringthe 18-month procedure, which commenced inDecember2014,MKBBankdisposedofitstoxicassetportfoliobyapplyingthesaleofbusinessandtheassetseparationresolutiontools,whichtogetherwiththereorganisationmeasurestakeninparallel,contributedtotherecoveryoftheinstitution’slong-termviability.The bank, which was thus set on a sustainablepath, was sold by theMNB, acting in its scope asresolutionauthority,inanopen,transparentandnon-
discriminatorysalesprocesstomarketparticipantsinthefirsthalfof2016.Meanwhile,thefundsqualifyingasStateaidwereusedtothesmallestpossibledegreeandwererefundedbythemarketsale.Thecreditorsofthebanksufferednolossinrelationtotheresolutionproceeding,andthefundsandassetsofthebank’sclientsandbusinesspartnerscontinuouslyenjoyedmaximumprotection.InviewofthefactthattheMNBfulfilledthemeasuresspecifiedintheresolutionactionplan,asa resultofwhich the resolutionobjectiveswere met in full, the resolution procedure wasclosedon30June2016.Oneofthemostimportantfundamentalprinciplesoftheresolutionframeworkisthatnoownerorcreditorshouldincurgreaterlossesasa resultof the resolutionprocedure thanwouldhavebeenincurrediftheinstitutionhadbeenwoundupundernormalinsolvencyproceedings(NoCreditorsWorseOffprinciple);ifthisisnotthecase,theownersandthecreditorsareentitledtocompensationfromtheResolutionFund.Inmakingthatassessment,aftercompletionoftheresolutionproceeding,insummer2016 the MNB appointed an independent valuer,complyingwiththerelevantprofessionalandconflictof interest criteria, toprepare thevaluationof thedifferencebetweentherelevantassumedliquidationprocedureandthecompletedresolutionprocedure.Inviewofthecomplexityofthetask,thevaluationextendedoninto2017.
TheMNB exercises the ownership rights over theHungarian Resolution Asset Management vehicle(MagyarSzanálásivagyonkezelőZrt.–MSZvKZrt.).ThesubsidiariesofMSZvKmanagethemostlytoxicassetportfolio,separatedfromMKBBankduringtheresolutionandtheirdutyistosellthoseatthehighestpossibleprice.
In 2016, the MNB participated in the work ofthe resolution colleges set up for given groups ofinstitutions–ledbytheSingleResolutionBoard,astheresolutionauthorityoftheBankingUnion–asthehostresolutionauthorityoftheHungariansubsidiarybanksofseveralparentbankswithregisteredofficeintheEuropeanUnion.Inrespectofthebankinggroup,belongingtoitscompetenceasgroup-levelresolutionauthority,themostimportantobjectivein2016wastoidentifythecriticalfunctionsofthegroupandtoelaboratetheresolutionstrategy,whichensuresthemaintenanceof these functions,and tohave themacceptedbytheresolutioncollege.Thejointdecision,representingtheacceptanceoftheresolutionplan,maybepassedinthefirstquarterof2017.
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Inadditiontotheworkperformedintheresolutioncolleges, cooperating closely with EU resolutionauthorities, the MNB also participates in theenhancementoftheregulatoryenvironmentrelatedtoresolution,primarilyinthevariousworkinggroupsof theEuropeanBankingAuthority (EBA). TheEBAguidelinesissuedduringtheyearweredulyadoptedin the MNB’s internal regulations. The ResolutionHandbookwas also revised in linewith regulatorychanges,whichwasjustifiedbytheincorporationoftheusefulexperiencesgainedduringtheresolutionofMKB Bank in the internal regulations, and alsoby the need to ensure harmony with the directlyapplicableEUregulations,whichentered intoforcein2016. Inaddition, togetherwith respectivepeerauthorities,theMNBparticipatesinthedevelopmentof the resolution framework applicable to centralcounterpartiesandinsurers,whichisexpectedtobecodifiedinthenearfuture.
With a view to developing cooperation with theresolution authorities of countries outside theEuropeanUnion, in2016 theMNB liaisedwith theresolutionauthoritiesof46non-EUcountriesinsevenphases,withthepurposeofdeepeningprofessionalcooperation and later concluding cooperationagreements with the authorities of particularimportanceintermsofcross-bordercooperation.
Thecollectivefunds(NationalDepositInsuranceFund,ResolutionFund,InvestorProtectionFund,SettlementFund) are important parts of the financial stabilitysafetynet.In2016,theMNBgranted3-monthliquidityloanssubjecttofullcompliancewiththeprohibitionsofmonetaryfinancing,totheSettlementFundandtotheInvestorProtectionFundinordertoensuretheorderlycompensationoftheaffectedinvestors,whichwererepaidinfullbytheduedate.ItisarecurringtaskfortheMNBeveryyeartodeterminetherateoftherisk-basedpremiumpaymenttothefundforthemember institutionsof theResolutionFund,at themarketlevelandforindividualinstitutions.
The experts of the MNB made presentations onresolutionbothatdomesticandforeignconferencesand also published a number of academic andprofessionalpapers.
3.5 PAYMENT AND SECURITIES SETTLEMENT SYSTEMS
Security of domestic payments
Findings of payment inspections
In 2016, the MNB verified compliance with theprovisionsofActLXXXvof2009onthePursuitoftheBusinessofPaymentServices(hereinafter:PaymentServicesAct),MNBDecreeNo.18/2009(vIII.6.)onexecutingpayments(hereinafter:MNBDecree),andtheRegulationoftheEuropeanParliamentandtheCounciloninterchangefeesforcard-basedpaymenttransactions(hereinafter:MIFregulation),publishedasanewlawtobecontrolled)at15creditinstitutions(2 banks, and 13 cooperative credit institutions).OnthebasisoftheActonCertainPaymentServiceProviders (hereinafter: Payment Service ProvidersAct),italsoinspectedthe4voucherissuersoperating– in practice as well – in Hungary. In addition toscheduledinspections,atthebeginningof2016theMNBconcluded5inspectionscarriedoverfrom2015.In addition toprescribing correctivemeasures, theMNBimposedfinesamountingtoatotalofHUF51.5million in thecaseof3 inspections. In threecases,themeasures prescribedbasedon the inspectionscarriedoutin2015wereimplementedinadequately;theMNBthereforeprescribedadditionalmeasuresand repeatedly imposed fines amounting to HUF6.4millioninthesecases.Duringthe19inspectionsconducted in 2016, the infringement of statutoryprovisions was identified in 94 cases. 16 of theseinspections were concluded by the application ofmeasures(theMNBinstructedtheinstitutionstomeettheirobligationsbythedeadline),ofwhichapenaltyinthetotalamountofHUF3.2wasimposedon1creditinstitutionduetotheseverityoftheinfringements.Thus,thefinesimposedin2016amountedtoatotalofHUF61.1million,includingfinesbroughtforwardfromthepreviousyearandfollow-upaudits.Inaddition,2administrativeprocedureswerestillinprogresson31December2016.
Theinspectionsrevealedthatcreditinstitutionsfailedtocomplywithcertainrulesrelatedtotheprovisionofadvanceandsubsequentinformation,theformaland
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substantiverequirementsofthemasteragreement,the amendment and termination of the masteragreement, the opening of the payment account,thecorrectionofpaymenttransactions,liabilityandthe bearing of damages and queuing.4 Moreover,theMNBalso identifiedshortcomings inrespectofcertain rules pertaining to the receipt of paymentorders,therejectionofpaymentordersissuedbytheotherpaymentserviceprovidersorbytheclient,thequeuingorpartialexecutionofpaymentorders,theadministrative payment order and court paymentorder,theexecutionofpaymenttransactionsbetweenpayment service providers to the credit of thepaymentaccount,thevaluedate,makingtheamountofthepaymenttransactionavailabletothebeneficiaryandtheexecutionofdirectdebits.5ThemostfrequentinfringementsinvolvedviolationsoftherequirementsofthePaymentServicesActinrespectofthesupplyofadvanceandsubsequentinformation,andoftheMNBDecreeinrespectofmakingtheamountofthepaymenttransactionavailabletothebeneficiary.
Duringtheinspectionofinstitutionsengagedintheissuance of negotiable vouchers, the infringementof the rules pertaining to themanagement of theconsiderationforthenegotiablevouchers,complaintmanagement and the registration of the contactperson in charge of consumer protectionmatters6 andastatutoryshortcomingrelatedtodatareportingregulation7wereidentified.
By reinforcing the complianceof credit institutionsandotherpaymentserviceproviderswithregulations,payment inspectionscontribute to the reliableandcompliant operation of the financial intermediarysystem,thepredictabilityofpaymentprocessesforcustomers,andhence,theefficientdeliveryofservicestocustomers.
Statements on payments
In 2016, the central bank issued 29 resolutionsand professional opinions on payments based onadministrativeandcustomerenquiries.Intwocases,theMNBprovidedanopinionfocusingonpaymentissuesinrelationtoEuropeanUnionlegislation,andin
27casesitissuedstatementsorprofessionalopinionsbasedonhousehold,institutional,administrativeorotherrequests.
Payment and settlement systems
Introduction of the instant payment service in Hungary
Inthefirsthalfof2016,theMNBlaunchedaprojecttoimplementtheintroductionoftheinstantpaymentservicesinHungary,asafirststepofwhichitstartedcomprehensiveconsultationswiththeaffectedmarketparticipants. The stakeholders of theproject couldexpresstheirprofessionalopinionontheconceptputupforprofessionaldebateatindustryforums,bilateraldiscussionsandintheformofwrittenproposals.Asthefirststepof theconsultationprocess, theMNBorganisedprofessional forums inMay2016 for thebanking sector, the technical service sector, thepublicactors,andfororganisationsrepresentingtheinterestsofenterprisesandconsumers.Theforumswere followed by bilateral meetings in June withanarrower circleofmarketparticipants,while theoptiontosubmitwrittencommentswasopentoallorganisationsinthesector.Aftertheprocessingoftheprofessionalopinionsreceived,theMNBelaboratedthefinaldevelopmentconcept.
TheFinancialStabilityCounciloftheMNBapprovedthe rules applicable to instant payments on 13December 2016. The rules contain fundamentalrequirements, the fulfilment of which is thepreconditionforrenderinginstantpaymentservicesin Hungary, and they define the transactions thatmust be executed in all cases in accordance withtherulesofinstantexecutionafterthelaunchofthesystem. The development of the instant paymentsystem permits the application of modern IT andcommunication solutions in payments, therebysupporting innovation and fostering competitionbetweenactorsinthepaymentsmarket.Inthenewsystem,itwillbepossibletoinitiatepaymentsuptotheamountHUF10million, 24hoursoneachdayof the year, even bymerely specifying themobilenumberofthebeneficiary,andthefundswillreachthe
4Sections3(2),4(1)and(2),8(1)and(2),10(1),13,14(1),15(1),17.(4)and(6),18(1)and(3),2(1)and(2),26(1)and(2),43-46,49,50(3),61(1)and(2)ofthePaymentServicesAct.
5Sections5(1),(2),(5)and(6),7(3),(4)and(7),8(2),9(3),17,20,21,21/B,31(3a),37/A(8)oftheMNBDecree.6Sections52(4)a),(5)and(6)a),70(9),70(15)ofthePaymentServiceProviderAct.7MNBDecree48/2014(XI.27)ontheDatasupplyobligationstobefulfilledforenablingtheMagyarNemzetiBanktoperformitsbasicduties,rulesrelatedtothedatareportingentitled“Reportonthe issuednegotiablevouchers”(MNBidentificationcode:P54) (filling instructions inSectionIIofAnnex2).
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8Regulation260/2012/EUestablishingtechnicalandbusinessrequirementsforcredittransfersanddirectdebitsineuroandamendingRegulation924/2009/EC.
9RegulatoryTechnicalStandardonStrongCustomerAuthenticationandCommonandSecureCommunication.
addresseeinamatterofseconds.Buildingonthenewsystem, itwillbepossible tocreatesupplementaryservices,suchase.g.mobilepaymentsolutions.Asaresultofthis,newtypesofserviceprovidersmayalsoenter thepaymentsmarketandcompetewithtraditional participants, providing customers withamuchwider rangeof convenient, fast and cheapelectronic payment services than at present. TheMNBwillpublishthedetailsrelatedtotheoperationand development of the infrastructure early 2017.Thereafter, a national infrastructuremodernisationprojectwillcommencewiththe leadofthecentralbanktoensurethatboththecentralinfrastructureandthesystemsofthepaymentserviceprovidersbecomecapableofprocessingthetransactionsinaccordancewiththerulesfromthesecondhalfof2019.
The MNB regards the introduction of the instantpayment service as a development project thatservesthelong-termcompetitivenessofthepaymentindustry. The success of this project will providecustomers with services of higher quality than atpresent.Theproject,whichcommencedinthefirsthalfof2016,willgeneratechangesacrossthesectorinthecomingyears,whichwillincreasetheefficiencyofthesector.
Intensive preparation for the changes accompanying the SEPA regulation’s entry into force
In 2016, domestic payment service providerscontinued to beprepared for compliancewith therequirements defined in the EU regulation8 (finaldateregulation)applicabletoEURcredittransfersanddirectdebits.IntheEuropeanUnion,theSEPAcredittransfer (SCT)and theSEPAdirectdebit (SDD)wasintroducedin2008and2009,respectively.Pursuanttotheregulation,thechangeovertothesinglepaymentschemehadtobecompletedbyAugust2014intheeuroareacountries,whilethedeadlineforcountriesoutsidetheeuroareawasOctober2016.
Inordertomonitorthepreparationprocess,theMNBand the Hungarian Banking Association conducteda questionnaire-based survey on the changeovertothesinglepaymentschemeamongthepaymentserviceprovidersinthefirsthalfof2016.Asaresultof the survey, itwas established that themajority
of the service providers transacting high paymentturnover had already started preparations for thesinglepaymentschemeearlier,whiletherestofthepayment service providers started this in the firstorsecondquarterof2016.Aruleoftheregulationrepresentingoneofthegreatestchallengesisthatthepaymentserviceprovidermustensureinthecaseofthecustomers,notqualifyingasconsumersormicroenterprises(companies,publicauthorities),initiatingorreceivingEURcredittransfer(directdebit)ordersinbatchesthatafterthedeadlinetheyuseonlythemessages specified in SEPA format. In the case ofHungary,thechangeoverwasdulyimplementedbythedeadlineof31October2016.
Elaboration of the security requirements related to electronic payments
TheexpertsoftheMNB’sfunctionalareaperformingthe oversight of the payment systemsparticipatedinthetwentiethplenarymeetingoftheSecuRePayforum,dealingwiththesecurityofretailpayments,jointlycontrolledbytheEuropeanCentralBankandtheEuropeanBankingAuthority(EBA),thetopicofwhich–pursuanttothepaymentservicesdirectiverevised in 2015 (PSD2) –was the agreement on adraftstandard9ensuringthedevelopmentofstrongclientauthenticationandcommunicationrelatedtoelectronicpayments.TheMNB’scolleaguesengagedin oversight – in cooperation with the BankingAssociation–madeaprofessional presentationonthe draft published by EBA on 12 August 2016 totherepresentativesofthecommercialbanks,wheretheydescribedtherequirementsoftheregulationinrelationtotheauthorisationprovidedbytherelevantPSD2.
Experiences in 2016 with regard to the forint’s accession to the CLS system
Since16November2015,theHungarianforintisalsoa settlement currency in the international foreigncurrencysettlementinfrastructureoperatedbyCLS.Throughtheaccession,theMNBacquiredmembershipin theCLS InternationalOversightCommittee, asaresultofwhichthecentralbank’sdutiesperformedwithin the framework of international cooperativeoversightexpanded.Aspartofthis,atthemeetingsofthecommitteeheldin2016theMNB’srepresentatives
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ANNUAL REPORT • 2016 44
reported,amongothers,ontheexperiencesof theforint’saccessiontodate.
In2016,thesystemoperatedsmoothly.SincethestartoftheservicetheforintturnoversettledinCLShasbeencontinuouslyincreasing;in2016thevolumeoftherelatednettedRTGSturnovermultipliedcomparedtotheinitialvalue.Thegrowthwasalsoattributableto the fact that in theperiodafteraccession therewas amajor increase in the number of direct CLSmemberssettlingtheirforeignexchangetransactionagainstforint inthissystem,andseveralHungariancreditinstitutionsalsobecameindirectmembersinthe system. In accordance with the central bank’sobjectives,anincreasingvolumeofdomesticbanks’foreigncurrencyturnoveristransferredtoCLS,whichgreatlyincreasesthestabilityofthedomesticfinancialsystembyeliminatingthesettlementrisk.Basedontheexperiencesgainedsofar itmaybestatedthatthe infrastructure cooperation developed betweentherespectivepartiesfullycomplieswiththesecurityandoperationrequirements,andit isreadyfortheintegrationofadditionalinstitutions.Accordingly,thecentralbankmaintainsitsexpectationthatasmanyaspossibledomesticmarketparticipantsshoulddevelopdirect or indirect connection to the system, and itsupportstheinitiativesrelatedtothisinallcases.
New transactions in the intraday clearing system of the Interbank Clearing System
Followingtheintroductionofintradayclearingin2012,paper-basedcredittransfertransactions,collection-type operations and the credit transfers of theHungarianStateTreasuryremainedintheovernightsettlement cycle. As a result of the developmentperformed lastyear, from1 January2016all forintcredit transfers requiring interbank clearing,whicharesubmittedtothecreditinstitutionsonpaper,areprocessed inthe intradaysettlementsystemoftheInterbankClearingSystem.Asaresultofthis,apartfromTreasury credit transfers, only collection-typetransactions are settled in the overnight system.However,inordertosupporttheefficiencyofpublicpayments, the MNB initiated that the Treasury’sindividualanddirectcreditsshouldbealsosettledinthefastandmodernintradayclearingsystem,similarlytothecredittransfersexecutedinthecreditinstitutionsector.ThediversionoftheTreasury’sdirectcreditstotheintradayclearingrequiressubstantialpreparation,asduetothemasspayments,transactionswithan
extremely high number of items must be settledwithinashorttimeonthegivendays.TheMNB,GIROandthecreditinstitutionshavealreadypreparedforthechangeover;thego-liveplannedforthefirsthalfof2017dependsonthepreparednessoftheTreasury.
Annual review of the EMIR licence of KELER CCP completed
KELER CCP, as an institution performing centralcounterpartyactivitywithintheEuropeanUnion,hadtogothroughare-licensingprocessin2014toensurecompliancewithEMIR,10whichwasperformedbyalicensingcollegecomprisedofinternationalmembers.Basedon theEMIR requirements,KELERCCPmustcontinuouslycomplywiththerequirements,andthiscomplianceisreviewedbythelicensingcollegeatleastonceayearinperson;additionally,itmustregularlynotifythecollegeonallmajoroperationalchangesthataffectthelicensedactivity.The2016reviewwasperformed in September, as a result of which thecollegeestablishedthattheoperationofKELERCCPcontinues to comply with the EMIR requirements.InadditiontotheMNBandtheEuropeanSecuritiesMarket Authority (ESMA), the authorities of thosecountriesalsoparticipateinthecollegeofKELERCCP,whichhavedelegates at KELERCCP, thus the Irish,BelgianandBritishfinancialsupervisoryauthoritieswerealsorepresentedinthecollege.
Other information
Survey of the frauds related to direct debit and credit transfers
At the initiative of the European Central Bank, inSeptember2016a consultationwas launchedwiththeMNB’s cooperation to survey the features andunderlying motives of the fraud cases related todirectdebitsandcredittransfers.Theinformationwascollectedinanonymousformonquestionnaires,whichwereprocessedbyECB.
Range of data published in the payment table set expanded further
Taking account of users’ requirements, from early2016thepaymenttablesetwasexpandedtoincludedata presentingpayment card turnover. As part ofthis,thevalueofpaymentcardturnoverispublishedinabreakdownbycard types. Inaddition,dataon
10EuropeanUnionregulationontheOTCderivativetransactions,centralcounterpartiesandtradingdatawarehouses.
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debit and credit card turnover are also availableretrospectivelytothefirsthalfof2010.
Publications related to payments and payment systems
In June 2016, the MNB’s publication related topaymentsystems,entitledPayment Systems Report 2016waspublishedforthefifthtime.Inthisregularpublication, the MNB prepared a comprehensiveexpert analysis on the trends observed in 2015 inthe domestic payments and the operation of thesupervised payment and securities settlementsystems, and a forward-looking analysis of currentevents in 2016. The report is available at: https://www.mnb.hu/en/publications/reports/payment-systems-report/payment-systems-report-2016.
IntheJuneissueoftheFinancialandEconomicReview,a paper by Tamás Ilyés and Lóránt varga entitledMacroeconomic effects of the increase of electronic retail payments – A general equilibrium approach using Hungarian datawaspublished.InthepapertheyfocusonthepotentialeffectsontheperformanceoftheHungarianeconomyifcomponentsofvarioussizesoftheretailandotherhouseholdcashpaymentsweresubstitutedwithpaymentbydebitcard.Thepaperisavailableathttp://english.hitelintezetiszemle.hu/.
On 29 August, the MNB published the volumesummarisingtheexperiencesgainedduringthetwoyears since the introduction of the Self-financingProgramme. The analysis describes in detail theways inwhich participants of the payment systemadjustedtothespecificmeasuresoftheSelf-FinancingProgrammeandillustratestheimpactoftheseriesofmeasuresonselectedliquidityindicators.
In theMNBOccasionalPapers series, thepaperofGergelyBallaandTamásIlyésentitled Liquidity needs and liquidity costs of an instant payment systemswaspublishedon30November2016,whichprovidesabackgroundanalysis for the introductionof instantpaymentservicesinHungary.Inthepaper,theauthorspresentedandquantified three cost elements thatmayoccurintheHungarianinstantpaymentsysteminrelationtoliquiditymanagement.Intheanalysisofthecosttypes,itwasrevealedthattheliquidityneedsoftheinstantpaymentsystemandthecostofprovidingthisliquidityismanageableattheleveloftheentirepaymentsystem,i.e.itdoesnotrepresentanobstaclethatwouldsubstantiallyhindertheintroductionoftheinstantpaymentservices.Theauthorsalsopresented
theanalysisattheinternationalconferenceentitledEconomics of Payments VIII,organisedbyDeutscheBundesbank on 9 November 2016. The analysis isavailable at https://www.mnb.hu/en/publications/studies-publications-statistics/occasional-papers.
3.6 FOREIGN EXCHANGE RESERVES MANAGEMENT
Purposes of holding reserves
Similarlytoothercentralbanks,oneofthekeytasksoftheMNB–asspecifiedintheActonMNB–istomanagetheforeignexchangereservesofthecountry.TheMNB holds foreign exchange reserves for thepurposeoffulfillingseveralfunctions:
–toensurethelevelofreservesexpectedbymarketparticipants(‘internationalcollateral’),
–tosupportthemonetaryandexchangeratepolicy(providinginterventioncapacity),
–toprovideforeigncurrencyliquidityforthebankingsystem,
–to satisfy the state’s transaction-related foreigncurrencyrequirement.
Marketparticipantscontinuetopayspecialattentiontodevelopments in foreignexchangereserves.TheMNB also regularly reviews the desirable level ofreservesand,ifnecessary,initiatesmeasures–withinthepermitted limits– toreachtheadequate level.In2016,theforeignexchangereservesexceededthesecure level, expected by the investors and othermarketparticipants,throughouttheyear.
In terms of transaction goals, servicing themanagement of government debt continued tobe the most important objective last year, whichwas greatly influencedby theMNB’s Self-financingProgramme.Thedebtmanagementagencysupportedthepolicyofrollingovertheexpiringforeigncurrencyliabilityessentiallyusing the forintbyhigher shareof forint denominated issuance,whichwasmostlyfacilitated by the banks’ excess demand and thegovernment securities purchases of households.Throughthenegativenetforeigncurrencyissuance,theGovernmentDebtManagementAgency repaidthe expiring foreign currency debt by the foreigncurrency purchased from the central bank to thedebitofitsincreasedforintdeposit.Inaddition,the
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continuousprovisionofbudgetary institutionswithforeign currency should be mentioned here. Thetransfers received from the European Union alsoflowthroughtheMNB;thesehavebeenandwillbesubstantialsourcesofforeignexchangereserves.Theaforementioned transactiongoalswereonce againsatisfiedsmoothlyin2016.
TheMNBstilldoesnotholdforeignexchangereservespurelyforassetaccumulationpurposes.Ontheotherhand,inthecourseofmanagingtherequiredvolumeofforeignreservesitmakeseffortstoenforceyieldconsiderationsatalltimes,i.e.asaresponsibleassetmanagertoretainand,ifpossible,evenincreasethevaluethereof.
Reserve size
The level of Hungary’s foreign exchange reservesdeclinedbyEUR5.94billion in2016,amountingtoEUR24.4billionattheendoftheyear.
TheGovernmentDebtManagementAgency’sitemsservingtherepaymentofdebt,particularlythenetforeigncurrencyfinancingofthegovernmentandthenetforeigncurrencyinterestexpenditures,aswellastheforeigncurrencyexpensesoftheHungarianStateTreasury, reduced the foreign exchange reservesbyroughlyEUR6.6billion intotal.Thechangewasprimarily the combined result of bond maturitiesin thenominalvaluesofGBP500million,CHF200millionandEUR1billion,therepaymentofthelastinstalmentof the foreigncurrency loan taken fromtheEuropeanCommission,cashmovementsrelatedtotheretailforeigncurrencybond(P€MÁK)andotheritems.Thecashmovementsrelatedtotheconversionofthehouseholds’foreigncurrencyloansintoHUF,
to the foreign currencypillarof the thirdphaseoftheFGS,andtotheforeignexchangeswapsexpiringunderPillar3ofthefirstphaseoftheFGS,reducedthereservesbyalmostEUR4.5billion.TheinflowofEUtransfers,intheamountofroughlyEUR3.4billionin2016,weretheprimaryitemsthatpointedtowardtheincreaseinforeignexchangereservesagainstthereserve-reducingitems;however,thishasoffsetthefall in the reserve holdings only partially. In April,Hungary – as the first among the countries in theregion–issuedaforeigncurrencybonddenominatedin renminbi in the Chinese offshoremarketwith avalueofCNy1billion.Thematurityof1-weekliquidityprovidingswaptransactionat theendof2015hadareserve-increasingeffectofapproximatelyEUR0.5billion,whileforeigncurrencyswaptendersprovidingforint liquidity,announcedinSeptemberandcalledforasofmid-October,hadareserve-increasingeffectamountingtosomeEUR1.3billion.TheprofitrealisedonthereservesinthereportingperiodamountedtoEUR28million.
Financial performance and risks of foreign exchange reserves
InfulfillingitscoretasksasstipulatedintheAct,i.e.managing the country’s foreignexchange reserves,theMNB inevitably faces financial risks. The basicprinciplesarethatthedegreeoftheassumedrisksshould be aligned with the objectives of the coreactivity, thesizeof the risksshouldbeknown,andrisk assumption should be conscious and limited,in accordance with the institution’s risk-takingcapacity.Inthecourseofforeignexchangereservesmanagement, the threefold objective of liquidity,security and yieldmust be satisfied,meaning thattheMNBtriestoachievethehighestyieldlevelwhilecontinuouslykeepingtherisksatthepre-definedlowlevel.
Similarlytoothercentralbankduties,theMonetaryCouncilisalsothesupremedecision-makingbodyinrespectof foreignexchangereservesmanagement:it defines the objectives and requirements relatedto the foreignexchangereserves, suchas the levelandliquidityofthereserves,decidesonthecurrencyused for optimisation, the risk strategy and themost important numerical strategic parameters ofreserve investment. Theoperativedecision-makingpowers are exercised and the foreign exchangereservemanagementstrategyisimplementedbytheExecutiveBoard,withintheframeworkstipulatedbytheMonetaryCouncil.TheExecutiveBoardapproves
Chart 8Developments in the size of foreign exchange reserves
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thelimitsystemservingasaframeworkforrisktaking:the permitted maximum deviation of the reserveportfolios from the benchmarks, the counterpartylimits and the range of investment instrumentspermittedinthefieldofreservemanagement.
The two main pillars of the reserve managementare the benchmark system and the limit system.Independent performance measurement is animportantelementof the risk-takingpolicy.Withaview to ensuring themeasurement of the successofportfoliomanagement,theperformanceofeachreserveportfolioiscomparedwiththeperformanceof a reference (benchmark) portfolio. Benchmarkportfoliosshowwhatyieldwouldhavebeenproducedby a passively managed portfolio that representsa wide market segment if investment parametershad been the same. The performance of foreignexchangereservesmanagementactivityispresentedin comparison to these benchmark portfolios. Thebenchmarksreflectingtherisk-returnpreferenceoftheMNBandservingtheperformancemeasurementoftheportfoliosaremaintainedbytheriskmanagementunit,independentlyofthebusinessarea.
Themostimportantriskcategoriesrelatedtoforeignexchange reserves management include marketrisk, liquidity risk, credit risk, settlement risk andcounterparty risk. The MNB controls the possibledegreeoffinancialrisksrelatedtoforeignexchangereserves management using limits. In accordancewiththeconservativereserveportfoliomanagementcharacteristic of central banks, theMNB applies astrictlimitsystem,whichconsidersmarketandotherindicators, inadditiontotheexpectedhighlevelofcreditratings.
In the course of foreign exchange reservesmanagement, the MNB applies a variety of risk-minimising techniques toensure that theassumedriskscomplywiththeMNB’srisktolerance.Inthecaseofderivativeinstruments,theMNBconcludedISDA(InternationalSwapsandDerivativesAssociation)andrelatedCSA(CreditSupportAnnex)agreementswithitscounterparties,whichkeepthecreditriskexposurepotentiallyarisinginrespectofthecounterpartyata low level through the margin arrangement. Inthe caseof the repo transactions regulatedby theGMRAs (Global Master Repurchase Agreement),theprescribedmarginsalsohelps limitrisks. Inthecase of foreign exchangemarket transactions, theMNB settles its transactions, in accordance withthe internationalbestpractices, in theCLS system,
therebyminimisingitssettlementrisks.Inthecourseofreservemanagement,theMNBalsoconsiderstheforeigncurrencyliquidityrequirementofthemonetarypolicyinstruments.
In2016,theMNBmanagedeuro,USdollar,Japaneseyen,BritishpoundandChineserenminbiportfolios.TheMNBassumes exchange rate exposure only ineuro: it hedges theother currency/euro cross raterisksbyderivativeinstruments.Theholdingofotherexchangerate-hedgedforeigncurrencyinstrumentsisjustifiedbythehigherdiversificationand,inthecaseoftheUSdollar,theavailablehigherliquidity.Altogether,theMNBactivelymanagessevenportfolios,ineuro,USdollar,Britishpoundandrenminbi.BasedontheMNB’s former decision, it allocates a small part ofthe foreign exchange reserveportfolios to Chinesegovernmentsecuritiesinvestments,thefirststepofwhichwascarriedoutindirectly,incooperationwithBIS (Bank for International Settlements, Basel). Bymid-2016, the building of the internallymanaged,Chineserenminbiexposurewasalsocompleted.TheMNBmanagestheJapaneseyenportfolio,containinggovernment securities only, as an index-linkedportfoliostrictlyfollowingthebenchmark.Fromtheendof2012–intheformofamandategiventoanexternalassetmanagerandcustodian–USagencymortgagebackedsecurities (MBS)also formapartoftheMNB’sinvestmentstrategy.In2016,asecondMBSportfoliowasalsobuilt,relyingonexternalassetmanagement.Thestrategicaverageduration(targetduration)ofthereserveportfolioswasaround1year.TheMNB’sgoldreservesamountto98,857ounces,worthEUR108millionat theendof the reportingperiod.
TheEURrisk-freeportfoliorepresentsthebackboneof the foreign exchange reserves and may onlyinclude highly-rated government securities, state-guaranteedsecuritiesandtheissuesof(supranational)internationalinstitutions.Itsbenchmarkincludes100per cent euro area government securities of AAA-AArating.Inadditiontotheforegoing,highly-ratedcorporateandbankissues,andcoveredsecuritiesmaybepurchasedfortheEURinvestmentportfolio;thisportfoliotypicallyincludesgovernmentsecuritiesonlyforthepurposeofadjustingthematuritystructure.
ThebenchmarkofboththeeuroandtheUSdollarinvestmentportfoliocontainsgovernmentsecurities,corporate and bank bonds, as well as money andcapitalmarketinstrumentsofhighcreditratingwithamaximumresidualmaturityof7years.Thestructure
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ANNUAL REPORT • 2016 48
of the benchmark portfolios, the credit rating andresidualmaturityoftheassetsreflectaconservativewillingnesstotakerisks,typicallycharacterisingcentralbanks.
Inthedecreasingyieldenvironmentresultingfromtheglobalcrisisthatcommencedin2008,mostcentralbanks realised a profit on their foreign exchangereservesasa resultof the typically risingpricesofthebondsmanagedinthecentralbanks’portfolios.Withthegovernmentandotherbondsofmostlyhighcreditrating,managedinitsportfolios,theMNBalsobenefitedfromthisprocessthroughtherevaluationof thepositionsas a result of thedecreasing yieldenvironment. In view of the substantially negativeyield environment that sank close to zero in theeuroarea,thepossibilityoffurtherpriceincreaseislimited,whichexplainsthemoremodestperformancecomparedtopreviousyears.
Similarly to the previous year, the ECB’s and Fed’sopposite monetary policy measures continued tobe determinant factors. In the USA, an interestrate increasing cycle commenced after the endof quantitative easing and the asset purchaseprogramme. Itwas anticipated that the Fedwouldcontinue its tightening cycle started in December2015,however,asaresultofthereferendumheldinGreat-BritainonleavingtheEuropeanUnion(Brexit),thedecelerationinglobalgrowth,andotherdomesticmacroeconomicdata,thetighteningdidnotcontinueuntilDecember2016,whenFedraisedthe interestby25basispoints.Bycontrast,inEuropeeasingthemonetarystanceremainedinfocusin2016.Duringthe year, the ECBmodified its securities purchaseprogrammeannouncedearlieronseveraloccasions.Inadditiontotheextensionoftheprogramme,italsodecidedtoreduceallthreeelementsoftheinterestratecorridor.Attheendoftheyear,theGoverningCounciloftheECBannouncedtheextensionoftheassetpurchaseprogrammeuntiltheendof2017.Intheperiodunderreview,Brexitwasoneofthemostimportanteconomicevents,whichalsocontributedtotheglobalpostponementoftheinterestrateincreaseexpectationsandthehighlevelofdemandsforsafeinstruments.Asregardstheperformanceofreserves,thereportingperiodwasdeterminedbycontinuouslydecliningEURyields,whichwereinthenegativerangein amajor part of the yield curve.USD yields also
fellinthefirsthalfof2016,followedbyariseinthesecondhalf-year,andthusbytheendoftheyeartheyexceededthelevelrecordedayearagoby10-25basispointsintotal.
Despitethelowyieldenvironment,in2016theMNBachievedclosetozero,butpositiveperformanceontheforeignexchangereservesbothinabsolutetermsand compared to the respective benchmarks. Theliquidityallocatedfortheattainmentofthemonetarypolicyobjectiveswas continuouslyavailableduringtheyearandnocreditriskeventoccurredthatwouldhavehadanadverseeffectontheMNB’sreputation.Theannualisedyieldrealisedonthegoldandforeignexchangereserves–weightedbythemarketvalueandadjustedforthefinancingcost–was0.01percent,outperformingthebenchmarkby9basispoints.
In respect of the future performance of foreignexchangereserves, itstillrepresentsariskthattheperformanceofthereserveportfoliosmaybecomenegativeiftheyieldsofthehighly-ratedassetsmovefrom an extremely low level as result of a yieldincrease,whichdeterioratesreserveperformanceasaresultoftherevaluationlossarisingfromdepreciationoftheexistingbondsovertheshortrun.Ontheotherhand,duetotheshortdurationofthereserves,themedium-termimpactofthisisalreadypositive.
Inviewofthesubstantiallychangedfinancialmarketenvironment and the negative expected returnrealisableontheforeignexchangereserves,theMNBresponded by the diversification of its exposures,andinordertomaintainthecapital–inlinewiththeconservativecentralbankmandate–bytheamendmentoftheportfoliostructureandtheparallelstrengtheningof risk controls. At the end of December 2016, thedegreeoftheMNB’sinterestraterisk,accordingtothevaRterminologywitha95percentconfidenceleveland1-monthhorizon,wasEUR20million,withanExpectedShortfall(ES)ofEUR25million.Thismeansthatundertheportfolio compositionandmarket circumstancesat the end of December, the chance of the MNB’ssufferingalosshigherthanEUR20millioncomparedtotheexpectedreturnwithinonemonthis5percent,whiletheexpectedvalueofthelossesexceedingthevaRvalueisEUR25million.TheESvalueofEUR25millioncorrespondsto1thousandthofthereserveportfoliovalue.
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3.7 CASH LOGISTICS ACTIVITY
Currency in circulation
On31December2016, the total valueof currencyin circulation amounted to HUF 4,580 billion,representing a 6 per cent year-on-year increaseofHUF275.7billion.
Cashholdingsincreasedstronglyin2016aswell,buttheextremelyintensive,double-digitexpansionseensince2012decelerated.Asaresultofthegrowth,theGDP-proportionatevalueofcashholdingsattheendof2016reached13percent, representingaminorincrease compared to the value of 12.6 per centregisteredattheendof2015.
The decline in the growth of cash holdings ispresumablyattributabletothefactthat lastyear–comparedtotheperiodof2012-2015–therewasno
suchmajorchangeintheinterestrateenvironmentthatwouldhavemateriallyreducedtheopportunitycostofholdingcurrency,therebyrepresentingastrongincentive for theuseof cash for savingspurposes.In2015,anumberofone-offeffectsincreasedcashholdings(settlementofforeigncurrency loan,NDIFpayments),whichwaslesstypicalin2016.Inflation,whichonceagainstartedtoriserecently,alsopointedtothedecelerationofthegrowthincashholdings.Bycontrast,householdconsumptiongrowthsupportedthe continuation of the major increase in cashholdings.Onthewhole,thedecelerationofthegrowthincashholdingswasinlinewiththeexpectations.
Thechangeinthevolumeofbanknotesincirculationvaries by denomination. In the case of the20,000-forint,10,000-forint,5,000-forint,1,000-forintand500-forintdenominations,thestockroseby5,9,5,8and5percent,respectively,whileinthecaseofthe2,000forintdenominationthestockdecreasedby2percentlastyear.
The two largest banknote denominations still playadominantroleinthecashturnover:attheendoflastyeartheyjointlyaccountedfor65percentofthevolumeofbanknotesincirculation.Thisisduetothefactthatinadditiontotheirpaymentroleinthecashturnover,theyalsofulfilacapitalformationfunction.
Comparedtotheendofpreviousyear,thevolumeoftheforintcoinsincirculationincreasedby7percentonaverage.
TheMNB’sexpendituresrelatedtocashproductionamountedtoagrosssumofHUF13.7billionin2016.Theincreasecomparedtopreviousyearsisprimarilyattributabletothehighermanufacturingneedsrelatedtothenew,enhancedbanknotes.
Chart 10Distribution of banknotes in circulation by quantity at end-2016
5009% 20,000
29%
10,00036%
5,0006%
2,0005%
1,00015%
Chart 11Banknote and circulation coin manufacturing (gross expenditure)
4.7 4.8 5.0 5.9 2.7 2.8 2.9 3.7
7.9 11.7 4.0
1.7 2.5 1.8
1.4 0.9 1.0 1.2
3.0
2.0
0 2 4 6 8
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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
HUF Billion HUF Billion
Cost of banknote productionCost of circulation coin production
Chart 9Cash/GDP and cash/consumption expenditure of households
0 2 4 6 8
10 12 14 16 18 20 22 24 26 28
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*
Per cent Per cent
Cash/GDPCash/Household consumption expenditure
* The 2016 GDP figure and the consumption expenditure of households are MNB estimates.
MAGYAR NEMZETI BANK
ANNUAL REPORT • 2016 50
Table 6Banknotes and coins11 in circulation (data from 31 December 2016 and 31 December 2015)
2016 2015
BanknotesVolume Value Ratio (%) Volume Value Ratio (%)
Million pieces Billion HUF Volume Value Million pieces Billion HUF Volume Value
20,000forint 130.7 2,613.8 28.9 58.0 124.5 2,491.0 29.3 58.8
10,000forint 162.3 1,622.8 35.9 36.0 148.6 1,486.2 35.0 35.1
5,000forint 27.5 137.8 6.1 3.1 26.2 130.8 6.2 3.1
2,000forint 23.4 46.8 5.1 1.0 23.8 47.6 5.6 1.1
1,000forint 67.9 67.9 15.0 1.5 63.2 63.2 14.8 1.5
500forint 40.5 20.3 9.0 0.4 38.7 19.3 9.1 0.4
Total 452.3 4,509.4 100.0 100.0 425.0 4,238.1 100.0 100.0
CoinsVolume Value Ratio (%) Volume Value Ratio (%)
Million pieces Billion HUF Volume Value Million pieces Billion HUF Volume Value
200forint 130.1 26.0 8.0 41.5 121.4 24.3 8.0 41.3
100forint 170.9 17.1 10.5 27.3 161.9 16.2 10.6 27.6
50forint 153.0 7.6 9.4 12.2 142.6 7.1 9.3 12.1
20forint 289.6 5.8 17.9 9.3 272.4 5.4 17.9 9.2
10forint 336.6 3.4 20.7 5.4 317.5 3.2 20.8 5.4
5forint 544.4 2.7 33.5 4.3 509.6 2.6 33.4 4.4
Total 1,624.6 62.6 100.0 100.0 1,525.4 58.8 100.0 100.0
11Thetabledoesnotincludeholdingsofcommemorativecoinsandcommemorativebanknotesissuedbythecentralbank,whichalthough–aslegaltender–formpartofthemeansofpaymentincirculation,inaccordancewiththeirrole,donotparticipateactivelyintheexecutionofcashturnover.
Distribution of cash
In 2016, the MNB managed cash turnover for itsclients,i.e.creditinstitutionsandtheHungarianPost,inatotalamountofHUF4,130billion;withinthatitdistributed319millionbanknotestoitsclients,while291millionbanknotesweredeliveredtothecentralbank.
Inthepastyear,theMNBscrapped164millionend-of-lifebanknotes,andreplacedthembynew,highqualitymeansofpayment.
Prevention and reduction of counterfeiting
In accordance with the previous years, thecounterfeitingofforintbanknoteswasextremelylowagain in2016; thetotalnumberof forintbanknotecounterfeits eliminated from cash circulation was1,549.
Thenumberofcounterfeitbanknotes foreachonemilliongenuinebanknotes incirculationwas3.4 inlast year, which is extremely favourable even byinternationalstandards.
ThefreeeducationalactivityperformedbytheMNBinrespectofbanknotesalsocontributessignificantlytomaintainingthelowcounterfeitindicator.Inadditiontotheprintededucationalmaterialsprovidedbythecentralbankandalsopublishedonthe internet, in2016 theMNB’s experts trained more than 2,000retailcashiersonthefeaturesofbanknotesandthepossibilitiesofverifyingthegenuinenessofbanknotes,therebyalsoensuring theefficient identificationofcounterfeitbanknotes.
In 2016, counterfeiting of higher denominations(mainlythe10,000-forintand20,000-forintbanknotes)remainedmosttypical,accountingfor87percentofcounterfeitforintbanknotes.
Table 7Denomination breakdown of discovered forint banknote counterfeits in 2016
Denominations 500 1,000 2,000 5,000 10,000 20,000
Breakdown(%) 2.5 0.6 2.6 7.7 33.8 52.8
The counterfeiting methods, which are stillcharacterised by the use of office reproduction
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equipment(colourcopymachines,printers),alsodidnotchangeconsiderably.
Persons familiar with the features of authenticbanknotescandetectthecounterfeitsusingsimplechecks(touching,holdinguptolightormoving)orinacashofficeenvironmentusingcombinedchecks,i.e.withtheuseofUv-AandUv-Clight.
The occurrence of counterfeit foreign currency isstillnegligible.Thecentralbank’sexpertsexamined1,576variousforeigncurrencycounterfeitsin2016.Ofthese,thenumberofcounterfeiteurobanknoteswas1,233.
Cash distribution administrative inspections
In 2016, the MNB inspected compliance with theprovisionsoftheMNBActoncashissuance,oftheBanknoteDecree12andoftheMNBDecrees13onthecentralbankdatasupplyat12creditinstitutions,threecashprocessingprovidersandonepaymentinstitution.Thepurposeofthecashdistributionadministrativeinspectionswastoensuretheproperqualityoftheforint banknotes in circulation, the mitigation ofoperationalrisksforthesmoothcashcirculationandtheprovisionoffairservicesbythecreditinstitutiontothehouseholds.TheMNBlaunched16administrativeinspection procedures in 2016, one of which wasclosed in January 2017.Of these, in six cases in aletterofwarningtheMNBcalledupontheinspectedinstitutionstoeliminatetheshortcomingsidentified,whileitfoundnoinfringementin10procedures.Inaddition, within the framework of the continuousverification of the data included in reporting, awarningwasissuedintwocasesduetomissingthedeadline.Ofthe inspections launchedin2015,twoadministrative procedureswere closed early 2016,without identifying any infringement. During theadministrative inspections, theMNB identified theviolationofcertainrules14applicabletotherecyclingof banknotes, the operation of banknote handlingmachines, the action plan for themanagement ofextraordinarysituationsoccurringinthedistributionofcash,themanagementofincompleteordamagedbanknotes, thecontentof the institutions’ internalregulations,themanagementofsuspectedcounterfeitbanknotesandtothefulfilmentofthecentralbankreportingobligations.
Hungarian banknotes being redesigned
Intheperiodof2014–2018,theMNBisrenewingthebanknoteseriescurrently incirculationand issuingredesigned, enhancedandmodernbanknotes thatwillalsosatisfythecashdistributionrequirementsofthecashprocessingmachinesandautomatedtellermachines,whileatthesametimeprovidingstate-of-the-artprotectionagainstcounterfeiting.
Of the series comprising six denominations, thefirst banknote redesigned by the MNB was the
Chart 13Trends in the counterfeits for each one million genuine banknotes and the value of the resulting damage
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Chart 12Annual trends in the number of counterfeit forint banknotes identified in turnover
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12MNBDecree11/2011(IX.6.)ontheprocessinganddistributionofbanknotesandontechnical tasksrelatingtotheprotectionofbanknotesagainstcounterfeiting.
13MNBDecrees50/2015(XII.9)and48/2014(XI.27.)onthedatareportingobligationstothecentralbank’sinformationsystemprimarilytoenabletheMagyarNemzetiBanktocarryoutitsbasicduties.
14Article23(8)oftheMNBAct,Sections4(2),5(1)-(3),14,19and23oftheBanknoteDecree,Subsection2.1.1ofAnnex2andAnnex4,AnnexIIoftheMNBDecreesoncentralbankdatareporting.
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10,000-forintbillin2014,followedbythe20,000-forintbanknotein2015.Thenexttwodenominationswerethe2,000-forintand5,000-forintbanknotes,whichbecamelegaltenderfrom15November2016;theyappearedinthecirculationgradually,from1March2017,aftertheproperpreparationoftheparticipantsofthecashsupplychain.
On 1 December 2016, the central bank prolongedtheexchangeofthe20,000-forintbanknotesissuedbefore2015byoneyear,thustheycanbeusedincashcirculationuntil31December2017.Afterthedayofthewithdrawalthecash-desksofthecreditinstitutionandtheHungarianPostwillexchangethewithdrawnforintbanknotestolegaltenderforfurtherthreeyearsandtheMNBfor20years,freeofcharge.
Issue of commemorative coins and the commemorative version of circulation coins
Pursuant to theMNB Act, theMNB has exclusiveright to issue banknotes and coins, also includingcommemorative banknotes and commemorativecoins,whicharealsolegaltenderinHungary.TheMNB–inlinewiththepracticeofforeigncentralbanks–issuescommemorativecoinswiththeaimofcreatingaworthymemorialofHungary’smajorhistoric,culturaland scientific anniversaries, events and personsin a lasting form for succeeding generations. Thecommemorativecoinsarenotmeantforcirculation.
Since 2014, the MNB has also issued allcommemorative coins made of precious metal ina cheaper, non-ferrousmetal version, with a viewto enforcing the coins’ value-conveying, attention-raising andeducational roles in awider circle. TheMNB’s decision with regard to the distribution ofsilvercommemorativecoins(for3monthafterissue)andnon-ferrousmetalcommemorativecoinsatfacevaluealsoservesthepurposeofexpandingtherangeofconveyingvalue.
Basedonthestatutorypowersandinthespiritofthesalespolicyinplacesince2014,in2016thecentralbankissued19commemorativecoinsinninetopics.Threeoftheseweregoldcoins,sevenweresilvercoinsandnine(oftwoindependentdesignsofcoin)werenon-ferrousmetalcollectorcoins.
Thetechnologicalinnovationintroducedinthe2016commemorative coin programme is the securityfeatureappearinginthemintmark:‘B’and‘P’letters
inmicroletteringonthemintmarkareindiscernible,theyarevisibleonlyifmagnifiedminimumtentimesandserveasprotectionagainstthecounterfeitingofthecommemorativecoins.Thenewsecurityfeaturesappearedonallcommemorativecoinsissuedin2016,exceptfortheminigoldcoinswithdiameterof11mm.
The MNB’s 2016 commemorative coin issuingprogrammecommencedon25April2016withthesilvercoininadenominationofHUF10,000,entitledFundamental LawofHungary, and thenon-ferrousmetalversionthereofinadenominationofHUF2,000.Thecommemorativecoinsrecalledthe5thanniversaryof theenactmentof theFundamentalLawandthesignificancethereof.The5-yearoldFundamentalLawisthefoundationofthelegalsystemofHungaryandthefirstwrittenconstitutioninthecountry’shistorywhich was adopted by a democratically electedlegislature.
On27April2016,theMNBissuedaminigoldcollectorcoinwithafacevalueofHUF5,000,asilvercoinwithafacevalueofHUF10,000andthenon-ferrousmetalcoinversionofthelatterone,withafacevalueofHUF2,000inhonouroftheGamesoftheXXXIOlympiad.The MNB issues collector coins to commemoratethe world’s most-viewed sports event since 1984;however,itisthefirsttimethatanon-ferrouscoinsisalsoissuedwiththeOlympicsasitstheme.
On 9 July 2016, the central bank issued a silvercollectorcoinwithafacevalueofHUF10,000andanon-ferrousmetalcoinwithafacevalueofHUF2,000tocommemoratethe1700thanniversaryofthebirthofSaintMartin,whowasborninSavaria(present-daySzombathely) and is veneratedasoneof themostpopularsaintsofEurope.Exceptionally,thesilverandnon-ferrousmetal coinswere issuedwithdifferentcoindesign.
On14July2016,theMNBissuedagoldcollectorcoin‘GoldflorinofSigismund’witha facevalueofHUF50,000innormalandpiedfortsize,whichisfourtimestheweightofthestandardcoin.Thenon-ferrousmetalversionofthecommemorativecoin,withafacevalueofHUF2,000wasalsoissued.Allthreecoinsarepartof the“MediaevalHungariangoldflorins”collectorseries,launchedin2012.
On1August2016,i.e.onthe70thanniversaryoftheintroductionoftheforint,theMNBwishedtoremindthe population about the notable anniversary byissuingsilvercollectorcoinswithafacevalueofHUF
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10,000,non-ferrousmetalcoinswithafacevalueofHUF2,000 and the commemorative versionof theHUF50circulationcoin.Thecommemorativeversionofthecirculationcoinwasreleasedtocirculationin2millioncopies.
TheMNBissuedspecial,verticalrectangularsilverandbrasscommemorativecoinswithfacevalueofHUF10,000andHUF2,000,respectively,on9August2016,tomarkthe150thanniversaryoftheBudapestZooandBotanicalGarden.
Oneofthemostspecialissuesin2016wasthesilvercollectorcoinwitha facevalueofHUF20,000anditsnonferrousmetalversionwithafacevalueofHUF2,000tocelebratethe225thanniversaryofthebirthof IstvánSzéchenyi. The face valueand sizeof thesilvercommemorativecoinissuedon21September2016 is exceptional, thereby acknowledging thecharacterisationofSzéchenyibyKossuth:thebiggestsilvercommemorativecoin(withadiameterof52.5mm)for“thegreatestamongHungarians”.Thereedededgeofthecommemorativecoinsisuniquelydivided;thegroupingof the reeds refers to theyear IstvánSzéchenyiwasborn.
The2016commemorativecoinprogrammewasclosedbytheissueofanon-ferrousmetalcommemorativecoinforthe60thanniversaryofthe1956HungarianRevolutionandFightforIndependenceon3November2016. The commemorative coinwith face value ofHUF2,000wasissuedaspartoftheserieslaunchedin2014,presentingtheHungariannationalmemorialsites.
3.8 STATISTICAL SERVICES
ForthepurposeoffulfillingitsdutiesasspecifiedintheMNBAct,theMNBcollectsstatisticalinformationfortheanalysisoffinancialdevelopments,preparationof monetary policy decisions, oversight of theoperationpaymentandsettlementsystemstoensurethe smooth execution of payments, supportingthe stability of the financial system, aswell as forthe fulfilment of the micro and macroprudentialsupervisory activity, and publishes the statisticscompiledfromthose.
TheMNBpublishesstatistical information,analysesand time series on its website for the public, inaccordancewiththereleasecalendarforstatistics.InrelationtotheindividualstatisticalareastheMNBalsoissuesmethodologicalpublications.
In2016, theMNB issued6decrees related todatareporting in 2017; these were primarily decreescontainingdatareportingorderedforthefulfilmentof theMNB’s basic tasks,15 supplemented by fourdecrees ordering the data reporting necessaryprimarilyforthefulfilmentofthesupervisorytasks.16 Inaddition,theMNBalsoissued,inaseparateformrelated to one year – to ensure promulgation assoonaspossible–theMNBDecreeprescribingdatareportingwithregardtocertainfinancialinstruments,generalfinancialinformationandcapitaladequacyofthecreditinstitutions.17Inrespectofthefulfilmentofthereportingrequirements in2016severalmid-yearchangeswere implemented. Inrelationtotheconversionofcertainforeigncurrency-denominatedreceivablesoriginatingfromconsumerloancontracts,theMNBalsoissuedanMNBDecree18prescribingaone-offdatareportingin2016.In2016,theeffectiveMNBDecrees related to thedata suppliesof 2016weremodifiedon sevenoccasions due to changesinthedomesticlegislativeenvironment,withaviewtoeffectingpublicationchanges,andtoensurethereceiptofdatanecessaryfortheresearch,analysisanddecisionsupportactivityrequiredforthefulfilmentoftheMNB’sfundamentalduties.19
Results of the data collection integration projects
Ofthetwoharmonisationprojects– Integration of data collection for statistical and supervisory purposes and Integration of the statistical and supervisory IT systems –launched after the integration of theHFSAand theMNB, thedata collection integrationproject was successfully completed in 2016. Themaingoalofthedatacollection integrationprojectwas to rationalise and consolidate statistical andsupervisorydatacollectionsaftertheintegration,toeliminateoverlaps,andtodevelopanew,integrated,internationalqualitydatacollectionsystemthatisalsosuitableforsatisfyingallsupervisoryandcentralbank
15MNBDecree50/2016(XII.12).16MNBDecrees48/2016.(XII.12),49/2016(XII.12),51/2016(XII.12)and52/2016(XII.12).17MNBDecree20/2016(vI.6).18MNBDecree1/2016(I.13).19 ThechangesaffectedtheMNBDecreesorderedforthefulfilmentoftheMNB’sfundamentalandsupervisorytasks,aswellasMNBDecree20/2016(vI.6.)[MNBDecrees3/2016(II.8.),5/2016(III.1.),17/2016.(v.11.),21/2016(vI.29.),33/2016(vIII.8.),38/2016(IX.29.),46/2016(XI.25.)].
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statisticalrequirements.Changingthedatacollectionmodelwilltakeplaceoveraperiodofseveralyears,and inparallel, theproject entitled “Integration of statistical and supervisory IT systems”addressestherequiredinformationtechnologysupportsystem.
As the closure of the successful work performed bytheprojectentitled Integration of data collection for statistical and supervisory purposes, the MNB datareportingdecree,containingthecreditinstitutions’moredetaileddatasuppliesinthenewstructure,validfrom2017,waspromulgatedinthefirsthalfof2016[20/2016(vI.6.)].From2017,creditinstitutionsmaychangeoverfromtheapplicationoftheHungarianaccountingsystemtointernationalaccountingrules,i.e.IFRS.Withintheframeworkoftheproject,theMNBelaboratedanew,detailed data collection from the credit institutions,which replaces several former data collections andensuresuniformdatasupplybythecreditinstitutionsapplyingHungarianaccountingstandardsandIFRS.ThedecreepublishedinearlyJune2016appliestocertainfinancialinstrumentsandgeneralfinancialinformationofcreditinstitutions,andthusitcontainsthestatisticalbalancesheetandprofitandlossaccount,thedetaileddatarelatedtodepositsandfinancialderivatives,aswellasindividualFINREPpackage,i.e.thedatareportingofcreditinstitutionschangingovertoIFRSfrom1January2017,basedontheinternationalaccountingstandards.The individual FINREP package was elaborated onthebasisofandin linewiththeconsolidatedFINREPpackage,standardisedatEUlevel.
Therehasbeenanincreasingdemandforindividual-levelcreditdata,bothat internationalandnationallevel,intheareaofstatisticaldatacollection,centralbankanalysesand fulfilmentof supervisoryduties.The MNB places increasing emphasis on verifyingthequalityoftheloanregisterdata,availablefromtwo sources – the CCIS data taken over fromBISZZrt. and thedata from thedata collectionordereddirectlyforthecreditinstitutions,expandedin2016andsupplementingtheloanregister–andperformingthenecessarycorrections.Ahighqualityloanregisterbetterfulfilsitsfunctionrelatedtoresponsiblelending,providescomprehensiveanalyticalopportunitiesforthemonitoring of lending processes, andover thelongerrunitalsoallowsthepotentialreplacementofaggregatestatisticsbyindividualdata.
Publication changes in the MNB statistics
Asasupplementtothemonthlysecuritiesstatisticsdata dissemination, from2016 theMNBpublishes
pressreleasesonthechangesinthesecuritiesholdingsissuedbyresidentsandthebreakdownoftheholders.The publication of the press release was justifiedby the fact that the role of securities, particularlyof debt securities and within that of governmentsecurities,substantiallyincreasedintheinvestmentsof theeconomic sectors; inaddition, therewasanincreasing demand from market participants topresenttheownershipbreakdownofsecurities.Thepurposeofthesecuritiespressreleaseistoprovidetheuserswithmorecomprehensiveinformationonthemajoreventsthatoccurred inthegivenperiodandontheownershipstructureofthesecurities incirculation. Another important function of it is toprovide those interested with easy-to-understandsummary informationonthedataappearing inthemonthlysecuritiesstatisticalpublication.
Inlinewithinternationalstatisticalrecommendations,theMNBpublishesthecountrybreakdownofstock,flow and income data of direct investments in abreakdownby immediate investorand investment.However, among domestic and international usersthere is also mounting demand for a breakdownof the inward foreign direct investment positionby the ultimate investor. Starting from September2016,theMNBcompilesandpublishesthepositionof foreign direct investments in Hungary brokendownbythecountryoftheultimateinvestor.Thesesupplementary annual statistics are also publishedsimultaneouslywiththeSeptemberdatarelease,butwithatime lagof21months,andcanbedeemedfinal,inlinewiththenormalrevisionpractice,inthe33thmonthafterthereferenceperiod.Thefirstyearofwhichthisbreakdownisavailableis2014.ThenewcountrybreakdownofinwardFDIpositionsismadeavailablebytheMNBonitswebsitebrokendownbyinstruments,separatelyforequityanddebt,fordataexcludingspecialpurposeentities(SPEs).
Supervisory statistics
In2016,thesupervisorydatacollection introducedin2014forcredit institutionswithuniformcontentandformatacrosstheEuropeanUnion(hereinafter:EU reporting standard) was supplemented withadditional new elements, primarily in the area ofliquiditymonitoring. The standardised receipt andprocessing of these reports, ensuring data quality,andtrackingthefrequentamendmentsandtaxonomyversion changes take place in a regulatedmannerin accordancewith detailed procedures. TheMNBalso submits the supervisory reportsof the largest
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HungarianbankinggroupstotheEuropeanBankingAuthority and started tomake preparation for theplanned submission of the supervisory reports ofallcredit institutionsoperatinginHungaryoverthemediumrun.TheMNBdevelopedtheconsolidatedriskmonitoringsystemforbankinggroupsusingboththenewuniformdata standard and the additionaldatacontent regulatedby theMNBDecree,withintheframeworkofwhichaquarterlyriskassessmentoftheactivitiesofallbankinggroupsisprepared.Thestatisticsbasedonsupervisoryreporting,aggregatedatsectorlevel,arepublishedontheMNB’swebsitein the formoftimeseriesandthepublicationsareexpanded depending on the users’ needs. Amongthesupervisorydatapublishedoncreditinstitutions,new time series on corporate lending activitywasintroducedinthesecondhalfof2016,whichplacesspecial emphasis on analysing the components ofchangesintheoutstandingloanstowardsmicro,smallandmedium-sizedenterprises.
The insurers’ supervisory data reporting has fullychanged with the introduction of the uniformSolvencyII(SII)EuropeanUnionrulesin2016.Thedata,preparedinlinewiththenewtechnicalstandardapplicabletothereportingofinsurersbasedonthesingleEUauthorisation((2450/2015EU(2015.XII.31)arealreadysubmittedinXBRLformat.Simultaneouslywith this, the data content specified in the MNBdecree on supervisory reporting applicable to theinsurers falling within S II has been substantiallyreduced,containingonlysupplementaryinformationinordertopreventoverlaps.Thenewdatareportingrequirements were successfully implemented. TheMNBmettherequirementsprescribedbyEIOPA infullandbythedeadline,i.e.ituploadedtheopeningreportsofthe insurers fallingwithinS II,aswellastheir2016Q1-Q3reports,infullandbythedeadlineto EIOPA’s data receiving system. Simultaneouslywith this, the insurers’ institutional monitoringrisk assessment system also had to be renewed.Implementationwascarriedoutintwophases:Theassessmentofsevenriskelementscarriedoutinphaseonefrom2016Q1willbeexpandedto includetheassessmentoffurthertworiskelementsfrom2017Q1.Theintroductionofthenewdatareportingwasaccompanied by the major transformation of theformerlypublishedstatisticalseries,asSIIintroducedfundamentalmethodologicalchanges.Thus,mostofthe formerlypublishedtimeseriescouldno longerbecontinued.
International data supply, international cooperation
As follows from its status, the expectations arisingfrominternationalcooperationanditsmembershipobligations, the MNB regularly supplies data andinformation to the European Central Bank, theStatistical Office of the European Communities(Eurostat),theEuropeansupervisoryauthorities(EBA,EIOPA),theBankforInternationalSettlements(BIS),the InternationalMonetary Fund (IMF), theWorldBankandtheOrganisationforEconomicCo-operationandDevelopment(OECD).
With a view to complying with the internationalrecommendationsandrequirements,andmonitoringthechangestherein,theMNBiscontinuouslypresentatinternationalforumsrelatedtothecentralbank’sstatisticalactivityandplaysanactiveroleintheworkof the international working groups dealing withmethodologicaldevelopmentsandcurrentstatisticalmatters.
CESS 2016 (Conference of European Statistics Stakeholders)wasorganisedjointlybyEurostat,theECB,theEuropeanStatisticalAdvisoryCommittee,theFederationofEuropeanNationalStatisticalSocieties,the Hungarian Central Statistical Office and theHungarianStatisticalAssociation,inBudapeston20-21October2016.ThepurposeoftheconferencewastobringtogetherEuropeanmethodologicalexperts,andproducersandusersofstatistics,todiscusstheusers’needs,sharethebestpracticesrelatedtothecompilationandpublicationofstatistics,andpresentnew, innovative forms of communicating statistics(applications,videos).Inthepresentationheldattheevent, theMNBpresented theHungarianpracticesrelated to the compilation and publication of FDIstatistics filtering out the data of special purposeentities(SPEs),thecapitalintransitandtransactionsofassetportfoliorealignment.
Data quality, administrative inspection
TheMNBaudited the compliance – i.e. thetimelysubmission of the reports and the data quality –with the reporting requirements specified on thebasis of theMNB decrees prescribing data supplyto thecentralbank informationsystemandby thedirectlyapplicableEUlegalacts(hereinaftertogether:reporting regulations) in the form of continuous
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inspection in 2016 as well. In 2016, the MNBlaunched no administrative inspection procedures;theadministrativeinspectionprocedurelaunchedin2015inrespectofonecreditinstitutionendedwithawarningandbyprescribingmeasures.
In2016,duetotheinfringements identifiedonthebasisofthecontinuousinspectionofthefulfilmentofdatasupplies,measuresweretakenin430cases:in79casesbindingresolutionsornoticeswereissued,while intherestofthecaseswarningsweregiven,mostlydueto theomissionor lateperformanceofthereportingobligations(erroneousreportingjustifiedmeasures in2cases).Basedontheauditevidence,theMNBobliged thereportingagents toeliminatethe identified errors, submit the omitted reportsretrospectivelyandfulfilthestatutoryrequirementsinthefuture.Themeasuresaffectedcertainstatisticaldatasupplieswithregardtothebalanceofpayments,monetary,securitiesandpaymentsstatistics,andthefinancialintermediarysystem,aswellassupervisoryreports.
In2016,penaltieswereimposedon21occasions–on18reportingagents–duetothefailuretocomplywiththereportingrequirementsorforlatefulfilment.
3.9 THE MNB’S ACTIVITY IN THE AREA OF SOCIAL RESPONSIBILITY
In the implementation of the Pallas Athena PublicThinking Programme, which forms a key elementof the Social Responsibility Strategy, announcedin line with the mission, vision and fundamentalvalues laiddown in its Statute, theMNBconsidersthe enhancement of financial literacy, financialawareness, and underlying economic and socialknowledge,aswellastherelatedinstitutionalsystemand infrastructure to be its mission and strategictask.IntheMNB’sview,thecentralbankcansupporttherealisationofeconomicpolicyobjectiveswithintheframeworkoftheProgrammebyrenewingandenhancingeducation–primarilytertiaryeducation–andthesystemofeconomistandfinancialtrainingandbysupportingscientificactivityandfinancialliteracy.TheMNBimplementsitseducationprogrammeswiththisgoalinmind.
Under the auspices of the educationprogrammes,the MNB Excellence Scholarship programme wasannounced for the first time in 2016. Within itsframework more than 400 students of 25 higher
educationinstitutionsreceivedawardsandbenefitedfromscholarshipgrants.
Intheareaofinstitutionalpartnershipssupportingthesocialresponsibilitystrategy,thestrategiccooperationbetween the Corvinus University of Budapest andthe MNB commenced by signing the cooperationagreement two years ago. The purpose of thecooperationistocontributetotherealisationofthePallasAthenaPublicThinkingProgramme’sgoalsbyorganisingjointprofessionaleducationprojectsandproviding the infrastructure conditions supportingtheseinitiatives.In2016,theMNBDepartmentwassetupattheCorvinusSchoolofEconomicsandtheareas of geo-economy, geopolitics and economicgeographywere also strengthened by the supportoftheMNB.TheMNBDepartmentoffersnearlytencoursesonavarietyof subjects: inaddition to thesubjects“Analysisoftimeseries”,“Analysisoffinancialmarkets”,“Modellinginthecentralbank’spractice”,“Role of the banking system in the economy”,“Ethicaleconomy”,“Moderntrendsineconomy”and“Theoryandpracticeofmonetarypolicy”,thecourses“Internationaleconomicandfinancialinstitutions”and“Economicgovernance”werealso introduced.Asaresult of the cooperation, the central bank analystspecialisationwaslaunchedattheeconomicanalystmasterscourse,andafterabreakofseveralyearstheregional and environmental economy programmewasre-launched,withaneweducationprofileandlecturers.
WiththecooperationofthePallasAthenaFoundationsthedoctoral(Phd)programmeentitled“Geopolitics,geo-economicsandpoliticalgeographyfromaCentralEuropeanperspective”waslaunchedattheUniversityofPécsintheautumnof2015,startingtheacademicyear of 2016/2017with two classes. The studentsparticipating in the programme can learn fromprominent domestic and foreign experts, andmayattend, through application, international scientificconferences and foreign summer universities. ThePhdsupportingscholarshipprogramme,announcedbythePallasAthenaDomusScientiaeFoundation,wasexpandedwithanewclassinSeptember2016.Theyoungresearchershavetheopportunity–inadditiontofollowingmacroeconomics,financialandbankingcourses–tomasterthelatestmethodologicalskillsas well. The academic progress of the third year,whichhasalreadyenteredtheactiveresearchphase,is guaranteed by strict professional requirements,mentorsupportandaschedule.
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ThecooperationagreementbetweentheMNBandthe Budapest Business School was also signed inautumn2016.Aspartofthiscooperation,theMNBsupportstheeducationofyoungexpertsspeakingEastAsianlanguageswhoarefamiliarwiththecultureandeconomiesoftheEastAsiancountriesandregions,aswellasthedevelopmentoftheeducational,research,culturalandeconomicrelationsbetweenHungaryandthecountriesofEastAsia.
The MNB extended the range of institutionalcooperation supporting the reform of economichighereducationalsototheregionofNorthHungary,by concluding a cooperation agreement with theUniversity of Miskolc. As part of this, the MNBundertooktoprovidetheoutstandingstudentsoftheFacultyofEconomywithinternshipandscholarshipopportunities,and to facilitate the implementationofjointprofessionalevents.TheMNBalsosupportstheintroductionofanovelformofeducation–i.e.dualeducation–incooperationwiththePallasAthenaUniversity,whereattheMechanicalEngineeringandthe BusinessManagement bachelor courses morethan30dualstudentscangainprofessionalexperiencecurrently.
The Tiszaroff Scholarship Tender is aimed at theconvergenceofdisadvantagedregions.Thankstothisprogramme,morethan50studentsfromthemicro-regionwereabletobenefitfromscholarshipin2016again. The cooperation projects under preparationincludethepartnershiptobeformedwiththeEötvösLoránd University and the Károli Gáspár CalvinistUniversity,aswellasthesupportoftheNon-profitFoundationforStudents’ScientificAssociation(TDK).Duringtheyear,theMNBalsodevelopedpartnershiprelations with a number of prominent foreignuniversities,institutionsandresearchersintheareaofinternationaleducationalrelationsinordertokeeptrackof themost importanttrends in internationalhighereducation.
Withintheframeworkofaseriesoffestiveevents,thetemporaryexhibitionentitled“70yearsoftheforint”wasopenedon1August2016ontheoccasionoftheissuance of Hungary’s national legal tender, whichwasextendedintoatravellingexhibition,reachingsixregionsnationwide,fromOctober2016.TheMNBiscarryingoutthetravellingexhibitionincooperationwith local higher education and public educationpartner institutions–taking intoaccountthegivenregion’sspecificcharacteristicsrelatingtothehistory
ofmoneyandnumismatics–focusingontheprovisionofcomprehensiveinformationtothepublic.
In creating its Depository Programme in January2014, theMNB joined the group ofmajor centralbanks that contribute to theprotectionof culturalheritagethroughartworkpurchasesandcollections.TheprimaryobjectiveoftheDepositoryProgrammeistoregainthepossessionforHungaryofashighaportionofarttreasuresthatearlierpassedintoforeignownershipaspossible,andatthesametimetokeepthetreasuresthatcanbefoundindomesticestatesinHungarybypurchasingthem.
As a result of theprogramme, invaluable artworkshavebeenobtainedbythecentralbankandcanbeviewedinpubliccollections,suchasthepaintingbyTizianovecellio–virginMarywithChildandSt.Paul,byLajosGulácsy–Themulattomanandthestatue-white woman, by János vaszary – Christianity, byDezsőOrbán–Nude(largeformat),GáborBachman’sarchitecture and design collection, the painting byMihályMunkácsy–ChristinfrontofPilate,theSilverthalersmintedinthe16th-17thcenturyinTransylvania–coincollection,thepresentationoftheTransylvanianregionoftheOpenAirMuseumofSzentendre,thepaintingcollectionofIstvánKövesi,theearlyworksof LászlóMoholy-Nagy and thedocuments relatedtohisoeuvre,theArtpooldocumentcollectionbuiltbyJúliaKlaniczayandGyörgyGalántai,thepaintingby Abraham van Beijeren entitled Still Life withFruit,SeaFood,andPreciousTableware,thegraniteconferencetableofMarcellBreuer,theinternationallyacknowledged architect of Hungarian origin, thesilvercoveredtrayproducedin1791intheworkshopofJohannGeorgHann,vienna-basedgoldsmithforCount Sámuel Teleki (1739-1822), certainworksofartfromtheestateofRudolfBedő,theFerencKisscollection,whichincludestheportraitofSándorPetőfipainted byMiklós Barabás and the daguerreotypemadeinBostonportrayingLajosKossuth.
A detailed descriptionof theworks of art and thecollectionspurchasedwithin the frameworkof theMNB’s Depository programme is available on thecentralbank’swebsite.
In addition, to the best of its capacity, the MNBparticipates in value creation, the preservation ofnationalvalues,intellectualandculturalheritage(e.g.MuseumofFineArts,PalaceofArts),andsupportsthetrainingofprofessionalsandscientificactivities
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(e.g. Hungarian Economic Association, NationalAssociation of Doctoral Candidates) directly orthroughitsfoundationsunderstrategicagreementsorviaadhocgrants.Throughcharitabledonations,it has contributed to improving the quality of lifeand equal opportunities of disadvantaged groupsand to alleviating the difficulties arising fromextraordinary life situations (e.g.MagicLampWishFulfillingFoundation,HungarianRedCross).Withintheframeworkof itscorporatesocial responsibilityprogrammeandalignedwithitsdesignatedstrategicobjectives,thecentralbankisopentoexpandingthegroupofitscooperatingpartners.
3.10 FACTORS SHAPING THE COMMUNICATION OF THE MNB
Inordertosupplythegeneralpublicwithcontinuousand comprehensive information, in 2016 theMNBissued a total of 413 press releases, held 48 pressconferenceandpublished93professionalarticlesintheprintedpressandonline,aswellonitsownwebsite.
The purpose of the central bank’s statementsand press conferences included, among others,presentation of the decisions and facts related tomonetary policy and financial stability, theMNB’smostimportantdecisions,publicationoftheresultsoftheMonetaryCouncil’smeeting,presentationoftheresultsofthesupervisoryinspectionsandinformationontherelatedresolutions,aswellaspublicationofimportant statistical data and information on cashturnover,thebanknoteexchangeprogrammeandtheissuanceofcommemorativecoins.
The presentation and introduction of the targetedcentralbankprogrammesandmeasuressupportingtheeconomicpolicyofthegovernmentandHungarianeconomic growth, along with the demonstrationanddescriptionof importantprofessionaldecisionswasakeyobjectiveagainin2016.Thecentralbankcontinuously reported on the MNB’s initiatives,including the Funding forGrowth Scheme and thelatestresultsthereof,thecurrenteventsoftheself-financing programme and the MNB’s fine-tuningswap tenders. The professional papers publishedontheMNB’swebsiteandothercompetentonlineportalsmadeamajorcontributiontofamiliarisingandexplainingthebackgroundofprofessionaldecisionsandprocesses.
TheMNBprovided informationonthestepsofthebanknotereplacementprogramme,whichcontinued
in2016–amongothersonthenewissuancesandthewithdrawaldates–notonlythroughthepress,butalsodirectly inretail trade,withpostersandflyers,whichpresentedtheappearanceandsecurityfeaturesofthenewbanknotes,andinformedconsumersonthedatesuntilwhichthespecificbanknotescanbeused indailyshopping.Allpartsoftheeducationalseries launchedwith a view to increasing financialawareness and consumers’ knowledgeweremadepublicon thecentralbank’swebsite,videosharingchannelandsocialmediasites.
TheMNBpaid special attention to provide regularand detailed information on its value creatinginitiative,supplementingthetraditionalcentralbankactivities,beittheincreasingnumberofeducationalprogrammes implemented through universitycooperation or the activity performedwith a viewto augmenting the domestic art treasures withinthe framework of the Depository programme. AshortfilmwasalsoproducedonallelementsoftheDepository programme, from which anybody canobtain information on the importance of the arttreasures and the sites where they are exhibitedthrough theMNB’s socialmediaandvideo sharing site.
3.11 THE MNB’S INCOME IN 2016
In2016,theMagyarNemzetiBankrecordedaprofitof HUF 54.3 billion. In 2016, the following maindevelopmentshadaneffectonthebalancesheetandprofit:
–the level and composition of foreign exchangereservesdefinedbymonetarypolicy, and foreigncurrencypurchasesandsalesaffectingthelevelofreserves:operationsperformedbytheGovernmentDebt Management Agency in relation to debtmanagement, net foreign exchange inflows fromEU transfers, the foreign exchange conversionsperformed by the Hungarian State Treasury forpurposesnotrelatedtodebtfinancing;
–developments in instruments absorbing forintliquidity, which are correlated with changes inforeignexchangereservesandtheMNB’snetforeigncurrencyreceivables;
–changes in forint interest rates and internationalforeignexchangeinterestrates;and
–changesintheforintexchangerate.
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Netinterestandinterest-relatedlossesamountedtoHUF15.6billion,whichrepresentsanimprovementofHUF27.1billioncompared to thepreviousyear.TheMNB’sinterestlossstemsfromthefactthatFXreserves,whichaccountformorethantwothirdsofitsbalancesheet,aremainlyfinancedfromforintfunds,and foreignexchangeyieldsarebelowtheaverageforintinterestrate.In2016,theimprovementinnetinterestincomewasprimarilyattributabletothefactthat–owingtotheself-financingprogrammeandtheconversionofthehouseholds’foreigncurrencyloansinto forint – foreign exchange reserves decreasedsubstantially,andtherewasadeclineinthebalanceof liquidity absorbing instruments. The differencebetweentheyieldlevelswasalsosmaller,whichhadapositiveimpactonnetinterestincome.
Net forintinterest and interest-related lossesamounted toHUF28.4billion, i.e.HUF64.6billionlessthanin2015.Asaresultofthecontractionofthecentralbankbalancesheet,theaverageportfolioofforintliabilitieswithinterestratetiedtothebaserate(regulatoryreserve,liquidityabsorbinginstruments)washalvedyearonyear.Theaveragecentralbankbaserateweightedbycalendardaysfellby60basispoints in 2016. Both processes contributed to thesubstantialimprovementinnetinterestincome.
Foreign currency net interest and interest-relatedincome showedaprofitofHUF12.8billion,whichfell substantially short of the result from last year,
mainly due to the decline in interest income onforeignexchange reserves. The reservesdecreasedbyalmostEUR6billionduringtheyearandthefallintheeuroyieldlevelsalsocontinued.Duetothesefactors,interestincomeonforeignexchangereserveswasrealisedatalowerlevelthanlastyear.
RealisedgainsarisingfromfinancialoperationsrosebyHUF1.9billionin2016.Thisprofit/losscategoryprimarily contains gains and losses realised fromchanges in themarketpricesof securities includedintheFXreserves.Theincreaseinprofitwasmainlyattributabletothehighersecuritiessales,connectedto the decrease in foreign exchange reserves, andthiswas strengthenedby thecontinuingdecline ineuroyields.TheMNB’sprofitarising fromfinancialoperationsamountedtoHUF16.8billionin2016.
Thetwomainfactorsdeterminingtheincomearisingfrom exchange rate changes are the differencebetweentheofficialandthecostratesaswellasthevolumeofforeignexchangesales.In2016,theforintexchangeratewaslessvolatilecomparedtopreviousyears:thedifferencebetweentheofficialandthecostratebecamesmaller.Thevolumeofforeigncurrencysalesalsodroppedand they typically tookplace inrelationtothedebtmanagementoperationsoftheGovernment DebtManagement Agency. ExchangegainsearnedduringtheyearamountedtoHUF95.1billion,andcontinuedtobeakeycomponentofthecentralbank’sprofit.
Table 8Abbreviated income statement and individual balance sheet items of the MNB(HUF Billions)
No. Description(P/L line) 2015 2016 Change
1 Netinterestandinterest-relatedincome(I+II)-(X+XI) –42.7 –15.6 27.1
2 –netforintinterestandinterest-relatedincome(I-X) –93.0 –28.4 64.6
3 –netforeignexchangeinterestandinterest-relatedincome(II-XI) 50.3 12.8 –37.5
4 Realisedgains/lossesarisingfromfinancialoperations(Iv-XIv) 14.9 16.8 1.9
5 Incomearisingfromexchangeratechanges(III-XII) 177.7 95.1 –82.6
6 Otherconstituentsofnetincome*(v+vI+vII+vIII)-(XIII+Xv+XvI+XvII+XvIII) –55.3 –42.0 13.3
7 Profit/loss for the year (1+4+5+6) 94.5 54.3 –40.2
Revaluationreservesinthebalancesheet
8 –duetounrealisedforeignexchangegain/loss 312.6 182.5 –130.1
9 –duetochangesinthemarketvalueoftheforeigncurrencysecurities** 28.5 17.4 –11.1
* Revenues on supervisory activities, net profit/loss of banking operations, costs of issuing banknotes and coins, net creation and release of provisions, income/expenses from commission and from other items.
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Othercomponentsofnetincomeincludeoperatingincome, costs and expenses, the costs of issuingbanknotes and coins, creation and release ofprovisions, income from supervisory activity andincome/expenses from fees and commissions andother income/expenses.Net expenditures derivingfromtheseitemsamountedtoHUF42billionin2016,representing a year-on-year decrease of HUF 13.3billion.
TheMNB’sequityamountedtoHUF372billionattheendoftheyear.Itssizewasfundamentallydeterminedbythelevelofrevaluationreserves,inparticular,thereservesduetoforintexchangeratechanges.
RevaluationreservesduetotheforintexchangeratechangesdeclinedbyHUF130.1billioncomparedtoend-2015, since at the end of 2016 the differencebetweentheofficialandtheaveragecostrateswassmallerthanayearearlier.RevaluationreservesduetoexchangeratechangesstoodatHUF182.5billionon31December2016.
On 31 December 2016, the MNB’s balance sheetshowedunrealisedgainsofHUF17.4billiononforeign
currency-denominatedsecuritiesmarkedtomarket,fallingshortofthepreviousyear’slevel,duetothedeclineinFXreserves.
3.12 FINANCIAL PERFORMANCE OF THE MNB
The internaloperationsof theMNBareessentiallyaimed at providing the resources required for theefficientdischargeofthedutiesstipulatedbytheMNBAct.
Operating costs
Actual operating costs in 2016 amounted to HUF35,395 million, which is 13.2 per cent below theapproved budget and 7.3 per cent above theexpendituresincurredin2015.
Theshortfallcomparedtothe2016budgetinthecaseofpersonnelcostsisduetothefactthatduringtheyeartheheadcountwaslowerthanplanned,andpartofthefamily-friendlyworkplaceprogramme’s2016phasewill be implementeddifferently, in linewiththeExecutiveBoard’sdecision.Thefulfilmentofthe2016generaloperatingcostsbelowthebudgetwasmostlyattributabletothefactthatthenewcontractforthecommunicationservicewasnotconcludedin2016,contrarytotheplans,duetothelonger-than-anticipatedpublicprocurementprocedure.
The increase in the expenses compared to thepreviousyearoccurredinthepersonnelcosts,mostlyduetotheriseintheaverageheadcountby52(4.1percent)primarily through thefillingofvacancies,and also for the performance of new tasks (e.g.resolution and reorganisation activity, and extradutiesoftheFinancialArbitrationBoard,asmandatoryenforcementforum).
Generaloperatingcostsalsoincreased,mostlyduetotheriseinthecostsofarmedsecurityguarding,withintheoperatingexpenditures.Thisisattributabletothe
Chart 14Changes in the forint exchange rate (inverse scale)
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Revaluation reserves dueto exchange rate changes
HUF 182.5 billionRevaluation reserves dueto exchange rate changes
HUF 312.6 billion31
.12.
2015
31.1
2.20
16
EUR/HUF EUR/HUF
Average cost rateMNB official exchange rate EUR/HUF
Jan
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Fe
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15
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5 M
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201
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Feb
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M
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Apr 2
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6 De
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Table 9Operating costs of the MNB in 2016
Description Actual data for 2015 Budget for 2016 Actual data for 2016 Index (2016 actual /
2016 budgeted)
Index (2016 actual
/ 2015 actual)
HUF millions Per cent
1.Staffexpenditures 19,712 23,334 21,146 90.6 107.3
2.Generaloperatingcosts 13,261 17,459 14,249 81.6 107.5
Total 32,973 40,793 35,395 86.8 107.3
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factthatwiththeoutsourcingofthesecurityguardingactivity,securityrequirementsincreased,theimpactofwhichwas incurred in the operating costs fromMarch2015,whilein2016itwasalreadyincurredfortheentirereportingperiod.Inaddition,theflatfeeofthesecurityguardingservicesfor2016rosefrom1January.
Personnel costs
In 2016, personnel costs (HUF 21,146 million)exceeded thepreviousyear’scostsby7.3percent(byHUF1,434million).
Comparedto2015,theclosingheadcountwasupby117employees(9.2percent),whilethechangeintheaverageheadcountwasover4percent, i.e. it rosefrom1,274in2015to1,326in2016.
The impactoncostsof theaforementionedfactorsandof thewageadjustmentperformedwithin theframeworkofthewagebillmanagementappearedin2016.Inadditiontotheforegoing,thedifferenceinpersonnelcostsisalsoattributabletothefactthatthecostofmealallowanceswasincurredinrespectofthewholeyearin2016.Moreover,thehealthprogramme(general medical screening) was introduced mid-yearin2015,whilein2016theservicewasavailablethroughouttheyear.
General operating costs
In2016,generaloperatingcosts(HUF14,249million)were 7.5 per cent higher than in 2015 (up HUF988 million); the changes in the components areattributabletothefollowingreasons.
IT costsincreasedbyHUF132million(7.0percent)inyear-on-yearterms.ThiswasmostlyattributabletotheriseinITsecurityservicesanddatatransmissionfees,related to the high-level protection of confidentialdataandnewdatarelations.Theexcesscostsweremitigatedbytheoptimisationoftheuseofconsultingservices.
Comparedto2015,operating costsalsorose(byHUF1,177million,20.4percent),whichismostlyduetotheincreaseinsecurityguardingexpenses.Thecostoftheoutsourcedactivity in2015was incurredfor10months,whilein2016for12months,andtheflatrateoftheservicealsorosein2016.Theexcesscostsof security guardingweremitigated by a technical
decrease in property maintenance costs: from 1January2016theupkeepexpensesoftheTrainingandLeisureCentrearerecognisedamongpersonnelcosts,whichrepresentsasavinginoperatingexpenses,butinfactisnotasavingintermsofthetotalcostsoftheMNB.Consultingfeesrelatedtoupkeep,aswellasthevehicle,stationery,telephonecostsandpostagealsodecreased,albeittoasmallerdegree.
The annual amount of the depreciation charge oftangibleandintangibleassets(HUF2,951million)in2016exceededthatofthepreviousyearby10.6percent,primarilyasaresultoftheinvestmentsrealisedin2015.
Other expenses in 2016 fell by 15.7 per cent (HUF605million) compared to theexpenses incurred in2015,whichisthecombinedresultofseveralfactorsworking in opposite directions. Legal consultancycosts decreased substantially, asmost of the costsrelated to the set-up of the central bank’s assetmanagement agency were incurred in 2015; inaddition,thelegalresolutions,relatedtotheactivityoftheFinancialArbitrationBoard,prescribedbytheMNBActwereobtainedtoamuchlowerdegreethanin2015(comparedtothenumberofcasesin2015,substantially fewer legal disputes arose in 2016).Communicationcostsalsodecreasedin2016,duetothedelayinthenewpublicprocurementprocedureannouncedfortheuseofcommunicationservices.Ontheotherhand,expertfeessubstantiallyincreased,because the costs of the complex central bankresearchandanalysis,research-supportedconsultancyandstudycompilation tasks in2015were incurredonlyfromthesecondhalfoftheyear,whilein2016throughouttheyear,togetherwiththecostsofadhocworks.Theamountofthemembershipfeesrelatedtothesupervisoryactivity,prescribedbyEUregulations,alsoincreased.
Capital expenditure
In order to achieve the MNB’s objectives andmaintainthevolumeandqualityoftangibleassets,development projects and asset procurementsbecamenecessary.Inrelationtothenormalcourseof business, the approved capital expenditurebudget for 2016 amounted to HUF 8,829 million.An appropriation was also approved for theimplementationoftheCorporateSocialResponsibilityProgramme,forpurchasingthepropertiesservingasvenuesforinternaltraining,andfortherenovation,
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rebuildingorreconstructionofexistingpropertyandforpropertytobepurchasedinthefuture.(The2016budgetcontainedonlythepropertyrenovationsandmodernisationrelatedtotheusualcourseofbusinessagainstthisrealpropertyappropriation.)InrelationtotheCorporateSocialResponsibilityProgramme,theMNBsupportsthepurchaseofarttreasuresaspartoftheDepositoryProgramme,fortheimplementationof which the approved capital expenditure planincludesaseparateappropriation.In2016,HUF4,910millionwaspaidinrelationtocapitalexpenditure,ofwhichHUF559million is relatedto theDepositoryprogramme.
PurchasesmadeforIToperatingpurposescomprisea large portion of the information technologyinvestment. Investments included the purchase ofMicrosoftlicences,thedeveloperandtestservers,aswellasthelicencesnecessaryfortheimplementationof theSTAFIRprogrammeaimedat the integrationof the statistical and supervisory systems, and thedevelopmentofthesystemalsocontinued.TheversionchangeoftheKONDORsystemwasalsocompleted.ThemajorpurchasesofITequipmentalsoincludetheexpansionofthecapacityofthecentraldatastoragesystem and the renewal of the network devices.
OneofthemostimportantinvestmentsintheareaofITsecuritywastheprocurementofintrusiondetectionand prevention systems and the purchase of theprivilegedusermanagementsystem,whichensuresthemanagementandprotectionoftheaccountsofuserswithprivilegedaccess.
The procurement procedure related to thereplacement of the security technology system of
thebuildingatSzabadságsquareandoftheLogisticsCentre,aspartoftheenhancementofthesecuritytechnologyenvironment,wasclosedwithnoresult.Theinvestmentsprovideassistancefortheworkofthearmedsecurityguardsbythecomplexreplacementofthebanksecurityelectronicandmechanicalsystems,andtheyarealsoaimedatpreventingextraordinarysituations.Theprocurementprocedurerelatedtotheinvestmentswillbelaunchedin2017againbasedonnewconcept.
The most important property-related investmentsincludedthedevelopmentofthesocialareaonthe7th floor of Eiffel Palace, the strengthening of thefrontgatesofthebuildingatSzabadságsquareandthe replacement of the electric noise traps in thecomputerroom.
Personnel management at the MNB
The MNB continues to treat human resourcemanagement as a strategic issue with a viewto fostering efficient and profitable operation.Accordingly, it provides its employees who arecommittedtothecentralbank’sgoalsoverthelongrunandarereadytoenhancetheirprofessionalskillsonanongoingbasiswithstableemployment,moralandprofessionalappreciation,competitive income,advancement,trainingandeducationopportunities.
The MNB has developed a work culture wherein a value-driven atmosphere employees areable to perform their tasks efficiently, focusingon performance. They acquire and enhance theknowledge, skills and competence necessary forefficientwork,andtheproductiveworkperformedbytheemployeesissupportedbyincentivesandmoralappreciation. All these help the employees realisetheirindividualinterestsinharmonywiththeinterestsoftheinstitution.
The MNB’s human resource strategy is able tosecuretherequirednumberofhighlyeducatedandmotivatedemployees andemploy theprofessionalskillsandabilitiesoftheavailableresourcesefficiently.Itsgoalisnotonlytointegrateexcellentemployees,butalsoretainthem;thus,italsohelpssupporttheindividual ambitions in line with objectives of theorganisation.TheMNBstillconsidersitimportanttoemploy highly qualified, knowledgeable, dedicatedandloyalemployees,relyingonwhomit iscapableof taking part in the changes along the renewingdomesticeconomicandsocialinterestsandvalues.
Chart 15Trends in the MNB’s capital expenditure in 2016*
2016Actual
2016Budget
HUF Million
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 1,0000
BuildingsInformation – technology
Other investments and assets
* Excluding the appropriation for property purchases and renovations and the Depository Programme.
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Following its proven practice, the MNB elaborateda new three-year training concept in 2016 as well,as part of which it prepared a Training CatalogueandTrainingPlanwithaviewtoprovidingapoolofhighlyqualifiedemployees representingprofessionalexcellence.Employeestypicallyattendedprofessional,personalskillsdevelopmentprogrammesandlanguagetrainings,which–tailoredtoindividualneeds–servedthe participants’ development in themost effectiveandefficientmannerpossibleintermsofefficiencyandapproachaswellasthedevelopmentcooperationskills.
Withintheframeworkoftheinternshipsystem,theMNB also contributed to ensuring that universitystudentscanacquireasmuchprofessional skillsaspossible. Within the framework of the internshipsystem,theMNBreceivedhigher-educationstudentsfortheperiodoftheirfieldpracticeandalsowithintheframeworkofdualtraining.Thenewsystemallowsthe selection and employment of students whoseperformanceisoutstanding.
In 2016, the human resource area continued thedevelopmentofHRsystems,whichalsoensuretheemploymentframework,supporttheintegrationofnewentrants, therelationsbetweentheemployeeandtheorganisationduringtheexistenceofthelegalrelationship,andsupporttheprocessofleavingtheorganisation. The human resource functional areacommunicatesthehumanpolicygoalsandprinciplesto the employees, and facilitates information flowbetweentheemployerandthestaff.
The head of the functional area plays a dominantroleintheelaborationoftheheadcountandwagesnecessary for fulfilling the tasks. TheMNB’s wageand income policy reflects its special position andsupervisory function. The wages reflect the duerecognitionofthespecialknowledgethatthestaffofthefunctionalareas inchargeofmonetarycontrol,financialsupervisionorcashsupplyhave.
TheMNBoperatedawagebillmanagementsystemin 2016 aswell, which is suitable for the fast andflexiblemanagementofthechangesandrequirementsarising in the various functional areas by the(temporary) regrouping of employees. In addition,thewagebillmanagementalsosupports leaders inthemostcompleteperformanceofthetasksoftheareasmanagedbytheminawaythattheheadsofthe various areas can directly evaluate excellent
workandtherelevantachievements,whichmaybereflected in the remunerationof theemployeesaswell. Accordingly, the system that was introducedbecamesuitableforthelong-termretentionofhigh-quality, highly qualifiedpersonnel and also for thestrengtheningofresponsiblefinancialmanagementbygrantingmuchwiderpossibilitiesfortheheadsofwagemanagementareastogiveproposals.
Thelong-termgoalofthewagebillmanagementisthatthefulfilmentofthestrategicobjectivesandtasksofindividualareascanbereflectedinwagesettingaswell; itshouldhelpdeterminecompetitivesalaries,motivateamorethoroughassessmentofemployeesandacknowledgeexpertiseandskillsinthesalary,aswellasencourage theheadsof functionalareas tomanagehumanresourcesinawaythatisevenmorereasonable and economical than the current one,providing at the same time greater opportunitiesto ensure competitive income for knowledgeable,experienced employees. Within the framework ofthe incentive system, in 2016 it was also possibleto recognise individual efforts and responsibleprofessionalwork,withinthelimitspermittedbytherulesofwagebillmanagement.
With its multi-component fringe benefit system,theMNB provided a wide range of benefits to itsemployees in 2016 aswell, and also preserved itsfamilywelfarescheme.Withintheframeworkofthis,itprovidedspecialsupportforfamilieswithchildrenandcontributedtothemitigationofburdensrelatedtotheoccurrenceofunexpectedsituationsinlife.Forthepreservationofthepersonnel’shealth,acompletecheck-upprogrammeisavailableforeachemployeeonceayear.
It isofkey importance in theMNB’sorganisationalculture that employees can fulfil their family rolesas well and can perform their workplace taskswith a balanced family background. As a result ofa number of measures and successful initiativesand as an acknowledgementof its Child-focus andFamily-friendlyProgramme,theMNBwonthetitleof‘Family-friendlyWorkplace’presentedbytheMinistryofHumanCapacitiesin2016aswell.Withthistitle,theMinistry appreciated the efforts, programmes,initiatives and system-level solutions undertakenby the central bank voluntarily and irrespective ofcompetition, in order to support employees withfamilyandchildren.
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Changes in staff number
Changes in the staff number of theMNB in 2016weredeterminedbythelabour-intensivenessofthetaskstobecompletedandbymeasuresrelatedtothetransformationoftheorganisation.
Asaresultofthenaturalmigrationandquality-drivenreplacements,theemploymentof171employeeswasterminatedduringtheyear.
In order to secure an adequate workforce for theoperatingstructurealignedwiththechallengesandtheMNB’sexpandedtasks,276newentrantswererecruited to fill vacant or new positions in 2016.Duringtheyear,thenumberofemployeesjoiningtheso-called‘inactivepayroll’–whoarenotincludedinthestatisticalheadcount–fellshortofthenumberofthosereturningfromthe‘inactivepayroll’by12.Therelevanteffectalsoincreasedtheclosingheadcount.
At end-2016, the total staff number was 1,384employees; the number of employees was 117personshigherthanatend-2015.
In2016,theaveragestaffnumberoftheMNBwas1,326employees,exceedingthatofthepreviousyearby52.
Indualeducation,theMNBsupportedandaccepted17studentsastrainees.
Asregardstheaverageageofemployees, itcanbestatedthatthestaffbecameevenyounger:in2016theaverageageofemployeeswas40.
Procurement
LikeothercentralbanksintheEuropeanUnion,theMNB conducts public procurement procedures inrespect of purchaseswhere the value reaches thevalue limits of national public procurements. TheMNBisstillsubjecttopublicprocurementjurisdictionbasedonCommissionDecision2008/963amendingtheAnnexestoDirectives2004/17/ECand2004/18/ECoftheEuropeanParliamentandoftheCouncilonpublicprocurementprocedures,asregardstheirlistsofcontractingentitiesandcontractingauthorities.
TheprocurementprocessesoftheMNBareregulatedbytheinternalregulationsoftheDirectorGeneralandthebusinessmanagementmanual,inaccordancewiththeprevailingActonPublicProcurement.
Asregardsprocurementsin2016,therewerethreetypesofprocurementproceduresattheMNB:
–otherprocurementbelowanetamountofHUF2million;
–otherprocurementreachinganetamountofHUF2million,butnotreachingthepublicprocurementvalue limit (in 2016 this included procurementsbetween thenet amountofHUF2and8millionbasedonvalue);and
–publicprocurement.
Procurement procedures below net HUF 2millionare conducted by the cost-bearing organisationalunitswithintheirownsphereofresponsibility,whileprocurementsandpublicprocurementsreachingthevalueofnetHUF2millionarearrangedbytheCentralProcurementDepartmentoftheCentralProcurementand Operation Directorate with support from theorganisationalunitsconcerned.
In2016,207procurementrequestswerereceivedandprocedureslaunched,ofwhich62procedureswerecarriedoverto2017.
Number of procedures in 2016 (closed with theconclusion of a contract): 149 (of these 62 werebroughtforwardfrom2015)
–publicprocurement:60;
–otherprocurementinexcessofnetHUF2million:89.
ThetotalvalueofcompletedprocedureswithavalueinexcessofanetamountofHUF2millionrepresentedatotalexpenditureofHUF4,571millionforthecentralbank.
Environmentally-conscious operation
In 2016 again, the environmental activity of theMNBwasdeterminedbytheenvironmentalstrategyapplicabletotheperiod2014-2016.Alongwiththeenvironmentally-consciousdevelopmentofbuildings,themeasures implementedwere aimed at furtherenhancingtheenvironmentalperformanceofthecashsupplychain.
In2014,theMNBsetthegoalforitsheadofficetoachieve,bytheendof2016,the‘verygood’building
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certificationintheinternationalenvironmentalratingsystem(BREEAMIn-Use),whichisonegradehigherthanthecurrentrating.Itimplementedthechangesanddevelopmentsnecessaryfortheupgrading.Theexternalauditofthecomprehensivebuildingrating(MNBHeadOffice,LogisticsCentre)wasperformedin November 2016, and the MNB obtained the‘veryGood’rating.Basedontheassessmentofthebuildings’ certification resultbyexternal auditor, itshouldbeemphasisedthatnolistedbuildinghaseverobtained suchhigh-level certification,which in thecaseoftheMNBHeadOfficeisanoutstandingresultbyinternationalstandardsaswell.FromthedataoftheBREEAMIn-Usebuildingcertificationperformedinvariouscountriesoftheworlditcanbeestablishedthatmorethan50percentofthebuildingsdonotreachthe“veryGood”rating.Basedonthis,theMNBHeadOfficeandtheLogisticsCentrebuildingsbelongtothetop50percentgloballyaswell.Accordingtotheexternalexpertassessment,theLogisticsCentreperformsinlinewithitsage,whiletheHeadOffice’sperformanceisoutstandingbyinternationalstandardsaswell,sinceinthatcategorythemosttypicalratingofthebuildingsofsimilarageis“Pass”and“Good”.
In 2017, theMNB’s environmental strategywill bereviewed, which will also include the analysis ofthefurtherstepsrelatedtothedevelopmentofthebuildings.BasedonthescoreachievedinthecaseoftheLogisticsCentre,itisnotunfeasibletosetthegoalofachievingthe“Excellent”rating.InthecaseoftheHeadOffice, the retentionandconfirmationof the“veryGood”ratingmaybesetasatarget.
The 2014-2016 environmental strategy periodwas closed at the end of 2016. In relation to theimprovementofthecashsupplychain’senvironmentalperformance,basedonthedetailedenvironmentalreview of theMNB’s subsidiaries involved in cashproduction, in 2016 Pénzjegynyomda Zrt. andDiósgyőriPapírgyárZrt. started thepreparation forthe implementation of the MNB’s environmentalmanagement system (KÖvHIR). In 2017, thesubsidiaries will obtain the EMAS certificate – theinternationalaccreditationrecognisingenvironmental-friendly operation. In relation to the furtherenhancementofthecashsupplychain’senvironmentalperformance,inthemedium-termstrategicperiodof2017-2019thefocuswillbeonthesurveyofthecashlogisticsproviders’environmentalperformance.
ThetrendsintheMNB’senvironmentalperformanceare mostly determined by energy consumption,
and particularly by energy consumption relatedto theoperationof thebuildings.The totalenergyconsumption of the properties included in theenvironmental management system (Head Office,LogisticsCentre,businesssiteatKrisztinakrt.)declinedinthelastthreeyears,fallingshortofthe2013baseby2.6percent.(Accordingtotheenvironmentaltarget,the goal was to reduce total energy consumptionby 10 per by 2016 compared to the 2013 base.)Although the target was not achieved in nominalterms, the improvement in the efficiency of totalenergyconsumptioniswellreflectedbythefactthattheMNB’spercapita(specific)energyconsumptionfellby18.5percentinthelastthreeyears.
In the case of the targets set for the reduction ofenergy consumption, it is difficult to formulatea responsible undertaking due to the extremeweather conditions accompanying globalwarming;nevertheless,continuouseffortsshouldbemadetoimprovespecificenergyconsumption.
The operation of the MNB’s environmentalmanagement system (KÖvHIR) allows for thecontinuousmonitoringoftheenvironmentalfactorsthat result in significant environmental impacts,and also allows intervention if necessary for theimprovementofenvironmentalperformanceyearbyyear.TheMNBintendstomaintainandenhancethissysteminthe2017-2019strategicperiodaswell. Inrelationtothis,itisadvisabletoexaminethepossibilityofintegratingtheenvironmentalmanagementsystemsto be implemented by the subsidiaries involved inbanknoteproductionintheMNB’ssystem.
In2016,thesystemofselectivewastecollectionwasstandardised in the MNB’s properties, as a resultof which the possibility of recycling metal, plasticandglasswaste,inadditiontopaper,isguaranteedin all Budapest-based MNB properties. Importantprogresswasachievedinthedevelopmentofwastemanagement in connection with the utilisation of‘banknotebriquettes’.From1January2016,insteadofthepreviousutilisationforcharitypurposes,so-called‘greenelectricity’ is generated from the ‘banknotebriquettes’indomesticpowerplants,whichisamoreadvantageoussolutionintermsoftheprotectionofthe environment. The new system lived up to theexpectations;basedontheexperiences,theserviceprovider isflexible inacceptingandprocessing thewaste consignments that occasionally exceed theusualvolume,andtherecycledproductenters intobusinesscirculation.
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Operational risk management
ThesuccessfulimplementationoftheMNB’sstrategicobjectivesandtheprotectionofitsgoodreputationandassetsarecruciallyimportantvalues.Anefficientoperational risk management system plays animportantroleintheprotectionoftheseobjectivesand values. With that in mind, the identification,assessment and continuous internal monitoringof operational risks and the implementation ofthe appropriate response measures constitute anintegralpartoftheMNB’scorporategovernance.Inordertocontinuouslymaintaintheoperationalriskmanagementactivityatahighlevel,itisessentialtomonitorinternationalbestpracticesandtoimprovetheMNB’ssystemsinlinewithsuch.
In order to be able to adequately discharge itsfundamental tasks in critical situations as well,the MNB operates efficient business continuitymanagement.Withinthat,itcontinuouslyupdatesitsbusinesscontinuityanddisasterrecoveryplans,thereliabilityofwhichistestedeveryyear.The1-weekrealtimeintegratedtestperformedinrespectoftheoperationofthepaymentsystemandforeignreservemanagementbearsutmostimportance.
3.13 INTRODUCTION OF THE ESCB COMMITTEES
Since Hungary’s accession to the European Union,the MNB’s management and experts have beenparticipatingintheworkoftheESCBcommitteesandtheirworkinggroups.Thismembershipandcooperationprovides an opportunity for national central bankstowork together and formulate joint positions andalso enables the representatives of national centralbankstoobtaininformationontheECB’sactivitiesonaregularbasis.On31December2016,fifteenESCBcommitteesandtwoothercommitteesassistingthework of the ESCBwere in operation. In connectionwith the launch of the so-called Single SupervisoryMechanism(SSM) inNovember2014, inadditiontothetwoexistingconfigurations(euroareacompositionandESCBcomposition)somecommitteeshaveheldmeetingsinSSMcompositionsince2014aswell,withtheattendanceofrepresentativesofthesupervisoryauthoritiesoperatingasorganisationsindependentofthecentralbanksoftheMemberStatesparticipatingintheSSM.
Thefollowingprovidesabriefsummaryofthefieldsofactivity(mandates)ofeachESCBcommittee:
Accounting and Monetary Income Committee (AMICO): This Committee develops and regularlyreviewstheaccountingpolicyprincipleswhichdefinetheframeworkoffinancialstatementsinaccordancewiththeStatuteof theESCBandthemethodologyof the preparation of regular financial reports,facilitating their co-ordination at an internationallevel.Itmonitorsthecalculationofmonetaryincomein accordance with the risk management processdeveloped by the security framework system ofaccounting.
Banknote Committee (BANCO): This Committeedetermines the eurobanknoteneedsof euro areacountries,coordinatestheproductionofbanknotesandworksoutthestockpilingandbanknoteprocessingpoliciesofeurobanknotes.Itstasksincludesharingexperienceintheproductionofeurobanknotes,theexaminationanddevelopmentofsecurityfeaturestoprevent euro banknotes from being counterfeited,and the assessment of security risks related tothe production of the euro. It contributes to theharmonisationofpracticesappliedintheeuroarea,the development of the system which monitorscounterfeiting and the verification of statisticsregardingeurobanknotesandcoins.
Committee on Controlling (COMCO): COMCO hasbeenanESCBcommitteesinceJuly2007(onlyeuroareaNCBsparticipateintheworkofthiscommittee).It contributes to theapplicationandenhancementoftheCommonEurosystemCostMethodology,andpreparesanalysesonthecostdataandcoststructureofcertainfunctionsandproductsoftheEurosystem/ESCB.Intheareaofmanagementinformationsystems,itservesasanimportantforumforco-operationandinformationexchangeonissuesconcerningtheESCBasawhole.
Eurosystem/ESCB Communications Committee (ECCO): This Committee contributes to thedevelopmentoftheexternalcommunicationpolicyoftheEurosystem,theESCBandtheECB,withtheaimofmakingtheobjectivesdefinedbytheEurosystem/ESCB more transparent and understandable, andinformingthepublicofthetasksandactivitiesoftheEurosystemandtheESCB.
Financial Stability Committee (FSC):TheFSChasbeenoperationalsince2011,whentheBankingSupervisionCommittee (BSC) ceased operation. Its task is toprovideprofessionalsupporttothedecision-makingbodiesoftheEuropeanCentralBankintheirfunctions
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relating to financial stability and macroprudentialpolicyissues.
Internal Auditors Committee (IAC):Byreviewingtherelevant common projects, systems and activitiesandbyprovidingforco-operationincertainauditingissueswhichareof‘commoninterest’fortheECBandnational central banks, this Committee assists theESCBinachievingitstargets.
International Relations Committee (IRC): The IRCassistsincarryingoutthosetasksoftheESCBthatarerelatedtointernationalcooperationandcontributestoformulatingthepositionoftheEurosystemregardingthevariousareasofrelationswithnon-EUcountries.
Information Technology Committee (ITC): ThisCommittee contributes to the development of theinformation technology policy and strategy of theEurosystem and the ESCB as well as the relatedguidelineswith special regard to security concerns,andprovides technical advice to other committees.Furthermore,itinitiatesandimplementsEurosystemandESCBleveldevelopmentsandindependentprojects.
Legal Committee (LEGCO): LEGCO provides legalassistancefortheworkoftheESCB;inparticular,itcontributes to the maintenance of the regulatoryframeworkof theEurosystemandtheESCBandtothe reviewof the transpositionof legal regulationsintonationallaw,andmonitorsandreportsonhownational authorities and EU institutions complywith their consultation obligations relating todraft legislation in areas falling within the ECB’scompetence.
Market Infrastructure and Payments Committee (MIPC): The Payment and Settlement SystemsCommittee(PSSC)continuesitsoperationunderthename ofMIPC since 1 April 2016. This CommitteeassiststheESCBinthesmoothoperationofpaymentsystems and in connection with the cross-borderuse of collaterals. Furthermore, it supports theESCB in general and ‘oversight’ issues relating topayment systems, as well as in strategic decisionsrelated to securities clearing and settlementsystems. In accordancewith its new name, in thefuturethecommitteewillpaymoreattentiontothestrengtheningofoversightactivity, the fosteringofpan-European developments in the area of high-andsmall-valuepayments, securitiesandcollateralmanagement.
Market Operations Committee (MOC): The MOCassiststheESCBintheimplementationofthesinglemonetarypolicyandtheexecutionofforeignexchangetransactions, themanagementof theECB’s foreignreserves and in the appropriate adaptation of themonetarypolicytoolsappliedbythecentralbanksofMemberStateswheretheeuroisyettobeintroduced,aswellasintheimplementationofERMII.
Monetary Policy Committee (MPC):ThisCommitteeassiststheESCBintheimplementationofthesinglemonetaryandexchangeratepolicyoftheCommunity.Inaddition,itprovidesassistanceintheexecutionoftheESCB’s tasks related to the coordinationof themonetaryandexchangeratepoliciesoftheNCBsofnon-euroareaMemberStatesandtheECB.
Organisational Development Committee (ODC): The ODC was set up in July 2013 with only euroareamembers. Itassists theworkofECBdecision-makerswith proposals regarding the planning andorganisationalissuesrelatedtotheoperationoftheEurosystemand theSingleSupervisoryMechanism(SSM).Inaddition,italsocoordinatestheworkoftheEurosystemProcurementCoordinationOffice(EPCO),and runs the operational risk management andbusinesscontinuitysystemoftheEurosystem/ESCB.
Risk Management Committee (RMC):TheRMCwassetupinSeptember2010andconsistsofeuroareamembersonly. Its task is toassist theworkofECBdecision-makers in managing and controlling risksarisingfromthemarketoperationsoftheEurosystembymeansofanalysesandproposals.
Statistics Committee (STC): The STC assists in thecollection of statistical information required forcarryingoutthetasksoftheESCB.Itcontributes,interalia,totheelaborationandcosteffectiveapplicationofnecessarymodificationsinstatisticaldatacollection.
OthercommitteesassistingtheworkoftheESCB:
Budget Committee (BUCOM):ThisCommitteeassiststheGoverningCounciloftheECBonissuesconcerningthebudgetoftheECB;itsmembersarethecentralbanksoftheeuroareaMemberStates.
Human Resources Conference (HRC):Theobjectiveof this committee, established in 2005, is to serveasaforumforthecentralbanksoftheEurosystem/ESCB in the exchange of information, opinion and
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experienceson issuesconcerningthemanagementofhumanresources.
3.14 THE MNB’S RESEARCH ACTIVITIES IN 2016
Academic research is typically carried out by theResearch Directorate, while applied research isconductedbothbytheResearchDirectorateandtheanalysts of other economic directorates. Academicresearchisultimatelypublishedininternationalanddomesticscientificjournals.AppliedresearchismostlypresentedinthededicatedpublicationsoftheMNB:theMNB Working Papers(issuedinEnglishonly),theMNB Occasional PapersseriesandtheFinancial and Economic Review. In addition to the publications,participationininternationalconferencesandintheresearchnetworksandworkinggroupscoordinatedbytheECBallformpartoftheMNB’sresearchactivity.
Publications
In2016,fivepapersoftheMNB’sresearcherswerepublished in highly ranked international journals.Oneofthejournalsthatpublishedastudythatwasprepared intheMNBwasthe International Journal of Central Banking, which is the top internationaljournal in central banking. The other four MNBpapers were published by the European Economic Review, theEconomics of Transition, the Journal of Corporate Finance, and the Industrial and Labour Relations Review. In addition, two papers writtenby MNB authors were published in Közgazdasági Szemle(Economic Review),andtheStatisztikai Szemle (Statistical Review) also published a central bankstudy.Applied researchfindingswerepresented intheMNB’spublications.FourpaperswerepublishedintheMNB Working PapersseriesandthreeintheMNB Occasional Papers series, while the MNB’semployees contributed to the 2016 issues of theHitelintézeti Szemle (Financial and Economic Review) withfourteenstudies,elevenbookreviewsandfourconferencereports.
Conferences and lectures
TheMNBorganisedtheBudapestEconomicSeminarSeries (BESS) in 2016 again, with internationallyacknowledged economists presenting their studiesto those interested. In 2016, presentations weremade in the MNB by researchers from the UK,Austrian, Portuguese and Slovakian central banksandcolleagues from the following topuniversities:
HECMontreal,CERGE(Prague),ColegioCarloAlberto(Torino),TilburgUniversity,UniversityofBonn,andSapientiaUniversity.
The MNB’s researchers held presentations at anumber of international conferences as well as atseveral centralbanksanduniversities.Of themainconferences, ones that deserve mention includethe conference organised jointly by the EuropeanEconomic Association (EEA) and the EconometricSociety(ES)inAugustinMannheim,theconferenceoftheRoyalEconomicSociety(RES)inMayinBristol,theNorthAmericanSummerMeetingoftheEconometricSociety in Philadelphia, each of which includeda presentation by a researcher from theMNB. Inaddition, theMNB’s studieswerepresentedat theJuneannualconferenceofComputinginEconomicsandFinance(CEF)inBordeauxandattheprestigiousconference series entitled Money in Macro andFinanceinBath.RegardingpresentationsinHungary,twoMNBstudieswerepresentedintheseminarseriesof theResearchCentre for Economic andRegionalStudies of the Hungarian Academy of Sciences aswell,andmanylecturersalsorepresentedtheMNBattheDecemberconferenceoftheHungarianSocietyofEconomics.
Several MNB staff members participated in theresearchnetworksandworkinggroupscoordinatedbytheECB.Theanalystsandresearchersparticipatedin the regular meetings of theWorking Group onEconometricModelling(WGEM),theWageDynamicsNetwork (WDN) and the Household Finance andConsumptionNetwork(HFCN);atoneoftheWGEMmeetings in Frankfurtmeetings of theWGEMoneofthepresentationswasdeliveredbyanMNBstaffmember.
3.15 PUBLICATIONS AND CONFERENCES ORGANISED BY THE MNB IN 2016
Publications
Regular publications
Inflation Report
TheInflationReportispublishedquarterlyinordertoenablethepublictounderstandandfollowtheBank’spolicies.TheReportprovidesaregularpresentationofpastandexpectedfuturetrendsininflation,evaluatesthemacroeconomic developments that determine
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inflation,andprovidesasummaryoftheforecastsandconsiderationsonthebasisofwhichtheMonetaryCounciltakesitsdecisions.
Financial Stability Report
Publishedbiannually,thisReportoutlinesthepositionof theBankregardingthechangesobserved in thefinancial system and describes the effect of thesechangesonthestabilityofthefinancialsystem.TheanalysisintheReportfocusesontheforward-lookingassessmentoflong-termtrendsandrisks.
Growth Report
The annually publishedGrowthReport is intendedto present Hungary’s longer-term growth path(occasionallyencompassinganentirebusinesscycle)anditsdeterminants,usingstandardandalternativeindicators.TheReportprovidesanannualoverviewofthemostimportanttrendsshapingeconomicgrowthovertheshort,mediumandlongerterm.
Macroprudential Report
The purpose of the Macroprudential Report,publishedannually,istopresentthemacroprudentialinstruments applied by the MNB to preventand address the systemic risks identified andcommunicated in the Financial Stability Report, aswell as their effects and theadjustmentofmarketparticipants. In line with the MNB’s Statute andmacroprudentialstrategy,thepublicationintendstomake theMNB’smacroprudentialmeasures easiertofollowandunderstandbothfortheactorsofthesectorandthegeneralpublic.
Trends in Lending
The objective of the publication entitled Trends inLendingistopresentadetailedpictureofthelatesttrends in lending and to facilitate the appropriateinterpretationofthesedevelopments.Tothisend,itelaboratesonthedevelopmentsincreditaggregates,thedemandforloansperceivedbybanksandcreditconditions.
Housing Market Report
The MNB’s new “Housing Market Report”, whichwasfirst published in the springof 2016, presentscurrent trends in the Hungarian housing marketsemi-annually.Thepurposeof thepublication is to
provideacomprehensiveoverviewoftheshort-termandlong-termtrendsaffectingtheresidentialpropertymarket and to present the regional differences inthe domesticmarket. The HousingMarket Reportpresentsatopicwhichhasspecialrelevanceforthecentralbankaswell.Thehousingmarketrepresentsa key area at the level of the individual economicoperators (households, financial institutions), aswell as at the level of national economy. Housingmarketdevelopmentsarenotonlycloselyrelatedtothefinancialstabilityissues,butalsofundamentallydeterminetheshort-termandlong-termprospectsofeconomicactivity.Housingmarketdevelopmentsandinparticularthevolatilityofhousingpricesinfluencethe sector’s savings and consumption decisionsthrough households’ wealth, while influencing theportfolio,profitabilityandlendingactivityoffinancialinstitutionsviamortgageloancollateral.Overall,wecanstatethatthehousingmarketisintegrallylinkedtoallareasofthenationaleconomy.
Financial Consumer Protection Report
TheMNBhaspublished,onlineandinprintedform,itsFinancialConsumerProtectionReportonceayearsince2016.Thepurposeofthepublicationistoinformtheinstitutionsofthefinancialsystemandthepublicaboutcurrentfinancialconsumerprotectionissues,therebyalso enhancing the risk awareness of stakeholders,whileatthesametimemaintainingandstrengtheningconfidence in thefinancial system.TheobjectiveoftheMNBistoensurethattheadministrativeactivityperformedtoidentifyandmitigaterisks,thecentralbank’s informative and educational activity and itsworkaimedattheimprovementoffinancialliteracyinHungaryallcontributetoensuringthatthenecessaryinformation is readily available for stakeholders tomake financial decisions, and to strengthening thestability of the financial system as a whole. Aftersummarising thepriorities, the report presents theMNB’sfinancialconsumerprotection,administrativeandcustomerserviceactivity,theprioritycasesthataffected a wide range of consumers in the periodunder review, aswell as the risks identified by theMNB,whichmaybearspecialimportanceintermsofconsumerprotection.Previously,thepublicationwasissuedunderthetitleofFinancialConsumerProtectionandMarketSupervisionReport.
Risk Outlook for Non-Bank Financial Sectors
Startingfrom2015,thereportRiskOutlookforNon-BankFinancialSectorshasbeenpublishedbytheMNB
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onceayear.Thisreportpresentstherisksofinsurers,funds,financialenterprisesand intermediaries, co-operativecreditinstitutionsandthecapitalmarket.The Risk Outlook for Non-Bank Financial Sectorsmainly focusesonadeeperanalysisof the sectorsthatarenotpresentedoronlytoucheduponbrieflyintheFinancialStabilityReport,andthusitdoesnotcontainfindingsrelatedtothebankingsectoroutlinedindetailtherein.Themainobjectiveofthispublicationistoincreasetheriskawarenessofthoseactiveinthesupervisedmarketsandtostrengthentheconfidencein the sectors. The reportprovides anoverviewofthe key observations from official investigationsandcontinuoussupervisionbrokendownbyareas,highlightingthemainprudentialrisksidentifiedintheperiodunderreview.
Report on the Balance of Payments
TheReportispublishedfourtimesannuallytoinformmarket participants on developments in balanceof payments and to provide deeper insight intothe correlations in the economy. Developments inthe external balance are key to financial stability,as processes relating to the balance of paymentsallow for conclusions to be drawn concerning thesustainabilityofeconomicgrowthandtherelevantrisks.TheMNBcarriesoutcomprehensiveandregularanalyses of trends relating to Hungary’s externalbalance,examininganumberofindicatorstoassessmacroeconomicimbalances.
Payment Systems Report
Onceayear, theReportprovidesa comprehensivereviewofthetrendsinpaymentsandthefunctioningof theoverseenpaymentandsecuritiessettlementsystemsinHungary,themainrisksandanymeasurestakenbytheMNBwhicharenecessarytomaintainthesmoothprovisionofpaymentservicesandfacilitatethereliableandefficientoperationofthesupportingpaymentandsettlementsystems.
Public Finance Report
With the aim of supporting the fulfilment of itsfundamentaldutiesstipulated intheMNBAct,andparticularly the task related to the definition andimplementationofmonetarypolicy,theMNBanalysesthedevelopmentsinthebudgetarydeficitanddebt,monitors thefinancingof thegeneral government,analyses the impact of financing on themonetary
processes, on the capitalmarkets andon liquidity,and researchesfiscalpolicy issues.Pursuant toActCXCIvof2011ontheEconomicStabilityofHungary,theGovernoroftheMNBisamemberoftheFiscalCouncil (FC), and thus the professional expertiseandaccumulated informationavailable intheMNBcanindirectlysupporttheworkoftheFC.TheMNBpreparesbackgroundanalysesforthedutiesoftheFC stipulated in the Stability Act, andmakes themavailablefortheFC.ThegeneralpubliccanlearnaboutthemostimportantresultsoftheseexpertanalysesfromthepublicationentitledPublicFinanceReport(formerlyentitled:General government analysis).
Annual Report
Published once annually, this report presents theBank’sbusinessreportonthepreviousyearanditsauditedannualfinancialstatements.
Semi-annual Report: Semi-annual Report on the MNB’s Activities
TheSemi-annualReportispublishedonceayear,inSeptember.Thereportisthecentralbank’sbusinessreportrelatedtothefirsthalfoftheyear.
Interim Report: Quarterly Report on the MNB’s Activities
The Interim Report is published twice a year, inAprilandNovember,betweentheannualandsemi-annual reporting periods. It gives account of thebasicactivitiesoftheoperatingunitsoftheBankasstipulatedintheMNBAct,inrespectofthefirstandthethirdquarters:monetarypolicy,overviewofthefinancialsystem,FXreserves,paymenttransactions,cashlogisticsactivities,andstatisticalchanges.
Supervisory Board Report
ActCXXXIXof2013ontheMagyarNemzetiBank(MNBAct)prescribesthatthemembersoftheSupervisoryBoard have a reporting obligation to the NationalAssemblythatelectsthemandtotheMinisterwhoappointsthem.Inrespectofthereportingobligation,the rules of procedures of theMNB’s SupervisoryBoard, adopted in 2015, state the following: “Thechairman and members of the Supervisory Boardprepare–inlinewiththeobligationsetforthbytheMNBAct–a jointreportontheiractivityannually,and send it to the National Assembly and the
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Minister. Beyond this, the chairman andmembersoftheSupervisoryBoardalsohaveadhocreportingobligationtotheNationalAssemblyandtheMinisterelectingandappointingthem,respectively.”ThefocusoftheSupervisoryBoard’sdutiesspecifiedintheMNBActisonthecontrolofthecentralbank’scontinuousoperation.TheSupervisoryBoardperformsitsactivitybasedonthe lawsapplicableto it, itsownrulesofprocedure, and the internal operational principlesdefinedbythemembersjointlyduringtheoperationoftheboard.ThemainformofthecontrolactivityisthemeetingsoftheSupervisoryBoard.Thetopicsat these meetings are determined by the annualrollingwork-planbasedon theaudituniverse. TheSupervisoryBoard’s report is apresentationof theSupervisoryBoard’sactivity.
Central Bank Almanac
In a comprehensible format, the Central BankAlmanac provides a retrospective summary of themostimportanteventsofeconomiclifeandthemainstepsofmonetarypolicyintheyearunderreview.Thevolume,whichgivesacomprehensivepresentationand evaluation of decisions and results alreadypublishedearlier,allowsareviewandreassessmentoftheeventsofthepastmonthsforthepublicthatisinterestedinthesubject.TheCentralBankAlmanacisalsodesignedtosummarisealltheprofessionalMNBarticlespublishedduring theyear themessagesofwhich–althoughtheymaynotbeeternal–aidintheunderstandingofthemaineconomicdevelopmentsandcentralbankdecisionsoverthelongerterm.Thispublicationisreleasedonceayear,inHungarian.
Analyses, studies, statistics
MNB Occasional Papers
This series presents economic analyses relatedto the MNB’s monetary policy decision-makingprocess. It aims at increasing the transparency ofmonetarypolicy.Accordingly, inadditiontostudiesalsodescribing technical details of forecasting, thepublicationcoverseconomicissuessurroundingthepreparatorywork for decision-making aswell. TheOccasional Paper (OP) seriesof theMNBprimarilypresentspractical (applied) research related to thecentralbank’sprofessionalareas,summarisestheoriesandinternationalfindingsinrelationtospecifictopics,andprovidesanalysesfacilitatingtheunderstandingofcentralbankdecision-making.
MNB Working Papers
TheMNBWorkingPapersseriespresentstheresultsoftheoreticalresearchconductedattheMNB.Thestudies published in this series primarily addressthe audience of academic, central bank and otherresearchers, with the goal of encouraging readerstooffercommentsthattheauthorsmayuseintheirfutureresearch.Sincetheautumnof2005,thisserieshasbeenavailableonlyinEnglish.
Financial and Economic Review
Withahistoryofover adecade, the Financial andEconomic Review is a recently rejuvenated socialandscientificjournalofferinganincreasingrangeofcontentandagraduallydevelopingsetoftopics,withcontemporarytypography.ItispublishedinseparatevolumesinHungarianandinEnglish.Sincetheendof2014,thejournalhasbeeneditedandpublishedbytheMNB.Thewritingspublishedinthejournalincluderevised studies, essays, book reviews, conferencereportsandreportsonotherscientificactivities.ItisavailableonthewebsiteoftheFinancialandEconomicReview(http://english.hitelintezetiszemle.hu/).
Educational Booklets
The MNB considers the development of financialliteracyinHungaryasoneofitsprioritytasks,hence,relyingontheavailablemeans,itintendstofacilitateeducation in the field of economics aswell as thewidening and enhancement of financial literacy.InMay2016,thecentralbank launchedaseriesofeducational booklets on economic, financial andmonetarypolicymattersinHungarianandinEnglish.
Other publications
70 years of the forint: Road from hyperinflation to price stability
Theeveryday roleand importanceof inflationalsojustifythebirthofthispublication.Theanniversaryoftheintroductionofforinton1August1946offeredaproperopportunitytodrawtheconclusionsinrespectofinflationinHungary.
The first two years of the Self-financing Programme
TheMNBannouncedtheSelf-financingProgrammeinspring2014.Theprogramme,whichentailedthe
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transformationoftheentiresetofmonetarypolicyinstruments,asanunconventionaltool,contributed–inadditiontothereductionofgrossexternaldebtandforeigncurrencydebt–tomonetaryeasing,andalsoplayedasubstantialrole intheupgradeoftheHungariandebtratingtotheinvestmentgradeinMay2016.TheMNB’sexpertsanalysetheexperiencesofthefirsttwoyearsoftheSelf-financingProgrammeinavolumeofstudiescomprisingoffouranalyses.
Funding for Growth Scheme – Experience with the Magyar Nemzeti Bank’s instrument to incentivise bank lending
The objective of the publication is to present theresultsachievedbytheFundingforGrowthSchemelaunchedin2013untiltheendof2015.
By publishing the volume of five studies theMNBwishestohelptheHungarianandtheinternationalpublictogainadeeperinsightintotheeffectsoftheprogrammesofar.
2016 Macroprudential strategy of the MNB
ThemacroprudentialstrategyoftheMNBpresentstheoperationofthemacroprudentialfunctionindetail.The identificationandmonitoringofsystemicrisks,the applicationof themacroprudential toolkit, theevaluationandfollow-upoftheinterventions’effects,andcoordinationwithHungarianand internationalstakeholders constitute the main components ofthe macroprudential function. The clear statutorymandateandinstitutionalindependenceoftheMNBcan only properly serve macroprudential strategicobjectivesifmacroprudentialpolicyisastransparentandcredibleaspossible.Inthefuture,theMNBwillgiveanaccountoftheadjustmenttomacroprudentialinterventions and the impact and follow-upof theinterventionsinitsannualMacroprudentialReports.
Half-Term Report 2013-2016
TheHalf-TermReportsummarisesandevaluatestheworkperformedintheperiodsinceMarch2013andprovidesanoverviewofthemostimportantchangesinmonetarypolicyand itsrelated instruments, thenewtasksandinitiatives.Italsopresentsthechangesinthelastthreeyearsinthecentralbank’sapproach,theexpansionoftheformerdutiesandthedifferencesinthecentralbank’sworkcomparedtothepre-2013period.
The Self-financing Programme of the Magyar Nemzeti Bank
Priortotheglobalfinancialcrisisthateruptedin2008,theHungarianeconomyhadaccumulatedhighexternaldebt, and thus its external exposure increased. Inrecentyears,however,theexternalbalancepositionofthecountryhasimprovedconsiderably,andexternalvulnerabilityhasdeclined,allowingatargeteduseofforeign exchange reserves. The central bank’s self-financingprogrammeannouncedinApril2014aimsatreducingtherisksstemmingfromthehighexternalandFXgovernmentdebt.ThispublicationpresentshowHungarywasabletorenewitsmaturingexternalFXdebtfromforintsandhowitwasfacilitatedbytheMNB’sprogrammeoverthepastmorethanoneyear,i.e.thetransformationofthemainpolicyinstrumentandtheintroductionofthecentralbankinterestrateswaptenders.
The Renewed Magyar Nemzeti Bank 2013–2015
Theglobaleconomiccrisisof2008–2009openedanewerainmonetarypolicy.Partlyoutofnecessity,andpartlybecausetheyrecognisedtheshortcomingsoftheirearlierperceptionsconcerningtheirownroles,thecentralbanksoftheworldstartedtoplayamoreandmoreactiverole inthestabilisationand intherecoveryfromtheseriouseconomicdamagescausedbythecrisis.Intermsofdomesticmonetarypolicy,thisturnaroundonlystartedinthesummerof2012andunfoldedafterMarch2013.Followingitsappointment,thenewcentralbankmanagementattemptedtotakecarefulbutdeterminedstepstoworkoffthebacklogaccumulated before against the best internationalpractice,andthusreneweddomesticmonetarypolicyinanumberofareas.Thispublicationprovidesabriefsummaryoftheseeventfultwoyears,takingstockofthemostimportantdomesticmonetarypolicysteps.
TheMNB’spublicationsareavailableonitswebsite(http://www.mnb.hu/en/publications).
Series of books published by the MNB
On5March2015,thecentralbanklaunchedanewseries of books on the subjects of economic andmonetarypolicy.Thefirstvolumeoftheserieswaswritten by Dr GyörgyMatolcsy. The book entitled Balance and Growthprovidesadetailedpresentationofalltheneweconomicpolicyconcepts,innovationsandinstrumentsthatresultedinthesuccessofthe
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Hungarianeconomybetween2010and2014,whichwassignificantfromtheaspectofeconomichistoryas well, achieving fiscal and financial stabilisation,and thus creating the fundamental conditions forsustainablegrowth.
Competitiveness and GrowthisthesecondvolumeoftheseriesofMNBbooksoneconomicsandmonetarypolicy.Itwaspublishedin2016andeditedbyDánielPalotaiandBarnabásvirág,ExecutiveDirectorsofthecentralbank.TheMNBdecidedtolaunchthisseriesoftradebooksincompliancewithitsmandate,asitsstatutorytasksincludethedevelopmentoffinancialliteracy and economic thinking in Hungary and –withoutjeopardisingtheBank’sprimaryobjective–thesupportoftheeconomicpolicyofthegovernment.
Complyingwithitsstatutorytasks,withthevolumeCompetitiveness and Growth, the Bank intends tocontributetothecollectivethinkingaboutsustainablegrowthandcompetitiveness.Thebookprovidesanoverviewofdomesticandinternationalexperiencesaswellasacomprehensivepictureofthemostimportantdeterminantsofeconomicconvergence.Inaddition,itidentifiesareaswhereprogressismostnecessary,andgivesproposalsforreformsthatmaycontributetotheincreasingofcompetitiveness.
Events organised by the MNB
As for events, the MNB pursues a strategy ofopennesswithitsassociateandpartnerinstitutions,which strengthens professional partnership. Theeventsorganisedby theMNB include internationalconferences, internal events and so-called culturaleventsaswell.
International conferences
The majority of the international, professionalconferencesthatlastforseveraldaysusuallyinvolve50–60people,althoughthenumberofparticipantsin some events may reach 150–200 people. ThemajorityoftheinternationalconferencesareheldinthebuildingoftheMNB.
Themostimportantinternationalconferenceeventsorganisedin2016wereasfollows:
Lamfalussy Lectures Conference
Theobjectiveofthisannualeventlaunchedin2014underthename‘LamfalussyLecturesConference’isto
invitedistinguishedlecturerstoHungarytosharewithandpresenttotheaudienceandfellowprofessionalstheir views on current issues in global economicpolicy,specificallyinmonetarypolicyandthefinancialsystem.ParalleltolaunchingtheLamfalussyLecturesConference, theGovernor of theMNB establishedthe Lámfalussy Award to recognise outstandinginternationalprofessionalperformanceandlifetimeachievementsthatinfluencetheMNB’sactivityandhaveamajorlong-termimpactondevelopmentsininternational monetary and financial policies. Theawardispresentedannuallyatagalaceremonylinkedtotheconference.
The conference, organised for the third time inFebruary 2016,was entitled “Professor Lamfalussy Commemorative Conference – His contribution to economic policy and the birth of the euro” andpaidtributetotheoeuvreofAlexandreLamfalussy,whopassedawayin2015.Thepresentationsoftheconferencewere delivered by renowned lecturers,including Luiz Awazu Pereira da Silva, DeputyGeneralManageroftheBIS(representingtheBankfor InternationalSettlements,the2016recipientofthe Lámfalussy Award), Benoît Coeuré, ExecutiveBoardMember of the European Central Bank andEwald Nowotny, Governor of the OesterreichischeNationalbank (both of whom have already beenhonouredwiththeLámfalussyAward),theGovernorof the National Bank of Belgium, the Presidentof the Euro50 Group and the Managing Directorof the European Stability Mechanism (ESM). Thepresentationswere followedby a panel discussionon the circumstances of the establishment of themonetaryunion,withtheparticipationofrenownedeconomists.
Theconferencewasheldatanexternal location inBudapestandwasattendedbymorethan400guests.
2016 summer committee session and seminar of the International Association of Insurance Supervisors
Inthesummerof2016,theInternationalAssociationof Insurance Supervisors (IAS) held its summercommitteesessionandrelatedseminarinBudapest;botheventswereorganisedandhostedbytheMNB.
The IAIS is an organisation covering over 200institutions from almost 140 countries, with theHungarian authority in charge of supervision as afounding member. The summer session includedmeetingsofthemostimportantIAIScommittees,with
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theparticipationofmiddleandtop levelmanagersofthe insurancesupervisoryauthoritiesofthe IAISmembercountries.
The5-dayconferencewasorganisedatanexternallocation,witharound400attendees.
2016 external meeting of the ESCB Legal Committee
In September 2016, the Legal Committee (LEGCO)of the European System of Central Banks (ESCB)helditsannualexternalmeetinginBudapestattheinvitationoftheMNB.TheLEGCOisacommitteeoflegalprofessionalsoftheEUMemberStates’nationalcentralbanksandoftheECB.CurrentlegalissuesandtopicsrelatedtotheESCBwerediscussedatthetwo-daymeeting.
OMFIF Economists Meeting
In September 2016, for the second time theMNBhostedthesocalledEconomistsMeeting,whichisoneoftheprestigiouseventsoftheOfficialMonetaryandFinancialInstitutionsForum(OMFIF).Thediscussionfocusedon“The role of monetary policy in promoting growth in the CESEE region and wider Europe”.Atthehalf-dayroundtable,seniorofficialsfromthePolish,CzechandRomaniancentralbanks,andfromdomesticand international financial institutions reviewedthe post-crisis role of the Hungarian, regional andEuropean monetary policy and the European andglobalfutureofmonetarypolicy.
Adam Smith seminar
InNovember2016,theAutumnmeetingoftheAdamSmithSeminarwasorganisedinBudapest,atwhichpolicy-makers active in the field of internationaleconomics and finances reviewed and discussedthecurrentdevelopmentsandoutlookoftheglobaleconomyataninformalgathering.ThiswasthesecondtimethattheMNBhostedtheevent,whichlooksbackonahistoryofalmosttwenty-fiveyears.Duringtheseminar, presentationsweredeliveredby top levelmanagersofforeignpeerinstitutions–includingtheUS Fed, the Czech, Icelandic, Japanese, Polish andTurkish central banks – and international financialinstitutionsanduniversities.Thetwo-dayprogrammealsoincludedseveralround-tablediscussionswiththeactiveinvolvementoftheparticipants.
MNB-EBRD conference on the out-of-court settlement of corporate non-performing loans
TheMNBandtheEuropeanBankforReconstructionand Development (EBRD) have been closelycooperatingsince2014withtheaimofpromotingtheefficientmanagementofnon-performingloans,whichin themedium termalso contributes to improvingHungary’scompetitivenessandmaypreventthebuild-up of non-performing portfolios in the future. ThecooperationisledbytheEuropeanBankCoordinationviennaInitiative,whichcallsfordetermined,timelyandtargetedactioninthisarea.
At the conference organised on 3 October 2016,thealmost100participantsreviewedtheguidelinesrelated to the best practices of the out-of-courtdebt reschedulingand the settlementof corporatenon-performing loans through compromise,which were prepared jointly by theMNB and theEBRD. The Hungarian Banking Association and therepresentatives of the banking system were alsoinvolved in the discussions. The purpose of theguidelines is to encourage banks to follow amorecooperativeandcoordinatedapproachinthosecaseswhenseveralfinanciallendersareinvolved.
Other international events
BESS at MNB lectures
9 March 2016, Martin Brown(UniversityofSt.Gallen)–DepositWithdrawalsfromDistressedCommercialBanks
7 April 2016, Stephen Millard(BankofEngland)–ADynamicModelofFinancialBalancesfortheUnitedKingdom
27 April 2016, Zsolt Sándor (SapientaUniversity)–RandomCoefficientDemandEstimationbyOptimalInstrument-Based Continuously Updated GMM(GeneralisedMethodofMoments)
4 May 2016, Burak Uras(TilburgUniversity)–EfficientAssetOpacitywithBanksandMarkets
18 May 2016, Alessandro Barattieri (CollegioCarloAlberto)–BanksInterconnectivityandLeverage
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26 May 2016, Thomas Hintermaier (University ofBonn)–HouseholdDebtandCrisesofConfidence
1 June 2016, Helmut Stix (OesterreichischeNationalbank)–BankingCrises,Bail-ins,andDepositorConfidence:LessonsfromCyprus
14 September 2016, Pavel Gertler (National BankofSlovenia),Boris Hofmann(BIS)–MonetaryFactsRevisited
28 September 2016, Matteo Cacciatore (HECMontreal)–HoursandEmploymentOvertheBusinessCycle
16 November 2016, Sudipto Karmakar (Banco DePortugal)–RealEffectsofFinancialDistress:theRoleofHeterogeneity
Courses of the central bank’s “Budapest School for Central Bank Studies” Training Centre
Spring courses 2016
Enrique Sentana (CEMFI) – The econometrics of financial markets, 21-25March2016
–Boundaries of mean-variance estimate. GMMestimatesandconclusions.
–Impact of the boundaries of the mean varianceestimation on the arbitrage portfolios and grossyield.
–Timeseriesmodelsfortheanalysisofvolatility.
–Methodsbeyondthemean-varianceanalysis.
Fabio Canova (BI Norwegian Business School) –Empirical methods for the study of the monetary transmission mechanism, 29March–1April2016
–Structuralvectorautoregression.
–FactorandFAvARmodels.
–Structural time series analysis with Bayesianestimation.
–Panelmodels,PanelvARmodelsandpartialpooledmodels.
Summer courses 2016
Barbara Rossi (UniversitatPompeuFabra)–Exchange rate dynamics and predictability, 27 June– 1 July2016
–Dynamicsofexchangerates.
–Timeseriesmodelsofexchangerates.
–Forecastsandtheirevaluation.
–Connectionofnon-normaldistribution,time-varyingforecasts.
Jesper Lindé (Stockholm School of Economics andSverigesRiksbank)– Monetary and fiscal interactions in modern central banking analysis, 4-8July2016
–PracticalguideforBayesianDSGEestimates.
–Impactsofthefiscalpolicyinnon-crisisperiodsandclose-to-zerointerestenvironment.
–Impactsoffiscalpolicyinamonetaryunion.
–Internationalspilloveroffiscalpolicyimpacts inamonetaryunion.
–Impacts of deteriorated credibility on budgetaryconsolidation.
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4 Additional information on the supervisory activity of the MNB in 2016
4.1 INSTITUTION OVERSIGHT
As at 31 December 2016, the MNB performedoversight of 1,608 institutions according to thebreakdowninTable10.
4.2 INSPECTIONS COMPLETED
TheMNBcarriesouttheinspectionsonthebasisofanannualplanningsystem,accordingtodetaileddailyschedules.
Inpreparingtheinspectionplans,theMNBconsidersthefollowingcriteria:
–thecycleplanofsupervisoryinspectionsdefinedintheMNBAct;
–theriskratingoftheinstitutionsandtheresourcerequirement and inspectiondurationdeterminedaccordingly;
–thesupervisoryscoringsystemdesignedtoestablishthe order of institutions to be inspected, also inconsiderationofotherindividualcharacteristicsoftheinstitutionsconcerned;and
–theavailableresources.
The number of prudential on-site inspections andtheirbreakdownbysectorand inspection typearesummarisedinTable11.
Table 10Number of institutions supervised in 2016
Capital markets 85
Investmentfundmanager 65
Commoditiesexchangeserviceprovider 1
Investmentfirm 15
Trust 1
Clearinghouse 1
Centralcounterparty 1
Stockexchange 1
Funds 69
Privatepensionfund 4
voluntaryfunds 64
voluntaryhealthfund 16
voluntarypensionfund 41
voluntarymutualfund 7
Occupationalpensionfund 1
Financial market 958
Non-financialinstitution 612
Electronicmoneyissuer 1
Independentintermediary 605
Paymentserviceprovider 6
Financialinstitutions 346
Creditinstitution 93
Bank 29
Specialisedcreditinstitution 11
Cooperativecreditinstitution 53
Financialenterprises 253
Financialenterpriseequivalenttocreditinstitutions 2
Otherfinancialenterprises 251
Insurance 496
Insuranceinstitutions 45
Insuranceassociation 18
Insurancecompany 27
Insuranceintermediaries 450
Independentinsuranceintermediary 395
Tiedinsuranceintermediary 55
Advocacy 1
Total 1,608
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Table 11Inspection statistics
Number of prudential on-site inspections
2015 2016 2017 planned
Comprehensive Other* Comprehensive Other* Comprehensive Other*
Largebanksandbankgroups 4 20 3 14 3 27
Smallandmedium-sizedbanks 5 3 2 5 5 2
Integration(accededcreditinstitutions) 8 8 10 7 0 16
Specialisedcreditinstitutions 1 3 5 4 0 5
Branchofbanks 0 0 0 1 0 0
Non-bankinggroupfinancialenterprises 0 7 0 3 0 1
Paymentserviceproviders 2 1 2 0 2 0
Insurancecompanies 7 3 6 2 9 0
Insuranceassociations 1 2 1 0 8 0
Intermediaries 0 6 0 4 0 3
Funds 16 3 13 2 13 2
Capitalmarketinstitutions 9 22 30 9 24 0
Occupationalpensionfunds 0 0 1 0 0 0
Total 53 78 73 51 64 56
* Including the ICAAP inspections and validations.
4.3 LICENSING AND LEGAL ENFORCEMENT
The licensingand legalenforcementactivityof theMNBcomprisestheentirespectrumoflegalactivitieslinkedtothesupervisionofthefinancialintermediarysystem, includingtheexecutionofallauthorisation
proceduresrelatedtotheoverseeninstitutionsandtheperformanceofthelegalenforcementtasksoftheprudentialinspectionactivity.
The statistics on the licensing and prudential legalenforcementactivitiesoftheMNBareshownintheTables12-15,brokendownbysector.
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Table 12Measures taken in the financial market sector(Pieces)
Prudential measures
Resolutionsclosingsupervisoryproceedings 258
ofwhich:resolutionsimposingfines 139
Otherprudentialmeasures,resolutions 335
Rulings 66
Total amount of fines (million HUF) 753.4
Authorisation resolutions/rulings
Authorisationofthefoundationofcreditinstitutions 2
Refusalofthefoundationofcreditinstitutions 0
Authorisationoftheoperationofcreditinstitutions 2
Refusaloftheoperationofcreditinstitutions 0
Withdrawalofauthorisationforthefoundationofcreditinstitutions 0
Authorisationoftheoperationofpaymentserviceprovider 1
Authorisationoftheelectronicmoneyissuingactivityofelectronicmoneyissuers 0
Authorisationofthefoundationandtheoperationoffinancialenterprises 4
Refusalofthefoundationandtheoperationoffinancialenterprises 2
Authorisationoftheoperationoffinancialenterpriseequivalenttocreditinstitutions 0
Withdrawalofauthorisationforoperationsoffinancialenterprises 4
Resolutionsconcerningtheamendmentofthescopeofactivities 7
Authorisationoftheelectionofseniorexecutives 314
ofwhich:creditinstitutions'seniorexecutives 181
Refusaloftheelectionofseniorexecutives 3
Approvaloftheamendmentofagencycontract 146
Authorisationofmultiplespecialservicesintermediary 1
Authorisationofmultipleagents 20
Authorisationofbrokers 1
Authorisationoftheemploymentofintermediaries 65
Resolutionwithdrawingtheactivitylicenseofintermediaries 18
Authorisationoftheamendmentofthebylaws 19
Authorisationofotherregulations 11
Authorisationoftheacquisitionofqualifyingholdings 53
Refusaloftheacquisitionofqualifyingholdings 3
Authorisationofmergeranddivision 14
Authorisationoftransformation 0
Authorisationoftheacquisitionofqualifyingholdingsinanonresidententerprise 2
Authorisationofthetransferofclientaccounts 17
ResolutionsissuedunderCRR 34
ofwhich:–Resolutionconcerningthecalculationofcapitaladequacyofoperationalrisk–Resolutionconcerningthecalculationofcapitaladequacyofcreditrisk–ResolutionconcerningTier1,additionalTier1andTier2capitalinstruments–Resolutionconcerningsupervisiononaconsolidatedbasis
23
1013
Otherresolutions 107
Rulings 79
Total number of resolutions and rulings 1,588
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Table 13Measures taken in the capital market sector(Pieces)
Prudential measures
Resolutionsclosingsupervisoryproceedings 45
ofwhich:resolutionsimposingfines 44
Otherprudentialmeasures,resolutions 66
Rulings 68
Total amount of fines (million HUF) 377.5
Authorisation resolutions/rulings
Authorisationforoperations 4
Withdrawalofauthorisationforoperations 5
Authorisationofregulations 56
Authorisationofseniorexecutives 112
Authorisationoftheacquisitionofqualifyingholdings 4
Rulings 148
Otherresolutions 186
Total number of resolutions and ruings 694
Table 14Measures taken in the insurance sector(Pieces)
Prudential measures
Resolutionsclosingsupervisoryproceedings 112
ofwhich:resolutionsimposingfines 102
Otherprudentialmeasures,resolutions 50
Rulings 44
Total amount of fines (million HUF) 246.8
Authorisation resolutions/rulings
Authorisationofexecutiveofficers 75
Authorisationofprofessionalexecutives 55
Withdrawalofauthorisationforoperationsatrequest 14
Otherresolutions 73
Authorisationofactivitiescloselyrelatedtoinsuranceactivities 5
Authorisationoftheactivitiesofinsuranceintermediaries 17
Conditionaldecision 19
Rulings 35
Total number of resolutions and rulings 499
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Table 15Measures taken in the funds sector(Pieces)
Prudential measures
Resolutionsclosingsupervisoryproceedings 22
ofwhich:resolutionsimposingfines 18
Otherprudentialmeasures,resolutions 52
Rulings 16
Total amount of fines (million HUF) 11.4
Authorisation resolutions/rulings
Authorisationofexecutiveofficers 0
Authorisationofprofessionalexecutives 5
Withdrawalofauthorisationforoperationsatrequest 5
Otherresolutions 22
Conditionaldecision 3
Rulings 5
Total number of resolutions and rulings 130
4.4 MARKET SURVEILLANCE
ThesummarydataonmeasuresrequiredwithintheframeworkoftheMNB’smarketsurveillanceactivityin2016arepresentedintheTables16-17.
Table 16Market surveillance and supervision related measures(Pieces)
Market surveillance and supervisory measures
Resolutionsrelatedtomarketsurveillance 44
ofwhich:resolutionsimposingfines 34
Rulingsrelatedtomarketsurveillance 310
Resolutionsrelatedtoissuerssupervision 42
Rulingsrelatedtoissuerssupervision 3
Otherresolutionsandrulings 20
Fines–marketsurveillance(millionHUF) 3,837.4
–relatedtounauthorisedandunreportedactivities 3,672.3
–relatedtoinsiderdealingandunlawfulmarketmanipulation 125.1
–relatedtocompliancewithcompanytakeoverrules 40
Fines–supervisory(millionHUF) 52
–relatedtoissuerssupervision 42
Total amount of fines (million HUF) 3,889.4
Total number of resolutions and rulings 419
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Table 17Licensing related to securities issuance(Pieces)
Licensing related to securities issuance
Numberofissues 10
–stock 2
–bondsandmortgagebondsprogram 8
Numberofstockexchangelistings 4
–stock 3
–bondsandmortgagebonds 1
Numberofresolutionsrelatedtoissuers 851
Numberofrulings 21
Numberofapplicationstobeputinorder 222
Total number of resolutions and rulings 1,094
4.5 CONSUMER PROTECTION
Tables18-19containasummaryrelatedtotheMNB’sadministrativeactivityperformedin2016intheareaoffinancialconsumerprotection.
Table 18The MNB’s consumer protection administrative activity, number of procedures
Type of entities Targeted inspections ex
officio
Targeted consumer protection
inspections ex officio
Inspected entities Inspections along with prudential
inspections
Consumer protection
inspections by request
Creditinstitutionssector,Bank 19 1 14 1 114
Creditinstitutionssector,Cooperativecreditinstitution
9 0 0 1 0
Financialenterpriseequivalenttocreditinstitutions
2 0 0 1 4
Independentmoneymarketbroker 4 0 0 0 1
Pawnbrokerenterprises 3 1 4 1 0
Debtcollectionandmanagemententerprises
1 0 0 0 3
Insurancesector 1 0 0 10 89
Capitalmarketsector 2 0 0 6 5
Fundssector 0 0 0 1 6
Total: 41 2 18 21 222
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Table 19The MNB’s consumer protection administrative activity, result of the procedures
Sector/measures Financial market Insurance Capital market Funds Total
Rulings 2,520 473 19 12 3,024
ofwhich:substantive 333 118 5 1 457
nonsubstantive 2,187 355 14 11 2,567
Resolutions 496 84 6 2 588
ofwhich:withoutbreachoflaw 107 39 3 0 149
withbreachoflaw 223 45 3 2 273
Total amount of consumer protection fines (million HUF)
158.6 89.5 9.9 0.4 258.4
Tables20–22showthemaindatarelatedtotheactivityoftheFinancialConsumerProtectionCentre.
Table 20Distribution of customer inquiries and requests received by receipt channel
Channel of receipt No. Per cent
Mail 3,698 9.0
E-mail 7,393 17.9
Personal 4,264 10.3
Phone 25,886 62.8
Total 41,241 100.0
Table 21Customer inquiries and requests broken down by sectors
Sector No. Per cent
Financialmarkets 20,162 48.9
Capitalmarkets 2,893 7.0
Insurance 9,432 22.9
Pension,healthandmutualaidfunds 305 0.7
Other 8,449 20.5
Total 41,241 100.0
Table 22Number of customer inquiries and requests broken down by sector and quarter
Sector Q1 Q2 Q3 Q4 2016 Total
Financialmarkets 6,839 4,814 4,403 4,106 20,162
Capitalmarkets 933 889 627 444 2,893
Insurance 3,331 2,047 1,951 2,103 9,432
Pension,healthandmutualaidfunds 99 93 47 66 305
Other 2,435 2,246 2,056 1,712 8,449
Total 13,637 10,089 9,084 8,431 41,241
:
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4.6 ADMINISTRATIVE REPRESENTATION AT PROCEEDINGS
Administrative representation at proceedingscomprises the representation of the MNB in theassertion of claims of public interest, as well aslitigationandnon-litigiousproceedingsrelatedtothe
MNB’sadministrativedecisionspassedinthecontextofitssupervisoryandconsumerprotectionactivities,andalsotherepresentationoftheFinancialArbitrationBoardinlitigationlaunchedfortheabrogationoftheFAB’sresolutionsorrecommendations,andkeepingrecordspertainingtosuchprocedures.
Chart 16Number of customer inquiries and requests in a sectoral and monthly breakdown
0
1,000
2,000
3,000
4,000
5,000
6,000
0
1,000
2,000
3,000
4,000
5,000
6,000
Janu
ary
Febr
uary
Mar
ch
April
May
June July
Augu
st
Sept
embe
r
Oct
ober
Nov
embe
r
Dece
mbe
r
Pension, health and mutual aid fundsInsuranceCapital marketsFinancial markets
Other
Table 23Cases commenced in 2016, broken down by type and sector
Type No. Per cent Sector No. Per cent
Judicialreviewofadministrativedecisions(litigous)
43 68.3 Financialmarkets 29 46.0
Non-litigous 12 19.0 Capitalmarkets 23 36.5
Non-litigous(rulingsimposingfines) 2 3.2 Insurance 8 12.7
FinancialArbitrationBoard 6 9.5 Pension,healthandmutualaidfunds
3 4.8
Total 63 100.0 Total 63 100.0
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5 Explanation of abbreviations and terms specific to central banking
ABBREVIATIONS
BIS: BankforInternationalSettlements
BISZ Zrt.:BISZCentralCreditInformationPlc.
BREEAM: Building Research EstablishmentEnvironmentalAssessmentMethodology
BRRD:BankRecoveryandResolutionDirective
BSE:BudapestStockExchange
CCB:CountercyclicalCapitalBuffer
CCIS:CentralCreditInformationSystem
CEBS: CommitteeofEuropeanBankingSupervisors
EBA:EuropeanBankingAuthority
ECB:EuropeanCentralBank
EIOPA:EuropeanInsuranceandOccupationalPensionsAuthority
EMU:EconomicandMonetaryUnion
ESCB:EuropeanSystemofCentralBanks
ESRB:EuropeanSystemicRiskBoard
FCPC:FinancialConsumerProtectionCentre
FGS:FundingforGrowthScheme
FSC:FinancialStabilityCouncil
GIRO: GiroClearingHouseLtd.
GSP:GrowthSupportingProgramme
HCSO:HungarianCentralStatisticalOffice
ICS: InterbankClearingSystem
IMF:InternationalMonetaryFund
ISDA: InternationalSwapsandDerivativesAssociation
KELER: KELERCentralClearingHouseandDepositoryLtd.
LCR:LiquidityCoverageRatio
MLS: Market-BasedLendingScheme
MNB:MagyarNemzetiBank
MNE:MinistryforNationalEconomy
OECD:OrganisationforEconomicCo-operationandDevelopment
PIP (‘FCP’):FinancialCompassProgramme
POP (‘FTP’):FinancialTrainingProgramme
SRB: SystemicRiskBuffer
SRM:SingleResolutionMechanism
SSM:SingleSupervisoryMechanism
VIBER:real-timegrosssettlementsystem,apaymentsystemoperatedbytheMNB
GLOSSARY
Cash turnover: Thesumofexchangesandpaymentstoandfromthecentralbank.
Clearing: Control and transmission of paymenttransactions, calculation of interbank balancesin accordance with specified rules; in the case ofsecuritiestransactions:matchingandconfirmationofpositions,calculationofaccountsreceivable/payableandmanagingthearisingfinancialrisk.
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ANNUAL REPORT • 2016 85
CLS (Continuous Linked Settlement): Aclearingandsettlement model that enables the elimination ofFXsettlement risks. It isbasedonamulti-currencypaymentversuspayment(PvP)mechanism.TheCLSisoperatedbytheCLSBank.
Currency interest rate swap, CIRS:Usuallyamediumor long-term transaction involving theexchangeofdifferentcurrencies,aseriesofinterestpaymentsontheprincipalandrepaymentofprincipalswhenthetransactionissettled.
Duration: Averageremainingmaturityofbonds.Itisanindicatormeasuringthelevelofriskassociatedwiththebondportfolio.
ERM II, Exchange Rate Mechanism II: Anexchangeratemechanismforestablishingtheconditionsforanexchangeratepolicyco-operationbetweeneuroareacountriesandEUMemberStatesnotparticipatinginthethirdstageofEMU.TheERMII isamultilateralsystemoffixedbutadjustableexchangerates,wherethemid-rate is surroundedbyanormal,+/−15percent fluctuation band. All decisions in relation tothemid-rate and, as the casemay be, a narrowerfluctuationband, aremadeon the basis of a jointagreementbetweentheMemberStateconcerned,theeuroareacountries,theECBandtheotherMemberStatesparticipatinginthemechanism.
Foreign exchange funding adequacy ratio (FFAR):Theratioofthesumofstableforeignexchangefundsandnetforeignexchangeswapstockwithamaturityoverayearandtheweightedforeigncurrencydenominatedassetstobefinanced.
Foreign exchange swap: Usually a short-termtransaction involving the exchange of differentcurrencies and, when the transaction is settled,exchange of the currencies again at the pricedeterminedinthecontractbythecrossrateandtheinterestrateofthecurrencies.
FX swap:SeeForeignexchangeswap.
IMF reserve quota: The freely drawable, i.e. notyet drawn portion of the IMF quota paid to theInternationalMonetaryFundinSDR(SpecialDrawingRight).
Interest rate futures:Astockexchange transactionwhere the basis of future settlement is a certain
amount of standardised (expressed-in-contract)depositswith interest rate specifiedat thetimeofthedeal.
Interest rate swap, IRS:Theexchangeoffixedrateandvariablerateinterestonprincipalatpre-determinedintervals, adjusted to certain market rates andconditions.
MNB Act:ActCXXXIXof2013ontheMagyarNemzetiBank.
Monetary financial institutions: The central bank,financial institutions and money market fundstogetherconstitutethisinstitutionalcategorywithinfinancialcorporations.
Money market funds: Money market funds areinvestmentfunds,themutualfundsharesofwhicharesimilartobankdepositsfromtheaspectofliquidity.Moneymarketfundsinvest85percentoftheirassetsinmoneymarket instruments or transferable debtsecuritieswitharemainingmaturityofmaximumoneyearorinstrumentswithareturnsimilartothatoftheinterestrateofmoneymarketinstruments.
Money market instruments: Low-risk,liquidsecuritiestradedinlargeamountsonmarketswheretheycanbeexchangedforcashimmediatelyatalowcost.
Omnibus II directive:SeeSolvencyIIdirective.
O/N: Overnightdeposit/loan.
Option contract: For the owner of the foreignexchange option this means a right, but not anobligation,tobuyorsellacertainamountofcurrencyagainstanothercurrencyatapre-determinedrate,atorbeforeapre-determineddate.Ifthepossessoroftheoptionexercisesthisright, itwillbecomeanobligationfortheseller(writer)oftheoption.
Payment System Forum: An independent, self-organising, open professional organisation withconsultativecharactercommittedtothemattersofthedomesticpaymentsystemandoperatingontheMNB’sinitiative,withthesupportoftheHungarianBankingAssociationandtheinvolvementofmarketparticipants that play a decisive role in paymenttransactionsaswellastheHungarianStateTreasury,GIROZrt.andKELERZrt.Thesupremebodyof theForumisthePaymentSystemCouncil,whichconsists
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oftherepresentativesofthemembersandoperatesunder the co-chairmanship of the MNB and theHungarianBankingAssociation.
Payment System Council:Thedecision-makingbodyofthePaymentSystemForum.
Revaluation reserve: Therevaluationreserveoftheforintexchangerateandtherevaluationreserveofforeignexchangesecuritiesarereservesthatarepartof the equity of theMNB. If they have a negativebalance,thecentralgovernmentisliabletoreimbursethenegativeportion,andcredittheamounttotherespectiverevaluationreserveaccountby31Marchoftheyearfollowingthecurrentyear.Theamountofthereimbursementisrecordedinthebalancesheetofthecurrentyearasareceivablefromthecentralbudget.
Revaluation reserve due to forint exchange rate changes:Unrealisedexchangerategainsandlossesontheforintexchangeratechangesofforeigncurrencyassets and liabilities are indicated in the forintexchangeraterevaluationreserve,whichconstitutesapartoftheequity.
Revaluation reserve of foreign exchange securities: Thevaluationdifferencebetweenthemarketvalueand cost rate of foreign exchange assets based onsecurities(exceptforrepurchasedforeignexchangebonds) is indicated in the revaluation reserve offoreignexchangesecurities,whichconstitutesapartoftheequity.
Repurchase and reverse repurchase transaction: Anagreement on the transfer of the ownership rightofasecuritywitharepurchaseobligationatapre-determinedpriceatafuturedatespecifiedortobespecifiedatthetimewhenthecontractisconcluded.During the term of the contract the buyer mayeitherobtainthesecuritywhichisthesubjectofthetransactionandfreelydisposeoverit(deliveryrepotransaction)ormaynotobtainitandmaynotfreelydisposeoverit,inwhichcasethesecurityisdepositedasabailtothebenefitofthebuyerduringthetermofthecontract(hold-in-custodyrepo).
ROA:Returnonassets.
ROE: returnonequity.
SEPA:SingleEuroPaymentsArea,anareawithinwhicheconomicoperatorscaneffectandreceivepaymentsineuroanywhere,usingonesinglepaymentaccount,in the same manner as in their own respectivecountries. Geographically, the Area covers the 28EUMemberStates, Iceland,Liechtenstein,Norway,SwitzerlandandMonaco.
Settlement: Final settlementof interbank liabilitiesandreceivablesonanaccountmanagedbyacommonbank,typicallytheMNB.
Solvency II directive: Directive 2009/138/EC ofthe European Parliament and of the Council of25 November 2009 on the taking-up and pursuitof the business of Insurance and Reinsurance. Anew, risk-based regulatory framework for insurerswhichisbasedonthreepillars,namely,quantitativerequirements, qualitative requirements and publicdisclosure.ItisaEuropeanstandardbasedonwhichthe supervisory authorities can create standardrules for capital in order to reduce/avoid the riskof insolvency.Applicable from1 January2016.TheOmnibus II directive (Directive 2012/23/EU of theEuropean Parliament and of the Council) includestheamendingprovisionsoftheSolvencyIIdirective–whichhasbeenapprovedbut it isyettobecomevalidandapplicable–andtheProspectusdirective(Directive2003/71/ECoftheEuropeanParliamentandoftheCouncil).
TARGET2-Securities (T2S):The single technicalplatform of the Eurosystem throughwhich centraldepositoriesandnationalcentralbankscanprovidebasic,cross-borderandneutralsecuritiessettlementservicesincentralbankfundsacrossallEurope.
VaR: valueat risk – amethod formeasuring risks.vaRquantifies themaximumamountof loss tobeexpectedatagivenconfidencelevelforaspecifictimehorizon.
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Part B Audited financial statements of the Magyar Nemzeti Bank
ANNUAL REPORT • 2016 89
1 Independent auditor’s report
A member firm of Ernst & Young Global Limited
Page 1 / 3
Ernst & Young Kft. Ernst & Young Ltd. H-1132 Budapest Váci út 20. 1399 Budapest 62. Pf.632, Hungary
Tel: +36 1 451 8100 Fax: +36 1 451 8199 www.ey.com/hu Cg. 01-09-267553
This is a translation of the Hungarian Report
Independent Auditors Report
To the Shareholder of Magyar Nemzeti Bank Opinion We have audited the accompanying 2016 annual financial statements of Magyar Nemzeti Bank (“the Company”), which comprise the balance sheet as at 31 December 2016 - showing a balance sheet total of HUF 10,054,901 million and a profit for the year of HUF 54,281 million -, the related profit and loss account for the financial year then ended and notes to the annual financial statements, including a summary of significant accounting policies. In our opinion the annual financial statements give a true and fair view of the equity and financial position of Magyar Nemzeti Bank as at 31 December 2016 and of the results of its operations for the financial year then ended in accordance with the Act C of 2000 on Accounting (“Hungarian Accounting Law”). Basis for opinion We conducted our audit in accordance with Hungarian National Auditing Standards and with applicable laws and regulations in Hungary. Our responsibilities under those standards are further described in the “Auditor’s responsibilities for the audit of the annual financial statements” section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the annual financial statements in Hungary, and we have fulfilled our ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Other information Other information consists of the 2016 business report of Magyar Nemzeti Bank. Management is responsible for the preparation of the business report in accordance with the Hungarian Accounting Law and other relevant legal requirements, if any. Our opinion on the annual financial statements does not cover the business report. In connection with our audit of the annual financial statements, our responsibility is to read the business report and, in doing so, consider whether the business report is materially inconsistent with the annual financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.
MAGYAR NEMZETI BANK
ANNUAL REPORT • 2016 90A member firm of Ernst & Young Global Limited
Page 2 / 3
Concerning the business report it is our responsibility also, in accordance with the Hungarian Accounting Law, to consider whether the business report has been prepared in accordance with the Hungarian Accounting Law and other relevant legal requirements, if any. In our opinion, the business report of Magyar Nemzeti Bank for 2016 corresponds the 2016 annual financial statements of Magyar Nemzeti Bank and has been prepared in accordance with the Hungarian Accounting Law. Since no other legal regulations prescribe for the Company further requirements with regard to its business report, our opinion on the business report does not include opinion in this regard as required by Subsection (5) h) of Section 156 of the Hungarian Accounting Law. Further to the above, based on the knowledge we have obtained about the Company and its environment in the course of the audit we are required to report whether we have identified any material misstatement in the business report, and if so, the nature of the misstatement in question. We have nothing to report in this regard. Responsibilities of management and those charged with governance for the annual financial statements Management is responsible for the preparation and fair presentation of the annual financial statements in accordance with the Hungarian Accounting Law, and for such internal control as management determines is necessary to enable the preparation of annual financial statements that are free from material misstatement, whether due to fraud or error. In preparing the annual financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. Auditor’s responsibilities for the audit of the annual financial statements Our objectives are to obtain reasonable assurance about whether the annual financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Hungarian National Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these annual financial statements.
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A member firm of Ernst & Young Global Limited
Page 3 / 3
As part of an audit in accordance with Hungarian National Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: ► Identify and assess the risks of material misstatement of the annual financial
statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
► Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.
► Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
► Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the annual financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.
► Evaluate the overall presentation, structure and content of the annual financial statements, including the disclosures, and whether the annual financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Budapest, 24 April 2017 (The original Hungarian language version has been signed.) Szabó Gergely Szabó Gergely Ernst & Young Kft. Registered auditor 1132 Budapest, Váci út 20. Chamber membership No.: 005676 Registration No.: 001165
A member firm of Ernst & Young Global Limited
Page 2 / 3
Concerning the business report it is our responsibility also, in accordance with the Hungarian Accounting Law, to consider whether the business report has been prepared in accordance with the Hungarian Accounting Law and other relevant legal requirements, if any. In our opinion, the business report of Magyar Nemzeti Bank for 2016 corresponds the 2016 annual financial statements of Magyar Nemzeti Bank and has been prepared in accordance with the Hungarian Accounting Law. Since no other legal regulations prescribe for the Company further requirements with regard to its business report, our opinion on the business report does not include opinion in this regard as required by Subsection (5) h) of Section 156 of the Hungarian Accounting Law. Further to the above, based on the knowledge we have obtained about the Company and its environment in the course of the audit we are required to report whether we have identified any material misstatement in the business report, and if so, the nature of the misstatement in question. We have nothing to report in this regard. Responsibilities of management and those charged with governance for the annual financial statements Management is responsible for the preparation and fair presentation of the annual financial statements in accordance with the Hungarian Accounting Law, and for such internal control as management determines is necessary to enable the preparation of annual financial statements that are free from material misstatement, whether due to fraud or error. In preparing the annual financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. Auditor’s responsibilities for the audit of the annual financial statements Our objectives are to obtain reasonable assurance about whether the annual financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Hungarian National Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these annual financial statements.
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2 Balance sheet of the Magyar Nemzeti Bank
HUF millions
Reference number to notes on
the Accounts
A S S E T S 31 Dec 2015* 31 Dec 2016 Change
1 2 3 4 4–3I. Receivables denominated in forint 1,446,828 1,590,537 143,709
4.3. 1.Receivablesfromthecentralgovernment 39,178 39,178 04.7. 2.Receivablesfromcreditinstitutions 1,405,552 1,548,530 142,978
4.10. 3.Otherreceivables 2,098 2,829 731II. Receivables denominated in foreign currency 9,843,344 8,286,460 –1,556,884
4.9. 1.Goldandforeignexchangereserves 9,436,975 7,557,282 –1,879,6934.4. 2.Receivablesfromthecentralgovernment 0 0 04.8. 3.Receivablesfromcreditinstitutions 6,962 62 –6,900
4.10. 4.Otherreceivables 399,407 729,116 329,709III. Banking assets 109,638 108,684 –954
4.12. ofwhich:investedassets 107,137 108,271 1,1344.14. IV. Prepaid expenses/accrued income 95,697 69,220 –26,477
V. Total assets (I+II+III+IV) 11,495,507 10,054,901 –1,440,606
Reference number to notes on
the Accounts
L I A B I L I T I E S A N D E Q U I T Y 31 Dec 2015* 31 Dec 2016 Change
1 2 3 4 4–3VI. Liabilities denominated in forint 9,527,734 7,833,804 –1,693,930
4.5. 1.Centralgovernmentdeposits 403,624 785,648 382,0244.7. 2.Depositsbycreditinstitutions 4,772,252 2,408,122 –2,364,130
ofwhich:themainpolicyinstrument 2,986,826 899,987 –2,086,8393.Banknotesandcoinsincirculation 4,304,879 4,580,614 275,735
4.11. 4.Otherdepositsandliabilities 46,979 59,420 12,441 VII. Liabilities denominated in foreign currency 1,407,934 1,798,115 390,181
4.5. 1.Centralgovernmentdeposits 416,115 544,616 128,5014.8. 2.Depositsbycreditinstitutions 58,378 75,866 17,488
4.11. 3.Otherdepositsandliabilities 933,441 1,177,633 244,1924.13. VIII. Provisions 1,978 689 –1,289
IX. Other banking liabilities** 17,839 17,847 84.14. X. Accrued expenses/deferred income 31,044 32,483 1,4394.15. XI. Equity 508,978 371,963 –137,015
1.Sharecapital 10,000 10,000 02.Retainedearnings 63,417 107,869 44,4523.valuationreserves 0 0 0
4.16. 4.Revaluationreservesduetoexchangeratechanges 312,599 182,459 –130,1404.16. 5.Revaluationreservesofforeigncurrencysecurities 28,510 17,354 –11,156
6.Profit/Lossfortheyear** 94,452 54,281 –40,171XII. Total equity and liabilities (VI+VII+VIII+IX+X+XI) 11,495,507 10,054,901 –1,440,606
* Presented in the 2016 balance-sheet structure.** In the new balance-sheet structure for 31 December, 2015 dividend payable was replaced from line IX. Other banking liabilities to line XI. 6. Profit for the year.
24April2017,Budapest
DrGyörgyMatolcsy GovernoroftheMagyarNemzetiBank
ANNUAL REPORT • 2016 93
3 Income statement of the Magyar Nemzeti Bank
HUF millionsReference number to notes on
the Accounts
I N C O M E 2015 2016 Difference
1 2 3 4 4–34.18. I. Interest and interest-related income denominated in forint 10,817 17,406 6,589
1.Interestonreceivablesfromthecentralgovernment 2,706 329 –2,3772.Interestonreceivablesfromcreditinstitutions 3,128 3,981 8533.Interestonotherreceivables 771 124 –6474.Interest-relatedincome 4,212 12,972 8,760
4.18. II. Interest and interest-related income denominated in foreign currency 215,866 154,036 –61,8301.Interestonforeignexchangereserves 123,495 78,010 –45,4852.Interestonreceivablesfromthecentralgovernment 3,235 0 –3,2353.Interestonreceivablesfromcreditinstitutions 0 0 04.Interestonotherreceivables 54 0 –545.Interest-relatedincome 89,082 76,026 –13,056
4.19. III. Income arising from exchange rate changes 184,568 117,716 –66,8524.18. IV. Realised gains arising from financial operations 18,190 23,700 5,5104.21. V. Other income 14,524 17,250 2,726
1.Feesandcommissions 1,033 941 –924.22. 2.Incomeotherthanfeesandcommissions 1,380 1,634 2544.23. 3.Incomefromsupervisoryactivities 12,111 14,675 2,5644.13. VI. Provisions released 2,933 1,569 –1,3644.13. VII. Impairment released 1,399 520 –8794.24. VIII. Operating income 1,466 1,337 –129
IX. Total income (I+II+III+IV+V+VI+VII+VIII) 449,763 333,534 –116,229
Reference number to notes on
the Accounts
E X P E N S E S 2015 2016 Difference
1 2 3 4 4–34.18. X. Interest and interest-related expenses denominated in forint 103,825 45,866 –57,959
1.Interestoncentralgovernmentdeposits 11,229 5,680 –5,5492.Interestondepositsbycreditinstitutions 92,498 32,853 –59,645ofwhich:interestonthemainpolicyinstrument* 74,063 23,535 –50,5283.Interestonotherdeposits 98 89 –94.Interest-relatedexpenses 0 7,244 7,244
4.18. XI. Interest and interest-related expenses denominated in foreign currency 165,561 141,203 –24,3581.Interestoncentralgovernmentdeposits –1,737 –1,845 –1082.Interestondepositsofcreditinstitutions –29 –173 –1443.Interestonotherliabilities 1,685 3,233 1,5484.Interest-relatedexpenses 165,642 139,988 –25,654
4.19. XII. Expenses resulting from exchange rate changes 6,891 22,627 15,7364.20. XIII. Cost of issuing banknotes and coins 11,286 14,163 2,8774.18. XIV. Realised losses arising from financial operations 3,328 6,854 3,5264.21. XV. Other expenses 21,268 5,263 –16,005
1.Feesandcommissions 851 693 –1584.22. 2.Expensesotherthanfeesandcommissions 20,417 4,570 –15,8474.13. XVI. Provisions charged 644 280 –3644.13. XVII. Impairment 7,556 5,966 –1,5904.24. XVIII. Operating costs and expenses 34,952 37,031 2,079
XIX. Total expenses (X+XI+XII+XIII+XIV+XV+XVI+XVII+XVIII) 355,311 279,253 –76,058XX. Profit/loss for the year (IX-XIX) 94,452 54,281 –40,171
Until 22 September 2015, the 2-week deposit was the main policy instrument; from 23 September 2015 the 3-month MNB deposit became the main policy instrument.
24April2017,Budapest DrGyörgyMatolcsy GovernoroftheMagyarNemzetiBank
ANNUAL REPORT • 2016 94
4 Notes to the financial statements
4.1 THE MNB’S ACCOUNTING POLICY
TheMagyarNemzetiBank(MNB),thecentralbankofHungary,isownedbytheHungarianState.Ownershiprightsareexercisedbytheministerinchargeofpublicfinances(theshareholder).
TheaccountingpolicyoftheMagyarNemzetiBankisbasedontheActonAccounting(ActCof2000),ActCXXXIXof2013ontheMagyarNemzetiBank(hereinafter:theMNBAct)andGovernmentDecree221/2000(XII.19)onthespecialreportingandaccountingrequirementsapplicabletotheMagyarNemzetiBank(hereinafter:theMNBDecree).SincetheeffectivedateoftheActpromulgatingtheinternationaltreatyontheaccessionofHungarytotheEU,i.e.1May2004,theMagyarNemzetiBankhasbeenamemberoftheEuropeanSystemofCentralBanks(ESCB).
ThefollowingsectionspresentabriefdescriptionoftheaccountingsystemoftheMNB,andthevaluationandprofitrecognitionrules,wheneverthesedifferfromthegeneralrules.
4.1.1 The MNB’s accounting framework
OneofthekeyaccountingprinciplesoftheMNBisthattransactionsarebookedfortheperiod inwhichtheyoccur,unlessthefinancialyearisalreadyclosed.Thisisespeciallyimportantintermsoftheaccuratemeasurementofexchangerategainsandlosses,withspecialregardtoforeignexchangesalesandpurchases.Spotforeigncurrencytransactionswhichinvolveforeignexchangeconversionsarerecordedinthebooksatthedateofthetransactions.AssetsandliabilitiesarisingfromsuchtransactionsaffecttheMNB’sforeigncurrencypositionfromthedateofenteringintothetransaction.Thesameprocedureisappliedtorecordingtherevaluationdifferenceinthebalancesheetrelatingtoderivativetransactionsforhedgingpurposes.
Onadailybasis,theMNBrecords:
–exchange rate differences arising from revaluation of its foreign assets and liabilities and derivativetransactionsforhedgingpurposesrecordedoff-balancesheet;
–amortisationofthesecurities’premiumsanddiscounts;and
–accrued/deferred interest arising from on and off-balance sheet assets and liabilities from hedgingtransactions.
PursuanttotheMNBDecree,forthepurposeofreportingdatatotheowner,theMNBisrequiredtocloseaccountsrelatingtoitsassetsandliabilitiesandtonetincomeonaquarterlybasis,andtopreparetrialbalancesfollowingtheprocedurespecifiedinitsaccountingpolicy.
Forinternaluse,theMNBcompilesabalancesheetandincomestatementeverymonth,whicharesupportedbythefollowing:
–marketvaluationofforeigncurrencysecurities;
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–breakdownandrecordingofrealisedandunrealisedportionsofforeignexchangegainsandlossesderivingfromdailyrevaluation;and
–chargingofdepreciationandamortisation.
Uponthequarterlyclosingofaccounts,theMNBmeasuresitsoff-balancesheetcontingentandfutureliabilitiesarisingfromderivativetransactionsforotherpurposesandsecuritieslendingoperationsbasedoninternationalagreements(inthiscase,theliabilitiesareequaltothepurchasevalueofthecollateralreceived)andotheroff-balancesheetliabilities.Onaquarterlybasis,theMNBalsogradestheclaimsandsecuritiesinthebalancesheet;inadditiontotheforegoing,itmeasurestheinvestmentsattheendoftheyearandatthesecondquarter.Asaresultofthismeasurement,theMNBrecognises impairment lossesasnecessaryandformsprovisionsforliabilitiesandexpectedlosses.
Thebalancesheetdateisthe15thworkingdayofJanuaryoftheyearfollowingthereportingyear.Withregardtothisreport,thebalancesheetdatewas20January2017.
Bylaw,theMNBisalsorequiredtoreporttoParliament.TheMNBsubmitsasinglereporttobothParliamentandtheMinistryforNationalEconomy,which–asitisinchargeofpublicfinances–exercisestherightsofownershipaslaiddownintheMNBAct.ThistakestheformofanAnnualReport,whichcontainsabusinessreportdescribingtheMNB’sstructure,operationsandstateofaffairsinthereportingyear,andtheMNB’sannualfinancialstatementsdefinedbytheActonAccounting,asadoptedbytheBoardofDirectorsandapprovedbyauditcertificate.TheSupervisoryBoardsubmitsanopinionontheAnnualReportandmakesareportonsuchtotheshareholder.TheAnnualReportispublishedinunabridgedformontheinternet.Thewebsiteisaccessibleat:http://english.mnb.hu.
TheGovernoroftheMNBalsoreportstotheParliament’scommitteeresponsibleforeconomicaffairsonthehalf-yearactivityoftheMNB.ThisreportistheHalf-yearReportwhichcontainsabusinessreportdescribingtheMNB’sstructure,operationsandstateofaffairsinthereportingperiod,andtheMNB’shalf-yearfinancialstatementsdefinedbytheActonAccounting.TheHalf-yearReportisalsopublishedontheinternet.
PursuanttoMNBDecree,theMNBisnotobligedtodrawupconsolidatedfinancialstatements.
ThefinancialstatementsoftheMNBmustbeauditedbythestatutoryauditorincompliancewiththeActonAccounting.TheregisteredauditoroftheMNBisGergelySzabó(Ernst&youngKönyvvizsgálóKft.),Chambermembershipnumber:005676.
ThepersonauthorisedtosigntheAnnualReportisDrGyörgyMatolcsy,GovernoroftheMagyarNemzetiBank.
ThepersonresponsibleforaccountingservicesisGáborKalina,registrationnumber:194599.
4.1.2 Major principles of valuation
Receivables from the central government
Securitiesstatedunderreceivablesfromthecentralgovernmentarerecordedinthebalancesheetatamortisedpurchasepriceandincludenointerest.ThedifferencebetweenthepurchasepriceexcludinginterestandthefacevalueisshownintheMNB’sincomestatementasavaluationgainorlossinproportiontothetimeelapsed.
Receivablesfromthecentralgovernmentalsoincludeanyreceivablesassociatedwiththereimbursementofrevaluationreservesatyear-end.
Impairmentlossesmaynotberecordedinconnectionwithreceivablesfromthecentralgovernment.
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Receivables from credit institutions
Mortgagebondsstatedunderreceivablesfromcreditinstitutionsarerecordedinthebalancesheetatamortisedpurchasepricenetofinterest.ThemarketvaluedifferenceatacquisitionisshownintheMNB’sinterestrelatedincomeasavaluationgainorlossinproportiontothetimeelapsed.
Impairmentlossesonmortgagebondsmustbeaccountedinproportiontotheriskoflosses.
Interest-freerefinancingloanswithintheframeworkoftheFundingforGrowthScheme(FGS)andthebaseratefixedsecurity-backedloansprovidedtocreditinstitutionsmustberecordedinthebalancesheetatthedisbursedamount.
Other receivables
Receivablesfromsupervisoryactivitiesarerecordedinthebalancesheetwiththeirimpairment.TheMNBbooksthesupervisoryfeeprescriptionsinlinewiththeincomingdatareportedbytheinstitutionsandthepenaltyprescriptionsarerecordedinlinewiththefinalisedresolutions.Thesupervisoryfees,leviedandthepenaltiesusedforsupportpurposesdefinedbytheMNBAct,aswellasthefeesreceivedfrompublicproceedingsmustberecordedas‘Incomefromsupervisoryactivities’.
Thebalanceof‘Otherreceivables’alsocontainstheemployeeloansandtheloansprovidedtootherlegalentitiesattheamountofthedisbursements.Therelatedinterestincomeisstatedunder‘Interestonotherreceivables’.
‘Otherreceivables’mustbequalifiedandimpairedifnecessary.
Valuation of foreign currency assets and liabilities and the recording of exchange rate gains
Initsbooks,theMNBrecordsallforeigncurrencyassetsandliabilitiesattheofficialexchangerateprevailingonthedateofacquisition.Ifaforeigncurrencyassetorliabilityiscreatedasaresultofforeignexchangeconversion,theexchangerategainorlossarisingfromthedifferencebetweentheactualrateandtheofficialrateisrecordedbytheMNBasconversionincomeforthatparticulardateandisrecognisedundergains/lossesfromexchangeratechangesintheincomestatement.
TheMNBcarriesoutdailyrevaluationofforeigncurrencyassetsandliabilitiesaswellasoff-balancesheetassetsandliabilitiesarisingfromderivativetransactionsforhedgingpurposes,takingaccountofvariationsintheofficialexchangerate.Asaresultofthisrevaluation,balancesheetitemsdenominatedinforeigncurrencyarestatedinanamountconvertedattheofficialexchangerateprevailingonthebalancesheetdate.Bankingassetsandbankingliabilitiesinforeigncurrencies(withtheexceptionofforeigninvestments)andforeigncurrencyaccrualsandderivativetransactionsforpurposesotherthanhedgingdonotformpartofrevaluation.
Incomereceivedinforeigncurrencyisstatedattheofficialexchangerateprevailingonthatparticulardate.
Dailyaccountingforaccruedincomeisprecededbyreversingtheaccruedincomeonthepreviousday.Asaresult,foreigncurrencyaccrualsarerecordedinthebalancesheetattheofficialexchangeratewithoutrevaluation.
Inrespectofforeignexchangegainsandlossesarisinginthecourseofdailyrevaluation,realisedexchangerategainsandlossescanbestatedasaprofititem,whiletheunrealisedresultisreportedunder‘Equity’,intheitem‘Revaluationreserveduetoexchangeratechanges’.
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Realisedincomeinaparticularcurrencyarisesasaresultofdecreaseinthenetforeigncurrencyposition(inabsoluteterms).Realisedincomearisesasthedifferencebetweenthevalueofthechangeinthenetforeigncurrencypositionattheofficialexchangerateandtheaveragecostrateprevailingonthatparticulardate.
Foreign currency securities
Foreigncurrencysecuritiesarestatedatmarketprice.Thedifferencebetweenthemarketvalue(midpricesappliedbytheportfoliomanagementfacilitatingtool)prevailingonthedateofvaluationandtheamortisedpurchasevalueisrecordedintherevaluationreserveofforeigncurrencysecuritiesaspartofequity.Exchangerategainsor losses realisedonsellingandmaturingarestatedunder ‘Realisedgains/lossesarising fromfinancialoperations’.
TheMagyarNemzetiBankmeasuresitssecuritiesonthebasisofmarketpricesprevailingonthelastworkingdayofeachmonth.Howeverifadequatelyliquidpricesarenotensuredonthisday,thevaluationofsecuritiesisbasedonthemarketpricesavailableonthepreviousworkingday.
Theforeigncurrencysecuritiesmanagedbytheexternaltrusteeonthegroundsofamandatearealsostatedatmarketprice,applyingthepricesreceivedfromthecustodian.
Securityrepurchasetransactionsarerecordedascredit/deposittransactions,whiletherelatedreceivablesorliabilitiesarestatedasoff-balancesheetitems.
Securitieslentthroughsecuritieslendingoperationsbasedoninternationalagreementsneednotberemovedfrom foreign exchange reserves; they are recorded as off-balance sheet items. Non-cash collateral andinvestmentsfromcashcollateralmustberecordedascontingent liabilitiesunderoff-balancesheet itemsandiftheirmarketvalueisnegative,aprovisionofequalamountmustbecreatedfortheinvestmentsonaquarterlybasis.
Accounting rules relating to the IMF quota
PartoftheIMFquotasubscribedinforeigncurrencyanddenominatedinSDRasacallableloanisstatedunderforeignexchangereserves.
Thepartofthequotapaidinforint,subscribedinSDR,ispresentedunder‘Otherforeigncurrencyreceivables’inthebalancesheet.TherelatedIMFforintdepositispresentedontheliabilitiessideofthebalancesheet.ItistheMNB’sdutytoensureatleastannuallythattheamountoftheIMF’sforintdepositisequaltotheamountofthequotapaidinforint.AsthisdepositaccountisaHUFaccountonlyformally,itispresentedunder‘Otherforeigncurrencypayables’inthebalancesheet.
TheSDRallocationaimsto increasetheforeignexchangereservesofthe IMF’smembersandcreatesanunmaturedliabilityvis-à-vistheIMFontheliabilitysideofthebalancesheet.Thistransactionhasaneffectonprofitorloss(interestmustbepaidontheSDRamountreceived),ifitisutilised.
Accounting rules relating to derivatives
Onthebasisoftransactionpurpose,theMNBdistinguishesbetweentwogroupsofderivativetransactions:hedgingtransactionsandderivativetransactionsforpurposesotherthanhedging.
Hedgingtransactionsaredefinedastransactionswhichreducetheriskarisingfromchangesintheexchangerateormarketvalueofaspecificassetorliabilityoropenposition,aredirectlyrelatedtosuch,areannouncedashedgingtransactionsatthestartofthedealandneutraliseorsignificantlymitigatetheriskthatisintendedtobehedged.Furthermore,derivativetransactionswiththegovernmentornon-residentcounterpartstohedgethesetransactionsarealsoregardedashedgingtransactions.
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Derivativetransactionsmustbestatedunderoff-balancesheetassetsandliabilities.Theaggregaterevaluationdifferenceofforeigncurrencyassetsandliabilitiesarisingfromhedgingtransactionsmustbestatedinthebalancesheet(dependingontheirbalance,eitherintheitem‘Otherforeigncurrencyreceivablesorliabilities’,or‘Foreigncurrencyreceivablesfromorliabilitiestothecentralgovernmentorcreditinstitutions’),includingtheinterestaccruedinproportiontothetimeelapsed(asaccruedincomeoraccruedexpenses).
Whenderivativetransactionsforpurposesotherthanhedgingareclosed,theincomefromsuchtransactionsmustbestatedinthelinesofincomeandexpensesarisingfromexchangeratechangeswhenforeignexchangetransactionsareinvolved,andinthelinesofinterest-relatedincomeandinterest-relatedexpensesinthecaseoftransactionslinkedtointerestratechanges.Whilesuchtransactionsarenotrevalued,consistentwiththeprincipleofprudence,inreasonablecases–basedontheinformationavailableatthebalancesheetdate–aprovisionissetasideonaquarterlybasis,equaltothenegativemarketvalueofthetransaction.
Banking assets and liabilities
Bankingassetsandliabilitiesarestatedontherespectivesidesofthebalancesheet.Thesearethefollowing:
–assetsandliabilitiesnotdirectlyrelatedtocentralbankfunctionsandbankoperations(suchassettlementsrelatingtotaxes,contributions,paymentstoemployees,creditors,unsoldpreciousmetalsheldfornon-centralbankpurposes);aswellas
–liabilitiesarisingfrombanknotesnolongeracceptedaslegaltenderbutnotyetexchanged;
–investments;and
–assetsrequiredforoperatingtheorganisation(suchasintangibles,tangibles,andinventories).
TheMNB’sbalancesheetdoesnotstatecashamongliquidassets.Thecentralbankistheexclusiveissuerofbanknotesandcoins.NotesandcoinsheldattheCashierandtheDepositoryarenotincirculationandthereforearedeductedfrombanknotesandcoinsontheliabilitiessideofthebalancesheet.
Depreciation rates applied by the Magyar Nemzeti Bank:
Per cent
Description 31 Dec 2016
Concessions,licencesandsimilarrights 17
Trademarkspatentsandsimilarassets 10–50
Capitalisedvalueofreorganisation 20
Ownedandmanagedbuildings 2–3
vehicles* 20
Telecommunicationdevices,officeequipment,machines 9–50
Officeequipment 14.5–33
Computerhardware 9–33
Emissionmachinery 5–33
Instruments 9–33
Banksecuritydevices 2–33
Otherequipmentanddevices 3–33
* Residual value 20 per cent of the vehicles.
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ANNUAL REPORT • 2016 99
Thedepreciationratesaredeterminedindividuallybasedonestimatedusefuleconomiclife.Depreciationischargedonastraight-linebasisineverycase.TheBankrecordsnodepreciationiftheassetsdonotlosetheirvalueinuseorifthevalueincreasesfromyeartoyear,giventheparticularnatureoftheassets(e.g.land,worksofart,arttreasure).
4.2 EFFECTS OF MACROECONOMIC TRENDS ON THE 2016 BALANCE SHEET AND INCOME STATEMENT OF THE MAGYAR NEMZETI BANK
In2016,theMNBrecordedaprofitofHUF54.3billion.Boththecontractionofcentralbank’sbalancesheetandthecontinuedreductionofthebaseratecontributedtotheprofit.Incomearisingfromexchangeratechangeswasthemostsignificantitemoftheprofitin2016.TheMNBquotedexchangerateagainsttheeurofluctuatedinanarrowerbandinthecourseof2016,relativeto2015.TheMNBofficialexchangeratewasEUR/HUF311.02atand-2016,representingappreciationof0.7percentrelativetotheendof2015.Theofficialexchangeratewasweakerthantheaveragecostratefortheentireyear;thedifferencebetweenthetworatesdroppedfromtheend-2015EUR/HUF14.95toEUR/HUF9.86asat31December2016.Duetothedecreasingvolumeofforeigncurrencysales,theMNBrealisedlessexchangerategains(amountingtoHUF95.1billion)inthecourseof2016.
Thebalanceofrevaluationreservesduetoexchangeratechanges,asanunrealisedforeignexchangeresult,decreasedbyHUF130.1billionfrom31December2015andamountedtoHUF182.5billionatend-2016.ThetotalexchangeratechangeeffectwasalossofHUF35.1billion.
ThebalancesheettotalaccordingtoHungarianAccountingStandards(HAS)wasHUF10,054.9billionon31December2016,representinga13percentyear-on-yeardecreasecomparedtoHUF11,495.5billionatend-2015.TheSelf-financingProgrammeandtheconversionofhouseholds’FXloansintoforintsaltogetherinducedastrongcontractioninthecentralbank’sbalancesheet.Ontheassetsside,thedecreaseinforeignexchangereserveswasmitigatedbytheincreaseintheIMFquotaandtheriseinrefinancingloansprovidedundertheFGS.Ontheliabilitiesside,thedepositsofcreditinstitutionsdeclinedsignificantly,whilethecentralgovernmentdepositsandthebanknotesandcoinsincreased,alongwithIMFforintdeposit,owingtothequotaincrease.
ThesumofthenetinterestresultandrealisedgainsarisingfromfinancialoperationschangedtopositiveafterthelossesofearlieryearsandshowedaprofitamountingtoHUF1.2billion.In2016,thebankrecordedanetinterestandinterestrelatedlossofHUF15.6billion,representinganimprovementofHUF27.1billioncomparedtothefigureforend-2015,mainlyduetothecontractioninthecentralbank’sbalancesheet.Owingtothedecreaseinforeignexchangereserves,theamountofforintliabilitiesfinancingthereservesalsodeclinedandafurtherreductionofthemarginbetweenforeignexchangeyieldsandforintinterestratesalsoimprovedtheinterestresult.TheHUF64.6billionincreaseintheforintinterestlosswascausedbyasignificantdecreaseofthevolumeandbytheinteresteffect.In2016,thecalendardayweightedaveragecentralbankbaseratewas60basispointslower.ThesignificantdecreaseinFXinterestgainsamountedtoHUF37.5billion,duetothedeclineofstockofforeignexchangereservesandtolowerinterestincomebecauseofthelowerforeignexchangeyields.
ThetotalrealisedgainsfromfinancialoperationsamountedtoHUF16.8billionin2016.BoththelargevolumeofforeigncurrencysecuritiessalesandshrinkingFXinterestratescausedanincreaseofHUF2billion.
Formoredetailsonimpactsonnetincome,seeSection3.11oftheBusinessReport.
MAGYAR NEMZETI BANK
ANNUAL REPORT • 2016 100
4.3 FORINT RECEIVABLES FROM THE CENTRAL GOVERNMENT
Thelineforforintreceivablesfromthecentralgovernmentcontainsgovernmentbonds,theamountofwhichdidnotchangeandamountedtoHUF39.2billionattheendof2016.Theportfolioconsistsofagovernmentdebtbondwithamaturityover5years.
4.4 FOREIGN CURRENCY RECEIVABLES FROM THE CENTRAL GOVERNMENT
Neitheratend-2015noratend-2016wasanyamountlistedinthelineforforeigncurrencyreceivablesfromthecentralgovernment.Thenetbalanceofcurrencyswapswiththecentralgovernmentshowedacreditbalance,andthustheseitemswerestatedas‘Foreigncurrencyliabilitiesofthecentralgovernment’(seeSection4.5).
4.5 FORINT AND FOREIGN CURRENCY LIABILITIES OF THE CENTRAL GOVERNMENT
Forint deposits of the central government
HUF millions
B/S line DescriptionBalance
Change31 Dec 2015 31 Dec 2016
SingleTreasuryAccount(KESZ) 403,218 785,157 381,939
DepositbyGovernmentDebtManagementAgency(ÁKKZrt) 347 433 86
Other 59 58 –1
VI.1. Forint deposits of the central government 403,624 785,648 382,024
ThetotalbalanceofforintdepositsofthecentralgovernmentamountedtoHUF785.6billionattheendofDecember2016andwasHUF382billionhigherthanattheendof2015.ThechangewascausedinthestockofKESZ,whichremainedatasteadilyhighlevelin2016.Duetothelargervolumeofgovernmentbondmaturitiesandgovernmentbondrepurchases,thebalanceofKESZwasunusuallylower.
Foreign currency liabilities of the central government
HUF millions
B/S line DescriptionBalance
Change31 Dec 2015 31 Dec 2016
Foreigncurrencydepositsofthecentralgovernment 255,939 354,385 98,446
Swapandforwardtransactionswiththecentralgovernment 0 0 0
Currencyswapswiththecentralgovernment 160,176 190,231 30,055
VII.1. Foreign currency liabilities of the central government 416,115 544,616 128,501
ThebalanceoftheforeigncurrencydepositsofthecentralgovernmentwasHUF354.4billionon31December2016,reflectinganincreaseofHUF98.4billion.However,theaverageamountofliabilitiesfor2015wasfarlowerandwasapproximately40percentbelowtheaverageofthepreviousyear.Thebalance-reducingeffectoftheDecember2015developments(PEMÁK-maturityandforeigncurrencygovernmentbondsrepurchases)carriedoverto2016.TheÁKKcontinuouslyrefilledtheforeignexchangeholdingswhichwasusedtodecreasethegovernmentdebt.OwingtoaMayandanOctoberPEMÁK-maturityandtheJulymaturityoftheeuro-bondissuedinthepastbytheÁKK,thebalanceofdepositsdroppedinthesecondhalfoftheyear.
Among the hedging transactions concludedwith the central government, only the currency swaps hadoutstandingamountatthetimesunderreview.Thecross-ratechangescausedtheincreaseofHUF30.1billion.
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Foreign currency liabilities of the central government in a breakdown by remaining maturity
HUF millions
B/S line Remaining maturityBalance
Change31 Dec 2015 31 Dec 2016
–within1year 255,939 354,385 98,446
–within1to5years 38,672 44,840 6,168
–over5years 121,504 145,391 23,887
VII.1. Foreign currency liabilities of the central government 416,115 544,616 128,501
4.6 NET POSITIONS VIS-À-VIS THE CENTRAL GOVERNMENT
HUF millions
B/S line DescriptionBalance
Change31 Dec 2015 31 Dec 2016
I.1.—vI.1. Netforintposition –364,446 –746,470 –382,024
II.2.—vII.1. Netforeigncurrencyposition –416,115 –544,616 –128,501
Total –780,561 –1,291,086 –510,525
4.7 FORINT RECEIVABLES FROM AND LIABILITIES TO CREDIT INSTITUTIONS
Forint receivables from credit institutions
HUF millions
B/S line DescriptionBalance
Change31 Dec 2015 31 Dec 2016
Security-backedloans 103,061 120,000 16,939
Coveredmortgagebonds 10,701 10,823 122
FGSrefinancingloans 1,286,742 1,415,028 128,286
Otherreceivables 5,048 2,679 -2,369
I.2. Total receivables from credit institutions 1,405,552 1,548,530 142,978
Theamountofreceivablesfromcredit institutionswasHUF1,548.5billiononDecember2016.ThetotalincreaseofHUF143billioninthebalancerelativetoend-2015appearedduetothejointeffectofanumberoffactors.
Initiatedon1June2013asatemporaryinstrument,theFundingGrowthScheme(FGS)successfullyfulfilledthegrowthandmarketdevelopmentobjectivesestablishedupontheannouncementoftheprogramme,andthereforetheFGSwasphasedoutgraduallyfromthebeginningof2016.Simultaneouslywiththis,theGrowthSupportingProgramme(GSP),wasannouncedinNovember2015,launchedwiththeaimofensuringthatbanksreturntomarket-basedlending.Withintheframeworkoftheprogramme,theMNBgrantsinterest-freerefinancingloanstocreditinstitutions.TheamountofrefinancingloansgrantedunderPillarIandPillarIIofFGS,afterdeductingrepayments,totalledHUF1,415billionon31December2016.Withintheoverallvolume,theamountfromthefirstphasewasHUF286.3billion,fromthesecondphasewasHUF753.3billion,fromthethirdphasewasHUF359billionandfromFGS+wasHUF16.2billion(repaymentoftheloanshasstarted).TheMNBacceptsSMEloansfinancedbycreditinstitutionsascollateral,inadditiontothenormalsecuritieseligibleforthecentralbank.AcceptingthevalueofcollateralblockedinfavouroftheMNBmustbecoveredbytheMNB’screditreceivablesvis-à-visthecreditinstitutioninquestion.ThetotalnominalvalueofthesecreditsamountedtoHUF834.4billionon31December2016.
MAGYAR NEMZETI BANK
ANNUAL REPORT • 2016 102
Thebalanceofsecurity-backedloansrosebyHUF16.9billionandamountedtoHUF120billionat31December2016.Itonlyincludesthestockof1-weekloantendergrantedtocreditinstitutions,astherewasnostockofovernightloansatend-2016.
Theend-2016balanceofotherreceivablesfromcreditinstitutionsdecreasedbyHUF2.4billioncomparedtopreviousyear,asthegrossvalueofnon-performingclaimsfrombanksunderliquidation,duetorecoveries,diminishedbyHUF2.9billiontoHUF8.2billionfromend-2015toend-2016.HUF0.5billionfromtherelatedimpairmentlosswaswrotebackasanimpairmentlossofHUF5.5billionwascreatedonthesereceivableson31December2016.
Forint receivables from credit institutions by remaining maturity
HUF millions
No. Remaining maturityBalance
Change31 Dec 2015 31 Dec 2016
1. –matured 5,048 2,679 –2,369
2. –within1year 177,991 186,791 8,800
3. –within1to5years 671,253 610,148 –61,105
4. –over5years 551,260 748,912 197,652
5. Total receivables from credit institutions (1+2+3+4) 1,405,552 1,548,530 142,978
Forint liabilities of credit institutions
HUF millions
B/S line DescriptionBalance
Change31 Dec 2015 31 Dec 2016
Currentaccounts 563,071 631,835 68,764
Two-weekMNBdeposits 958,100 0 –958,100
Three-monthMNBdeposits 2,986,826 899,987 –2,086,839
Otherdeposits 264,255 876,300 612,045
VI.2. Deposits of credit institutions 4,772,252 2,408,122 –2,364,130
Theline‘Depositsofcreditinstitutions’containstheliquidity-absorbinginstrumentsandminimumreservesofdomesticcreditinstitutions,bothofwhicharepeggedtothebaserate;theaggregatebalanceofsuchwasHUF2,408.1billionon31December2016.Thematuritydatesofalldepositswerewithinoneyear.ThetotaldecreaseofHUF2,364.1billioninthebalanceofdepositscanmainlybeexplainedbythedeclinein3-monthfixed-ratedeposits.Thesefixed-rateinstrumentsaresoldattendersbytheMNB;theinterestrateondepositsisthecentralbankbaserate,anditbecametheMNB’smainpolicyinstrumentfrom23September2015.The2-weekdepositwasphasedoutinApril2016.ThebalanceofovernightcentralbankdepositswasHUF612billionhigheratand-2016relativeto31December2015,buttheaverageamount,calculatedfor2016,waslowerbymorethan40percent.
4.8 NET POSITIONS VIS-À-VIS CREDIT INSTITUTIONS
HUF millions
B/S line DescriptionBalance
Change31 Dec 2015 31 Dec 2016
I.2.—vI.2. Netforintposition –3,366,700 –859,592 2,507,108
II.3.—vII.2. Netforeigncurrencyposition –51,416 –75,804 –24,388
Total –3,418,116 –935,396 2,482,720
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NetliabilitiestocreditinstitutionsdecreasedbyHUF2,482.7billiontoHUF935.4billionby31December2016.Nearlythesameamountofimprovementwasobservedintheline‘Netforintposition’,whichshowedanetforintliabilitiesbalanceofHUF859.6billionatend-2016.Thedeclinein3-monthdepositscontributedsignificantlytotheimprovementinthenetposition,aswellasthephase-outof2-weekdepositsandtheincreaseinFGSrefinancingloanstocreditinstitutionsandinsecurity-backedloans.Bycontrast,thenetforintliabilitiespositionvis-à-viscreditinstitutionsrose,owingtotheincreaseinovernightdepositsandcurrentaccountsandthedecreaseinnon-performingclaimsfromcreditinstitutionsunderliquidationcorrectedbyimpairmentloss.
NetforeigncurrencyliabilitiestocreditinstitutionsdeclinedbyHUF24.4billion,showingabalanceofHUF75.8billionat31December2016.Thenetbalanceof the foreigncurrencypositiontocredit institutionsincludedthefixforeigncurrencydepositsontheonehand,andtheoutstandingamountofforeignexchangeswapsattheendoftheperiodunderreviewontheotherhand.Theamountofforeigncurrencydepositedininterest-bearingaccountsattheMNBbydomesticcreditinstitutionsrosebyHUF36.8billionfromend-2015to31December2016.TherewasnodemandforswapsprovidingEURliquiditytothebankingsector.TheoutstandingamountofEUR/HUFswaptransactionconcludedfromMarch2016wasHUF273billionatend-2016inconnectionwithforintrefinancingloansofPillarIIoftheFGS’third,phase-outstage.TheMNB’sFXswapsinstrumentsrelatedtoPillarIIIoftheFGS(whichwasphasedoutin2014)maturedduringthesecondquarterof2016.Foreignexchangeswapsconcludedinlinewiththephasing-outofhousehold’sforeigncurrencyloansterminatedinApril2016,buttheamountofcurrencyinterestrateswapswasEUR1.1billionat31December2016.Inconnectionwiththequantitativerestrictionon3-monthdeposits,inOctober2016,theMNBdecidedtocreatetheforintliquidityprovidingfine-tuningFXswaps,whichamountedtoEUR1.3billionatend-2016.
Foreign currency receivables from and liabilities to credit institutions in a breakdown by remaining maturity
HUF millions
No. Remaining maturityBalance
Change31 Dec 2015 31 Dec 2016
1. –within1year 6,962 62 –6,900
2. –within1to5years 0 0 0
3. –over5years 0 0 0
4. Total foreign currency receivables from credit institutions (1+2+3) 6,962 62 –6,900
5. –within1year 52,445 75,507 23,062
6. –within1to5years 5,933 –9 –5,942
7. –over5years 0 368 368
8. Total foreign currency liabilities to credit institutions (5+6+7) 58,378 75,866 17,488
9. Net foreign currency position (4-8) –51,416 –75,804 –24,388
4.9 GOLD AND FOREIGN EXCHANGE RESERVES OF THE CENTRAL BANK
Forint balances
HUF millions
B/S line DescriptionBalance
Change31 Dec 2015 31 Dec 2016
Goldreserve 30,117 0 –30,117
ReservepositionintheIMF 29,353 117,772 88,419
Foreigncurrencydeposits 1,020,443 1,648,649 628,206
Foreigncurrencysecurities 8,305,698 5,787,115 –2,518,583
Foreigncurrencyrepotransactions 51,364 3,746 –47,618
II.1. Gold and foreign exchange reserves 9,436,975 7,557,282 –1,879,693
MAGYAR NEMZETI BANK
ANNUAL REPORT • 2016 104
Forstatisticalpurposes,theMNBregularlypublishestheamountofforeignexchangereserves.Accordingtothestatisticalrules,foreignexchangereservesalsoincludeaccruedinterest,andconsequently,goldandforeignexchangereservesdifferinamountaccordingtothestatisticalandaccountingrules.
ForeignexchangereservesnotincludingaccruedinterestamountedtoHUF7,557.3billionat31December2016,downHUF1,879.7billioncomparedtothepreviousyear-end.
ThereasonforthechangeingoldreserveisthatitwasinvestedbytheMNBingold-currencyswaps,insteadofreceivablesinconnectionwithgold,buttheswapshadhigheryieldswiththesamerisk.Theforeignexchangederivedfromtheswapsraisedtheamountoftheline‘Foreigncurrencydeposits’inforeignexchangereserves.The derivative-type gold receivables appeared under item II.4. Other foreign currency receivables. Thistransactiondoesnotcauseachangeinthelevelofgoldreserve,butmodifiedthetypeofreceivables.
TheIMFfreequotarosebyHUF88.4billionmainlyduetotheIMFquotaincreasecarriedoutinFebruary.TheHungary’sIMFquotarosebySDR901.6million(HUF354.4billion)toSDR1,940billion.AccordingtoIMFrules,25percentofquotaincrease(amountingtoSDR225.4million)–whichisstatedunderforeignexchangereserves–hadtobesatisfiedinSDR,and75percent(amountingtoSDR676.2million)inowncurrency,whichmeanforint(thelatterisshownunder‘Otherforeigncurrencyreceivables’;seeSection4.10).
Theend-2016balanceofforeigncurrencysecuritiescontainedthosesecuritieswhicharemanagedbytheexternaltrusteeonthegroundofthemandateinatotalamountofHUF209.2billion(3.6percentaltogether).
Euro balances
EUR millions
B/S line DescriptionBalance
Change31 Dec 2015 31 Dec 2016
Goldreserve 96 0 –96
ReservepositionintheIMF 94 379 285
Foreigncurrencydeposits 3,259 5,301 2,042
Foreigncurrencysecurities 26,526 18,607 –7,919
Foreigncurrencyrepotransactions 164 12 –152
II.1. Gold and foreign exchange reserves 30,139 24,299 –5,840
The official exchange rate of the forint was EUR/HUF 313.12 on 31 December 2015 and EUR/HUF 311.02 on 31 December 2016.
Inthecourseof2016,themostsignificantitemincreasingforeignexchangereserveswastheincomingEURtransfersfromtheEuropeanCommission;furthermore,thematurityofmonetarypolicyswapswithcreditinstitutionsandchangesincrossratesalsoincreasedthebalance.Thelevelofreserveswasreducedbythematurityandterminationofonepartofforeignexchangeswapsandcurrencyinterestrateswapsrelatedtophasing-outofhousehold’sforeigncurrencyloans;thesumofthedebtmanagementandotheractivitiesoftheGovernmentDebtManagementAgency;bythenetbalanceofforeigncurrencyinfluxandpaymentmanagedbytheHungarianStateTreasury.Asaconsequenceoftheaforementionedeffects,thestockofforeignexchangereservesdenominatedineurodecreasedbyEUR5.8billionby31December2016.
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4.10 OTHER FORINT AND FOREIGN CURRENCY RECEIVABLES
Other forint receivables
HUF millions
B/S line DescriptionBalance
Change31 Dec 2015 31 Dec 2016
Receivablesfromsupervisoryactivities 5,345 8,996 3,651
Employeeloans 2,061 2,552 491
Total other receivables in HUF in gross value 7,406 11,548 4,142
Impairmentlossforotherreceivables –5,308 –8,719 –3,411
I.3. Other forint receivables 2,098 2,829 731
ThebalanceofreceivablesfromsupervisoryactivitiescorrectedbyoverpaymentsamountedtoHUF9billionat31December2016,andanimpairmentlosswasrecognisedfor96.9percentofthis,inlinewiththeinternalrulesoftheMNB.ThetotalamountofthepersonalloansandpreferentialpropertyloansgrantedbytheMNBtoitsemployeeswasHUF2.6billionatend-2016.
Other foreign currency receivables
HUF millions
B/S line DescriptionBalance
Change31 Dec 2015 31 Dec 2016
ForintpaymentofIMFquota 383,432 645,754 262,322
Receivablesfrominvestmentunits 15,796 0 –15,796
Foreignhedgingtransactions* 96 81,951 81,855
Other 83 1,411 1,328
II.4. Other foreign currency receivables 399,407 729,116 329,709
* The revaluation difference of hedging derivative transactions is stated in net terms, in accordance with the MNB Decree.
TheforintpaymentoftheIMFquotarosebyHUF262.3billionduringtheyear(formoredetailsontheIMFquotaincrease,seeSection4.9).
ThedeclineofHUF15.8billionobservedintheline‘Receivablesfrominvestmentunits’wasduetothefactthattheChineserenminbi-denominatedinvestmentunitstoberecordedatmarketvaluewereshownamongnon-foreignexchangereservesbefore1February2016,buttheynowformapartofforeignexchangereserves(thetransactiontookplacewithintheframeworkofCentralBankRenminbiProgrammeannouncedbytheMNB,inthefirstphaseofwhichinvestmentunitswerepurchasedindirectlyfromtheBIS).
Theitem‘Foreignhedgingtransactions’includesthenetdebitbalanceofswapandforwardtransactionswithnon-residentcounterpartiesconcludedbytheMNB,includingthegold-currencyswapmentionedinSection4.9.
MAGYAR NEMZETI BANK
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4.11 OTHER DEPOSITS AND LIABILITIES
Other forint liabilities
HUF millions
B/S line DescriptionBalance
Change31 Dec 2015 31 Dec 2016
Internationalfinancialinstitutions'forintdeposits 38,818 50,029 11,211
Otherliabilities 8,161 9,391 1,230
VI.4. Other forint deposits and liabilities 46,979 59,420 12,441
Theitem‘Internationalfinancialinstitution’sdeposits’mainlyincludestheforintdepositsoftheEuropeanCommission.
Other foreign currency liabilitiesHUF millions
B/S line DescriptionBalance
Change31 Dec 2015 31 Dec 2016
IMFdeposit 777,395 1,035,803 258,408
Foreigndepositsandloans 129,834 141,112 11,278
Hedgingtransactions* 25,144 4 –25,140
Otherliabilities 1,068 714 –354
VII.3. Other foreign currency liabilities 933,441 1,177,633 244,192
* The revaluation difference of hedging transactions is stated in net terms, in accordance with the MNB Decree.
ThebalanceofotherforeigncurrencyliabilitiesincreasedbyHUF244.2billiontoHUF1,177.6billionasat31December2016.TheIMFdeposit’sbalancechangedduetotheFebruaryquotaincreaseamountingtoHUF257.1billion,alongwithanAprilswitch-overtothenewofficialexchangerateorderedbytheIMFamountingtoHUF13.4billion,inadditiontoexchangeratechanges.
ThetotalincreaseofHUF11.3billioninthebalanceofforeigndepositsresultedfromariseinthevolumeofhedgingtransactionsmarkedtomarket,anditwasreflectedinthechangeintheamountofthemark-to-marketdeposit,whichisforthemarketpricedifferencesoftransactions.
Theitem‘Hedgingtransactions’containsthenetcreditbalanceofforwardtransactionswithnon-residentcounterpartiesconcludedbytheMNB.Atend-2016,thenetdebitbalanceofHUF82billionofswaptransactionsappearedunderitemII.4.Otherforeigncurrencyreceivables.
Other foreign currency liabilities by remaining maturityHUF millions
B/S line Remaining maturityBalance
Change31 Dec 2015 31 Dec 2016
–within1year 539,056 787,152 248,096
–within1to5years 0 0 0
–over5years 0 0 0
–withoutmaturity 394,385 390,481 –3,904
VII.3. Other foreign currency liabilities 933,441 1,177,633 244,192
Theitem‘Liabilitieswithoutmaturity’almostexclusivelyincludestheliabilitiesamountingtoSDR991.1million,whichderivedfromtheSDRallocationcarriedoutbytheIMFin2009.Exchangeratechangescausedthedecrease.
INDEPENDENTAUDITOR’SREPORT
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Currency structure of other foreign currency liabilities
HUF millions
No. DescriptionBalance
Change31 Dec 2015 31 Dec 2016
1. –USD 13,853 19,740 5,887
2. –EUR 147,729 103,687 –44,042
3. –JPy 0 –14,619 –14,619
4. –SDR 437,140 429,720 –7,420
5. –Other 309,575 639,101 329,526
6. Other foreign currency liabilities 908,297 1,177,629 269,332
Theitem‘Other’amountedtoHUF639.1billionattheendof2016andmainlycontainstherevaluation-correctedforintcoverageoftheIMFquota.
4.12 INVESTED ASSETS
Inadditiontointangibles,tangiblesandcapitalexpenditure(HUF41.8billion),investedassetsincludesharesininvestments(HUF9.6billioninforeigninvestmentsandHUF56.9billionindomesticinvestments).
Changes in the gross value, depreciation, and net value of intangibles, tangibles and capital expenditure
HUF millions
AssetsIntangibles,
tangibles and capital
expenditure
Immaterial goods Tangible assets Capital expenditure
and advances
given
Intangible assets
Software under
development
Buildings and accessories Equipment Depository
Programme
Assets of banknote and coin
Gross value
31 Dec 2015 12,005 101 28,100 15,507 8,867 239 322 65,141
Commissioning/Acquisition
1,478 427 481 1,968 555 4 25 4,938
Otheraddition/Reclassificaion
8 8
Scrapping –585 –3 –15 –603
Selling –2 –2
Transferfreeofcharge
–310 –310
Otherdisposal/Reclassification
–83 –505 –2 –2 –7 –599
31 Dec 2016 12,815 528 28,076 17,158 9,430 241 325 68,573
Details of depreciation
31 Dec 2015 10,224 0 4,726 9,910 0 0 0 24,860
Ordinarydepreciation
818 867 1,270 2,955
Derecognition –658 –27 –314 –999
31 Dec 2016 10,384 0 5,566 10,866 0 0 0 26,816
Balance
31 Dec 2015 1,781 101 23,374 5,597 8,867 239 322 40,281
31 Dec 2016 2,431 528 22,510 6,292 9,430 241 325 41,757
Change 650 427 –864 695 563 2 3 1,476
MAGYAR NEMZETI BANK
ANNUAL REPORT • 2016 108
InMay2016,duringthetransferoftheTiszaroffTrainingandRecreationCenterascontributiontoMNB-JólétiKft,theTiszaroffproperty’snetbookvalueamountedofHUF486millionwasremovedfrombuildingsandcapitalexpenditure.ThevalueoftheinvestmentinMNB-JólétiKftincreasedaccordingtotheHUF510millioncontributionvalueoftheproperty,andthepricedifferenceamountedtoHUF24millionwasrecognisedasincomefromotherthancommissions.
Thenetvalueofthestate-owned,managedbuildings(3buildingsand2plotsofland)wasHUF64millionat31December2016.
Foreign investments and dividends from investments
HUF millions
DescriptionOwnership share (%) Book value Dividends received*
31 Dec 2015 31 Dec 2016 31 Dec 2015 31 Dec 2016 2015 2016
BIS 1.43 1.43 7,888 7,850 761 734
SDR millions 10 10
CHF millions 13.5 13.5
EuropeanCentralBank 1.38 1.38 1,754 1,742 – -–
EUR thousands 5,601 5,601
SWIFT 0.03 0.03 15 14 0 0
EUR thousands 46.4 46.4
Total investments 9,657 9,606 761 734
* Dividends financially settled in the given year.
Ownership distribution in the ECB at 31 December 2016
TheRepublicofHungaryjoinedtheEuropeanUnionon1May2004.Consequently,theMNBbecameamemberoftheESCB.TheESCBcomprisestheEuropeanCentralBank(ECB)andthenationalcentralbanksofthe28EUMemberStates.TheEurosystemiscomposedoftheECBandofthenationalcentralbanksofMemberStateswhichhavealreadyadoptedtheeuro.
PursuanttotheprovisionsofArticle28oftheStatuteoftheESCBandtheECB(hereinafterreferredtoas‘theStatute’),theMNBhasbecomeanowneroftheECB.SubscriptionsdependonshareswhicharefixedinaccordancewithArticle29oftheStatuteandmustbeadjustedeveryfiveyearsbasedondemographicandGDPdataprovidedbytheEuropeanCommission.SharescanadditionallychangewithanewaccessiontotheEUorwithcapitalincrease.
PursuanttoArticle47oftheStatute,non-euroareaNCBsarerequiredtopay3.75percentoftheirsubscribedcapitaltotheECBasacontributiontotheoperationalcostsoftheECB.Asanon-euroareaNCB,theMNBisnotentitledtoreceiveanyshareofthedistributableprofitsoftheECB,norisitliabletofundanylossoftheECB.
TheMNB’sparticipationintheECBispresentedinthesub-item‘Investedassets’under‘III.Bankingassets’inthebalancesheetoftheMNB.Thevalueoftheinvestment(i.e.paid-upcapital)amountedtoEUR5.6million(HUF1.7billion)intheMNB’sbalancesheetasat31December2016.
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National Central Banks (NCBs)Subscribed capital Paid-up capital
Capital key (%)EUR thousands
NationaleBankvanBelgië/BanqueNationaledeBelgique 268,222 268,222 2,4778DeutscheBundesbank 1,948,209 1,948,209 17,9973EestiPank 20,871 20,871 0,1928CentralBankofIreland 125,646 125,646 1,1607BankofGreece 220,094 220,094 2,0332BancodeEspaña 957,028 957,028 8,8409BanquedeFrance 1,534,900 1,534,900 14,1792Bancad'Italia 1,332,645 1,332,645 12,3108CentralBankofCyprus 16,378 16,378 0,1513LatvijasBanka 30,537 30,537 0,2821Lietuvosbanka 44,729 44,729 0,4132BanquecentraleduLuxembourg 21,975 21,975 0,2030CentralBankofMalta 7,015 7,015 0,0648DeNederlandscheBank 433,379 433,379 4,0035OesterreichischeNationalbank 212,506 212,506 1,9631BancodePortugal 188,723 188,723 1,7434BankaSlovenije 37,400 37,400 0,3455NárodnábankaSlovenska 83,623 83,623 0,7725SuomenPankki–FinlandsBank 136,005 136,005 1,2564Subtotal for euro area NCBs 7,619,885 7,619,885 70,3915BulgarianNationalBank 92,987 3,487 0,8590Českánárodníbanka 174,012 6,525 1,6075DanmarksNationalbank 161,000 6,038 1,4873Hrvatskanarodnabanka 65,199 2,445 0,6023MagyarNemzetiBank 149,363 5,601 1,3798NarodowyBankPolski 554,565 20,796 5,1230BancaNaţionalăaRomâniei 281,710 10,564 2,6024Sverigesriksbank 246,042 9,227 2,2729BankofEngland 1,480,244 55,509 13,6743Subtotal for non-euro area NCBs 3,205,122 120,192 29,6085Total NCBs 10,825,007 7,740,077 100,0000
Domestic investments and dividends from investments
HUF millions
DescriptionOwnership share (%) Book value Dividends received*
31 Dec 2015 31 Dec 2016 31 Dec 2015 31 Dec 2016 2015 2016Pénzjegynyomda Zrt. 1055Budapest,Markóutca13–17. 100.0 100.0 10,627 10,627 0 0
Magyar Pénzverő Zrt. 1239Budapest,Európau.1. 100.0 100.0 575 575 0 80
Pénzügyi Stabilitási és Felszámoló Nkft. 1055Budapest,Bajcsy-Zsilinszkyút78. 100.0 100.0 50 50 – –
MARK Magyar Reorganizációs és Követeléskezelő Zrt. 1055Budapest,Bajcsy-Zsilinszkyút78.
100.0 100.0 21,700 19,298 0 0
MNB-Jóléti Kft. 1054Budapest,Szabadságtér8–9. 100.0 100.0 75 569 – –
MNB-Biztonsági Zrt. 1054Budapest,Szabadságtér8–9. 100.0 100.0 200 740 0 0
GIRO Elszámolásforgalmi Zrt. 1054Budapest,vadászutca31. 100.0 100.0 9,779 9,779 0 0
KELER Zrt. 1074Budapest,Rákócziút70–72. 53.3 53.3 643 643 0 0
KELER KSZF Zrt. 1074Budapest,Rákócziút70–72. 0.2 0.2 7 7 0 0
Budapesti Értéktőzsde Zrt. 1054Budapest,Szabadságtér7. 75.7 81.4 13,543 14,619 36 0
Befektetések összesen 57,199 56,907 36 80
* Dividends financially settled in the given year.
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Participations of domestic investments
Description
Participations
NameHeadquarter
Ownership share (%)
Share capital (HUF millions)
31 Dec 2016
PénzjegynyomdaZrt. DIPA Diósgyőri Papírgyár Zrt.3535Miskolc,Hegyaljaút203/1. 100.0 4,196
MARKZrt. MARK Ingatlan Zrt.1055Budapest,Bajcsy-Zsilinszkyút78. 100.0 20
MNB-BiztonságiZrt. QUALITAS-Védelmi Tanácsadó Kft.1123Budapest,Alkotásutca50.C.ép.v.em. 100.0 140
GIROElszámolásforgalmiZrt. BISZ Központi Hitelinformációs Zrt.1205Budapest,Mártonffyutca25–27. 100.0 217
KELERZrt. KELER KSZF Zrt.1074Budapest,Rákócziút70–72. 99.7 1,823
BudapestiÉrtéktőzsdeZrt. KELER Zrt.1074Budapest,Rákócziút70–72. 46.7 4 500
KELER KSZF Zrt.1074Budapest,Rákócziút70–72. 0.1 1823
Inadditiontobanknotes,Pénzjegynyomda Zrt. producesdocuments,taxstampsandsecuritiesfordomesticandforeignclients.Developmentsandinvestmentswereimplementedtoensurethemodern,secureproductionofforintbanknotesanddocumentssatisfyingcustomerneeds.Themainstrategyofthecompanyisfocusedonbanknoteproduction inadequatequantityandexcellentquality,and increasedpenetration inmarketsegmentsotherthanbanknoteproductionbasedoncompetitiveadvantages.Thissetofgoalscanensurethelong-termgrowthpathforPénzjegynyomdaZrt.andmaintainandenhanceshareholdervalue. AspartoftheprogrammeforchanginganddevelopingHungary’sbanknotes(between2013and2018),thecompanyappliesallofitsresourcesfortheproductionofthedevelopedbanknotes.Beyondthatithasstabilizeditspresenceintheproductionandpersonalisationofimportantdomesticdocumentsforthecontractingperioduntil2022.In2015,anewsitewassetupinaccordancewiththemountingdemand,featuringnewtechnologyaswellastheimplementationofequipmentinvestmentsmeetingmodernrequirements.Inthefirsthalfof2016,thecompanymainlyproducedcards,printeddocuments,manufacturedtaxstamps/banderolesonsite,andin2017itwillestablishedacentreprimarilyprovidingthepersonalisationofpassportsandotherdomesticdocuments.ThevalueoftheinvestmentschangedtoHUF11,827millioninJanuary2017,resultingfromtheincreaseinthesharecapitalofHUF1.2billion,whichwasnecessaryfortheequipmentinvestments.TheprimaryfunctionofDiósgyőri Papírgyár Zrt.(DIPA),withthepriorityofservingitsshareholder,istoproducebanknotebasepaperinadequatequantity,quality,andtiming.Atthecentreoftheproductstrategyofthecompanyarequalityproductsappliedwithhigh-levelsecurityelements.Besidebanknotebasepaper,DIPAproducesasignificantshareofbasepapersfordocumentsusedinpublicadministration,basepapersfortickets,aswellasthebasepapersforthepassportsofseveralcountriesandfordocuments,forwhichitensurescomplexsolutions.Thecompanystands,alsoininternationalrelations,forstrengtheningtheappreciationofitscustomersbasedontraditionandinnovativesolutionsandstabilisingorimprovingtheresultsachieved,therebyensuringanefficientinvestmentfortheshareholder.
PursuanttotheMNB’sorder,theprimarydutyofMagyar Pénzverő Zrt.istoproducecirculationcoinsforcashturnoverandcommemorativecoinsissuedbytheMNB.Utilisationofthecompany’sfreecapacityallowsfortheproductionofnon-legaltendercommemorativecoinsandothermedalsonthebasisofitsowncoinprogrammeandcustomisedorders.Withintherangeofitscommercialactivities,thecompanysellscommemorativecoins,collectorbanknotes,medalsandgoldinvestmentproductsinHungaryandabroadasawholesalerandretaileraswell.
Pénzügyi Stabilitási és Felszámoló Nonprofit Kft.(PSFNKft.,FinancialStabilityandLiquidatorNon-profitLtd.)performstasksrelatedtotheadministrationandthereforetotheoperativemanagementandifnecessaryto
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theorganisedmarketderecognitionoffinancialinstitutionsincrisis.Withintheframeofitspublicfunction,PFSNKft.designatesthesupervisorycommissionersassumingpartialoroverallmanagementofthefinancialinstitutions,whichneeddirectprofessionalcontrolandreviewbythesupervisorymeasuresoftheMNB.IfitisstatedthatinspiteofthesupervisorymeasuresoftheMNBorthedesignationofsupervisorycommissioners,theprudentandlegaloperationofthefinancialinstitutionisnotensured,theexpertsofPSFNKft.shallprovideforliquidationorforwinding-upproceedingsofthefinancialinstitutions.Thepurposeoftheseproceduresistorealisecreditorsinterests,tosatisfytheirclaimspriortotheinstitution’stermination.PSFNKft.performsitsfunctionsforpublicuse,protectingtheinterestsoftheusersoffinancialservices.TheexpressedaimofPSFNKft.istoperformtheterminationofcreditinstitutions,financialenterprises,insurancecompanies,capitalmarketinstitutions,fundsandotherfinancialinstitutionsinaunifiedapproachandmethodology;andtoclosetheterminationsassoonaspossiblekeepinginmindtheircomplexityandtheinterestsofthefinancialcustomers.
TheobjectiveofMagyar Reorganizációs és Követeléskezelő (MARK) Zrt. (MARKHungarianRestructuringandDebtManagementPrivateCompanyLimitedbyShares,MARKLtd.)istoeffectivelycleanupasignificantportionofthenon-performingcommercialrealestateloanportfoliosofthebankingsectorfromthebalancesheetofthebankingsystem.In2016,MARKcontinuedintheframeworkoftheagencycontracttohandleandsellthereceivablesandpropertiesregisteredinthebooksofMagyarSzanálásivagyonkezelő(MSZvK)groupmembers.Followingthereviewofthepreviousstrategicdirections,thecompanyprimarilyprovidesinstitutionalorprofessionalinvestorswithdebtandrealestateportfoliomanagementservices.TheaimoftheMNBistohaveasuccessfulprecedentattheEuropeanlevelsetbytheoperationofMARK,asaresultofwhichtherelianceonthecentralbankwillceaseanditsoperationwillbeplacedonamarketbasisovertheshortterm.ThebookvalueoftheinvestmentwasmodifiedbyHUF2,402milliontoHUF19,298millionin2016duetotheimpairmentbasedontheyear-endvaluation.
MNB-Jóléti Humán Szolgáltató és Üzemeltető Kft.isresponsibleforthemaintenanceandoperationoftheTiszaroffTrainingandRecreationCenterandfortheprovisionofrecruitmentandotherservicesdeterminedbytheMNBathighlevelon-site(conferences,trainings,courses,externalassemblies).Inaddition,thecompanyoperatesthebuffetsatworkplacesforemployeesoftheMNBandprovidesotherservices(e.g.catering,operationofTeátrum)fortheMNBastheowner.ThebookvalueoftheinvestmentincreasedfromHUF75milliontoHUF569millionin2016duetothesharecapitalincrease(realpropertyandcashcontribution)duringtheyearandtheimpairmentlossbasedonthelossstatedinthefinancialstatementfor2015andtheexpectedlossfor2016.
MNB-Biztonsági Zrt. performs activepersonalguardingandprotectionactivityinaccordancewiththecontentsoftheservicecontract.ThecompanycarriesoutthepersonalguardingandprotectionoftheofficeobjectsandpremisesoftheMNBwitharmedsecurityguardsunderlegalobligation.Additionally,itisinvolvedinperformingthetasksofmoneyandvaluablestransportandthemaintenancetasksofCITvehicles.MNB-BiztonságiZrt.carriesouttasksofguardingandprotectingandsecuringeventsfortheMNBwithpersonalandpropertyprotectionguardsonadhocbasis,beyonditsmainactivitywitharmedsecurityguards.Thepersonalandpropertyprotectionactivityofthecompanywasintegratedin2016withtheconvoyofconsignmentsthatrequiresecuritysurveillance.MNB-BiztonságiZrt.doesnotprovideservicestothirdpartiesoutsidetheMNB.Afurtherrise,toanextentorderedbythepolice,inthenumberofhighlytrainedguardswithspecialexpertiseisessentialforsuccessfullydischargingtheincreasedguardingandprotectiontasks(e.g.guardsauthorisedtohandlenewequipmentrequiredforpassengerandluggageinspection).ThebookvalueoftheinvestmentincreasedtoHUF740millionin2016duetothepaymentinthesharecapitalofHUF10millionandinthecapitalreserveofHUF530million.
Bybecomingthesoleowner of GIRO Zrt.,theMNBhastheopportunitytodirectlyimplementitsideasfordevelopingelectronicmoneycirculation.Thecompanyoperatesthepaymentsystemfordomesticinterbankforintcredittransfersanddirectdebits,theso-calledInterbankClearingSystem.Thekeyobjectives in itsstrategyincludestableandsafeoperation,developmentoftheexistingclearingservices,implementationofnewclearingservices,andincreasingthecompetitivenessofclearingfees.Inlinewiththis,afterdecreasingtheclearingtransactionsfeesby20percentin2015,thecompanycarriedoutafurtherreductioninthefees
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inJanuary2016,asaresultofwhichtheinterbanktransferfeefellby27percentintotal,comparedtothepricesbeforetheacquisitionbycentralbank.From1January2016allforintcredittransfersrequiringinterbankclearing,submittedtothecreditinstitutionsonpaper,areprocessedintheintradaysettlementsystemoftheInterbankClearingSystem,representinganewsteptowardthetrendtomovealltransactionsfromtheovernightsettlementintothequickerintradaysettlementsystembasedonmodernstandards.Relatingtotheimplementationofthepaymentaccountdirective,aservicefacilitatingswitchingthebankswasintroducedforthecustomersofthepaymentserviceproviders.Thepreparationforimplementationoftheinstantpaymentinfrastructurewasstartedinordertoacceleratefurtherthepaymenttransactionsandtobroadentheuseofelectronicpaymentmethods.Usingthenewpaymentsystempaymentswillbeabletobeeffectedinafewseconds24hoursaday,oneverydayoftheyear.
MNBincreaseditsownershipinBudapesti Értéktőzsde Zrt.(BÉT)toa81.35percentstakebyend-2016bypartiallytakingoverthestakeofsmallinvestors.TheaimoftheMNBistodevelopandbuildmarketandtoachieveanadequatelysized,effectivelyoperatingcapitalmarketinHungary,sincethebaseofthecompetitiveeconomyandofthesustainablegrowthisadevelopedcapitalmarketanddiversifiedfinancialintermediarysystem.Thedevelopmentofthedomesticcapitalmarketisallthemorerelevant,becausefundsarisingfromtheEuropeanUnionarealreadyexpectedtodeclineconsiderablybefore2020andwiththephasing-outoftheFGStheMNBwillalsoreduceitssupportforcorporatelending.Theexpansionofthestockexchangewillbebasedontheclosecooperationofthestate,themarketandtheBÉTwiththedevelopmentofregulationframeworkandmarketstructurestimulatingtheoperationofthecapitalmarket.ThenewstrategicpolicyoftheBÉTuntil2020consistsofthefollowing:successfulofficiallistingsonthestockexchange,governmentsupport,renewalofthemarketstructure,strengtheninginvestorsandinternationalrelations,aswellasboostingbondandderivativemarkets.Thestrategyfocusesonwideningtheinvestorbaseandmakingmoreattractivetheconditionsofsupplyanddemandandliquidityinthedomesticstockexchange,contributingtoestablishingahealthierstructureofthefinancialsystemandimprovinginterestratetransmission.Thisstrategycanassistthefurtherreductionoftheshadoweconomybyensuringthetransparencyofthelistedcompanies.In2016,aspartofthenewstrategyBÉTcarriedoutseveralmeasures:organisinginternationalforumsandconferencesinordertostimulatethesupply-sideoftheissues,encouragingdemandsidewitheducation,theStockExchangeAdvisoryBodywasestablished,andpreparationsweremadefordevelopingtheSMEmarket.Asanimportantdevelopment,thegovernmentlaunchedtheStockExchangeDevelopmentFound,whichalsomaycontributetosupplyingSMEswithcapital.SincethecompanyhasaminorityparticipationintheKELERGroupconsistingofKELER Zrt.andKELER KSZF Zrt.,theMNBalsoholdsastrategicshareintheKELERGroupasthemajorityowneroftheBÉT.Astheoperatorofthepost-tradeinfrastructureintheHungariansecuritiesmarket,theKELERGroupaccounts,guaranteesandsettlesthestockexchangetransactionstradedontheBÉTandtransactionsinvolvingdematerialisedsecuritiesissuedinHungary.
Equity of domestic investments
UponcompilationoftheAnnualReport,thelatestavailabledataareshowninthefollowingtable.
HUF millions
InvestmentShare capital Reserves Profit/loss
for the year Equity
31 Dec 2016
PénzjegynyomdaZrt. 10,627 4,113 1,634 16,374
MagyarPénzverőZrt. 575 691 148 1,414
PénzügyiStabilitásiésFelszámolóNkft. 50 3 0 53
MARKZrt. 700 20,102 –21 20,781
MNB-JólétiKft. 763 –113 –74 576
MNB-BiztonságiZrt. 210 718 675 1,603
GIROElszámolásforgalmiZrt. 2,496 6,402 459 9,357
KELERZrt. 4,500 23,040 1,272 28,812
KELERKSZFZrt. 1,823 3,857 133 5,813
BudapestiÉrtéktőzsdeZrt. 541 5,432 73 6,046
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The MNB’s receivables from and liabilities to affiliated companies
HUF millions
InvestmentReceivables Liabilities
31 Dec 2016
PénzjegynyomdaZrt. 0 1,042
MagyarPénzverőZrt. 5 1
MNB-JólétiKft. 84 138
MNB-BiztonságiZrt. 1 0
GIROElszámolásforgalmiZrt. 1 1
KELERZrt. 0 1
Total 91 1,183
Theabovetablepresentsshort-termreceivablesandliabilities.LiabilitiestoPénzjegynyomdaZrt.derivefrominvoicingofproducedbanknotes.ReceivablesfromandliabilitiestoMNB-JólétiKft.areadvancedpaymentsprovidedinconnectionwithoperatingofthecompanyandfromcostaccounting.
4.13 IMPAIRMENT LOSSES AND PROVISIONS
HUF millions
B/S line Description31 Dec 2015 Interim changes in 2016 31 Dec 2016
Impairment losses / provisions Increase (+) Reversal (-) Total impairment
losses / provisions
1 2 3 4 5 3+4+5
I.2. Forintreceivablesfromcreditinstitutions 5,985 4 –500 5,489
I.3. Otherforintreceivables 5,308 3,411 0 8,719
II.4. Otherforeigncurrencyreceivables 18 0 –18 0
III. Investedassets 120 2,531 0 2,651
III. Otherassets 9 20 –2 27
vIII. Liabilities 1,978 280 –1,569 689
–litigationrelatedliabilities 1,096 131 –687 540
–FGS+refinancingloans 0 149 0 149
–derivatives 744 0 –744 0
–bondlending 138 0 –138 0
Total 13,418 6,246 –2,089 17,575
ImpairmentlossesandprovisionsincreasedbyHUF4,157milliontoHUF17,575millionin2016.
Basedontheexpectedrecovery,animpairmentlossofHUF5,489millionwascreatedforforintreceivablesfromcreditinstitutions;comparedtoend-2015,intotaltherewasaformationofanimpairmentlossintheamountofHUF4millionandawrite-backofanimpairmentlossintheamountofHUF500million.
Inrelationtoforintreceivablesfromsupervisoryactivities,aHUF3,411millionimpairmentlossappearedintotalduringthequarterlyimpairmenttestingin2016.
Theimpairmentbalanceofotherforeigncurrencyreceivableswasutilisedinconnectionwithdepreciationofunderlyingreceivablesattheendoftheyear.
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Inrelationtoinvestedassets,aHUF2,531millionimpairmentlosswasrecognisedaccordingtotheaccountingpolicy.InconnectionwiththeinvestmentinMNB-JólétiKft.,duringthesemi-annualimpairmenttestingtheimpairmentlossamountedtoHUF48millionbasedonthe2015loss,andduringtheyear-endtestinganimpairmentlossofHUF81millionwasjustifiedduetothepreliminarylossexpectedin2016.InrelationtotheinvestmentinMARKZrt.,animpairmentlossofHUF2,402millionwascreatedinviewoftheplannedchangesin2017(sharecapitaldecreaseanditsoperationneedtoplaceonamarketbasis).Asaresultofimpairmenttesting,on31December2016,thevalueoftheinvestmentreflectsthesecurereturns,consistentwiththeprincipleofprudence.
Inthecaseofotherbankingassets,duetouncertaintiesofrecoveriesofreceivablesanimpairmentlossofHUF20millionwascreated,whileHUF2millionwaswrittenbackowingtorecoveriesin2016.
Inconnectionwithlitigation-relatedcontingentliabilities,aprovisionofHUF540millionwasnecessaryasof31December2016;comparedtoend-2015;intotaltherewasaformationofaprovisionofHUF131millionandareversalintheamountofHUF687million.
IntheframeworkofFGS+,uptoamaximumof50percentofcreditinstitutions’capitallossarisingfromSMEloansarereimbursedbytheMNB,withinthelosscompensationlimit.In2016,provisionofHUF149millionwascreatedforthecompensationofexpectedloansinrelationtoFGS+.
Thewholeamountoftheprovisionforderivativetransactionsforpurposesotherthanhedging–duetothematurity–wasreversedin2016.
Accordingtotheinternationalsecuritieslendingcontracts,theMNBischargedwiththeentireamountofpotentiallossesarisingfromhedgeinvestmentsmadebyagents.Basedontheprincipleofprudence,aprovisionmustbecreatedtocoverthislossasafutureliability.Becauseoftherecallofthetwounderlyingsecuritiesin2016,theentireprovisioncreatedforsecuritieslendingwasreleased.
4.14 PREPAID EXPENSES/ACCRUED INCOME AND ACCRUED EXPENSES/DEFERRED INCOME
HUF millions
B/S line DescriptionBalance
Change31 Dec 2015 31 Dec 2016
Duetobankingtransactions 95,500 68,837 –26,663
Duetointernaloperation 197 383 186
IV. Prepaid expenses/accrued income 95,697 69,220 –26,477
Duetobankingtransactions 30,806 31,814 1,008
Duetointernaloperation 238 669 431
X. Accrued expenses/deferred income 31,044 32,483 1,439
Prepaidexpenses,accruedincome,accruedexpenses,anddeferredincomeincludeinterestreceived/chargedandinterestrelatedincome/chargesandexpensesincurredinthereportingperiod,independentlyofthedateoffinancialsettlement.
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4.15 CHANGES IN EQUITY
HUF millions
B/S line Description 31 Dec 2015 Interim change 31 Dec 2016
XI.1. Sharecapital 10,000 0 10,000
XI.2. Retainedearnings 63,417 44,452 107,869
XI.3. valuationreserves 0 0 0
XI.4. Revaluationreservesduetoexchangeratechanges 312,599 –130,140 182,459
XI.5. Revaluationreservesofforeigncurrencysecurities 28,510 –11,156 17,354
XI.6. Profit/Lossfortheyear 94,452 –40,171 54,281
XI. Equity 508,978 –137,015 371,963
* Presented in the 2016 balance-sheet structure.
ThesharecapitalconsistsofasingleregisteredsharewithanominalvalueofHUF10billion.
Formoredetailsonrevaluationreserves,seeSection4.16.
4.16 REVALUATION RESERVES
HUF millions
B/S line Description 31 Dec 2015 31 Dec 2016 Változás
XI.4. Revaluationreservesduetoexchangeratechanges 312,599 182,459 –130,140
XI.5. Revaluationreservesofforeigncurrencysecurities 28,510 17,354 –11,156
Total revaluation reserves 341,109 199,813 –141,296
TheofficialforintexchangerateversustheeurofluctuatedinarangeofEUR/HUF304.28to317.97in2016.ItreacheditslowestvalueinearlyOctoberanditshighestvalueinmid-January.Comparedto31December2015,theexchangeratestrengthenedby0.7percent.TheexchangeratewasEUR/HUF311.02asat31December2016.TheaveragecostrateweakenedbyHUF2.99toEUR/HUF301.16.Asaresult,thedifferencebetweentheofficialandaveragecostratewaslowercomparedtoend-2015(adecreasefromEUR/HUF14.95toEUR/HUF9.86).Consequently,therevaluationreservesduetoexchangeratechanges,calculatedasthedifferenceofforeignexchangeitemsconvertedintoforintsusingtheofficialandaveragecostrate,decreasedbyHUF130.1billiontoHUF182.5billion.
Revaluationreservesofforeigncurrencysecuritiesarecalculatedasthedifferencebetweenthemarketvalueandtheamortisedbookvalueofsecurities.MarketvaluedifferencesontheforeigncurrencysecuritiesintheMNB’sportfolioshowedabalanceofHUF17.4billionasat31December2016.
Annual changes in the forint exchange rate
EUR/HUF
Date MNB official exchange rate Average cost rate
31Dec2015 313.12 298.17
31Dec2016 311.02 301.16
Annual appreciation
In2015 0.6%
In2016 0.7%
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4.17 OFF-BALANCE SHEET LIABILITIES AND OTHER SIGNIFICANT OFF-BALANCE SHEET ITEMS OF THE MNB
Liabilities arising from hedging transactions and derivative transactions for purposes other than hedging with related receivables
HUF millions
No. Description31 Dec 2015 31 Dec 2016
Receivables Liabilities Net market value Receivables Liabilities Net market
value
1. Interestrateswaptransactions 2,634,171 2,634,171 17,976 3,870,739 3,870,739 36,358
–IRSconditionalonlendingactivity(LIRS) 0 0 0 779,560 779,560 –8,994
–IRScontractedwithdomesticcreditinstitutions
1,296,440 1,296,440 10,636 1,731,290 1,731,290 50,438
–IRScontractedwithforeignpartners 1,337,731 1,337,731 7,340 1,359,889 1,359,889 –5,086
2. Bondfuturetransactions 0 33,695 –19 0 260,719 –2,738
3. FXswapandforwardtransactions 3,478,755 3,501,907 –22,971 2,874,990 2,793,117 82,832
–ForintliquidityprovidingFXswaps 0 0 0 400,487 400,283 126
4. Currencyswaptransactions(includingtransactionswithoutcapitalreplacement)
3,291,513 3,351,549 –187,442 2,052,883 2,105,756 –172,066
–CurrencyswaptransactionslinkedtoFGS
148,106 142,494 5,734 84,783 85,143 10,094
5. Total hedging transaction (1+2+3+4) 9,404,439 9,521,322 –192,456 8,798,612 9,030,331 –55,614
6. CDStransactions 187,872 187,872 –716 0 0 0
7. FXswapandforwardtransactions 25,163 25,162 –18 0 0 0
8. Total derivative transactions for purposes other than hedging (6+7)
213,035 213,034 –734 0 0 0
9. Total (5+8) 9,617,474 9,734,356 –193,190 8,798,612 9,030,331 –55,614
Thetableaboveincludesalltypesofoff-balancesheetliabilitiesarisingfromderivativetransactions;italsoincludesFXswaps,currencyswapsandforwardtransactionsforhedgingpurposes,whicharepartoftheforeigncurrencypositionandarerecordedinthebalancesheet,exceptforcurrencyswapswithoutcapitalmovement.Hedgingtransactionsreducerisksrelatedtothenetforeigncurrencypositionandarisingfromcross-ratefluctuationsandinterestratechanges.ThesetransactionssupportthecreationofthebenchmarkforeigncurrencystructuredeterminedbytheMonetaryCouncil.
TheaimofinterestrateswaptransactionsforhedgingpurposeslinkedtospecificbondissuanceistoachievetheintereststructuredeemeddesiredbytheMNB.Furthermore,since2014,theMNBconcludedinterestrateswaptenderswithdomesticcreditinstitutionsinordertoreducetheirinterestraterisk,additionallyin2016interestrateswapsconditionalonlendingactivity(LIRS)wereconcluded.Mostoftheapprovedtransactionshaveamaturityof1to5years,andlessthan7percenthave10-yearmaturity.
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Theaimofbondfuturestransactionsistoreducethedurationofthereserveportfolio;thesearehedgingtransactionsmaturingwithin1year.
FXswapandforwardtransactionsarethemain instruments forhedging foreignexchangerisk,basedonexpectationsrelatedtoforeignexchangeratechanges;theiraimistoachievethetargetedforeigncurrencyposition,andtheirmaturityislessthan1year.Inthefourthquarterof2016,anewforintliquidity-providingFXswapwaslaunchedformonetarypolicypurposesrelatedtothequantitativelimitforthe3-monthdeposit.
Currencyswaptransactionsareformanagingforeignexchangeandinterestraterisksjointlyoverthelongrun.Theiramountdecreasedin2016,assomeofthetransactionsrelatedtophasingouthouseholds’foreigncurrencyloansmatured.Oftheend-2016balance,32percentofthecurrencyswaptransactionsconsistedoftransactionswithoutcapitalreplacementconcludedinFebruaryandNovember2013withamaturityof10years.
Liabilities from derivative transactions by remaining maturity
HUF millions
No. Remaining maturityBalance
Change31 Dec 2015 31 Dec 2016
–within1year 4,884,234 3,390,360 –1,493,874–within1to5years 1,988,576 2,829,416 840,840–over5years 2,648,512 2,810,555 162,043
1. Hedging transactions 9,521,322 9,030,331 –490,991–within1year 213,034 0 –213,034–within1to5years 0 0 0–over5years 0 0 0
2. Derivative transactions for purposes other than hedging 213,034 0 –213,0343. Total (1+2) 9,734,356 9,030,331 –704,025
Other off-balance sheet liabilities
HUF millions
No. DescriptionBalance
Change31 Dec 2015 31 Dec 2016
1. FGSresidualdrawablecreditfacilities 185,609 121,583 –64,0262. FGS+relatedcontingentliabilities 0 149 1493. Litigation-relatedcontingentliabilities 1,564 716 –8484. Guarantees 1,763 1,804 415. Otheroff-balancesheetliabilities 15 15 06. Total (1+2+3+4+5) 188,951 124,267 –64,684
InconnectionwiththeFundingforGrowthScheme,theMNBreportsthefollowingitemsasoff-balancesheetliabilities:thestillavailablecreditfacilitiesallocatedoriginallyintheframeworkofFGS+,butnowdrawablebothintheadditionalphaseofFGSPillarIandinthePillarofFGS+attherequestofthebanks;furthermore,thecreditfacilitiesdrawableinthe3rdphaseofFGSPillarIandPillarIIoriginatingfrom2016.
InaccordancewiththecontractsconcludedintheframeworkofFGS+,uptoamaximumof50percentofthecapitallossofcreditinstitutionsarisingfromSMEloansarereimbursedbytheMNBtothecreditinstitutionswithinalimit.FGS+relatedcontingentliabilitiesaretorecordtheexpectedreimbursementforwhichprovisionshavebeenformedinlinewiththerulesofqualification.
MAGYAR NEMZETI BANK
ANNUAL REPORT • 2016 118
Themajorityoftheproceedingsareconnectedtothesupervisoryactivitiesandcontainproceedingsagainstpenaltyresolutionsaswellasindemnitycases.Therelatedcontingentliabilitiesaretorecordthepaidbutlitigatedpenaltiesandotherexpectedcompensationsconnectedtolegalproceedingsforwhichprovisionshavebeenformed.
Theitem‘Guarantees’consistsofexportguarantees,towhichanirrevocableindemnitybondisalwayslinked.Whenexercisingaguarantee,theMNBhastherighttoareverseguaranteeifneeded.In2015,theincreaseinthebalancewascausedbyexchangeratechanges.
Recording off-balance sheet security transactions
HUF millions
No. DescriptionBalance
Change31 Dec 2015 31 Dec 2016
1. Facevalueofsecuritieslent 555,761 364,807 –190,954–automaticsecuritieslending 48,037 24,457 –23,580–agencysecuritieslending 507,724 340,350 –167,374
2. Purchasecostofthenon-cashhedgearisingfromsecuritylendingtransactions 96,973 89,298 –7,675
3. Investmentofcashhedgearisingfromsecuritylendingtransactions–atpurchasecost 432,792 236,400 –196,392–atmarketvalue 432,654 236,400 –196,254
4. Notinvestedcashhedgearisingfromsecuritylendingtransactions 0 27,199 27,1995. Facevalueofsecuritiesboughtunderrepotransactions 51,006 3,670 –47,3366. FacevalueofsecuritiessoldunderreverserepoandblockedtoECBrepo
transactions 0 0 0
4.18 NET INTEREST INCOME AND REALISED NET INCOME OF FINANCIAL OPERATIONS
Net forint and foreign currency interest and interest-related income
HUF millions
P/L line Description 2015 2016 Change
1 2 3 4 4–3
(I.1.+II.2.)—(X.1.+XI.1.) Centralgovernment –3,551 –3,506 45
(I.2.+II.3.)—(X.2.+XI.2.) Creditinstitutions –89,341 –28,699 60,642
(I.3.+II.1.+II.4.)—(X.3.+XI.3.) Other 122,537 74,812 –47,725
Net profit/loss from interest 29,645 42,607 12,962
Forintsecurities 485 122 –363
Foreigncurrencysecurities –91,024 –52,584 38,440
Derivativetransactionsforhedgingandotherpurposes* 18,218 –5,786 –24,004
Other –27 14 41
(I.4.+II.5.)—(X.4.+XI.4.) Net interest-related profit/loss –72,348 –58,234 14,114
(I.+II.)—(X.+XI.) Net interest and interest-related income –42,703 –15,627 27,076
* For details on derivative transactions for hedging and other purposes, see the last table in this section.
In 2016, theMNB recorded a net interest and interest-related loss ofHUF15.6billion, representing animprovementofHUF27.1billioncomparedtothefigureforend-2015,whenalossofHUF42.7billionwasreported.
INDEPENDENTAUDITOR’SREPORT
ANNUAL REPORT • 2016 119
Net interest incomeimprovedbyHUF13billion incomparisontoend-2015,duetothedropin liquidity-absorbinginstruments(mainpolicyinstrumentsandO/Ndeposits)asaresultoftheshrinkageofthecentralbankbalancesheetandthedecreaseintheaveragebaserate.
Positivefactorsinnetinterestincomewere:
–interestexpensesonthemainpolicyinstruments(onthree-monthMNBdeposits)wereHUF50.5billionlower;
–interestpaidontheforintdepositsofthecentralgovernmentdecreasedbyHUF5.5billioncomparedto2015,duetothefallingforintinterestrates;
–anincreaseininterestincomeonloanstocreditinstitutionsandmortgagebondsofHUF0.9billionstemmedfromtheriseinsecurity-backedloans.
Negativefactorsinnetinterestincomewere:
–adeclineofHUF45.5billionininterestincomeonforeignexchangereservesrelativeto2015;
–adecreaseofHUF5.6billionininterestincomeonreceivablesfromthecentralgovernmentarisingfromtheloweramountofgovernmentbonds.
Netinterest-relatedincomeincreasedbyHUF14.1billion;itincludesmainlythenetgainorlossonderivativetransactionswhicharenot relatedtoexchangeratechangesandtheamortisationof thepurchasepricedifference(premium)ofsecurities.
Negative sums for interest income/expenses in the net forint and foreign currency interest and interest-related income for 2016
HUF millions
P/L line Description Totalof which:
Negative sums for interest
INCOME
II. Interest and interest-related income denominated in foreign currency 154,036 –2,942
II.1. Interestonforeignexchange 78,010 –2,908
II.5. Interest-relatedincome 76,026 –35
EXPENSES
X. Interest and interest-related expenses denominated in forint 45,866 –17
X.1. Interestoncentralgovernmentdeposits 5,680 0
X.2. Interestondepositsbycreditinstitutions 32,853 –17
X.3. Interestonotherdeposits 89 0
X.4. Interest-relatedexpenses 7,244 0
XI. Interest and interest-related expenses denominated in foreign currency 141,203 –4,258
XI.1. Interestoncentralgovernmentdeposits –1,845 –1,848
XI.2. Interestondepositsbycreditinstitutions –173 –178
XI.3. Interestonotherliabilities 3,233 –410
XI.4. Interest-relatedexpenses 139,988 –1,822
MAGYAR NEMZETI BANK
ANNUAL REPORT • 2016 120
Details of income from derivative transactions for hedging and for purposes other than hedging represented in interest-related income
HUF millions
No. Description 2015 2016 Change
1. Netinterestoncurrencyswaps –2,288 –14,414 –12,126
2. Interestmarginonhedgeinterestrateswaps 15,798 11,047 –4,751
3. NetinterestgainsonhedgeFXswaps 5,902 –2,203 –8,105
4. Netinterestgainsonhedgeforwardtransactions 652 –1,015 –1,667
5. Netinterestgainsonhedgefuturestransactions –1,624 –2,956 –1,332
6. Netinterest-relatedincomeonhedgeswaptransactions –148 3,270 3,418
7. Netinterest-relatedincomeonhedgeoptiontransactions 137 95 –42
8. Netinterestandinterest-relatedincomeonothertransactions –211 390 601
9. Net income from derivative transactions (1+2+3+4+5+6+7+8) 18,218 –5,786 –24,004
Currency swap transactions include derivative transactions concluded with foreign partners, with theGovernmentDebtManagementAgency(ÁKK),andwithdomesticcreditinstitutions.TheaverageamountoftransactionsconcludedwiththeGovernmentDebtManagementAgencyincreasedin2016,butchangesinFXmarketyields(euroandUSdollaryields)hadanunfavourableimpactontheresult.ThetransactionsconcludedwithforeignpartnersservemainlytohedgetransactionsconcludedwiththeGovernmentDebtManagementAgency.Theaverageamountoftransactionsdidnotchangein2016,butchangesinFXmarketyieldscausedaslightlyincreaseintheinterestincome.Theaverageamountoftransactionsconcludedwithdomesticcreditinstitutionsdroppedconsiderablycomparedto2015,resultingfromthematurityofapartofthetransactionsrelatedtothephasing-outofhouseholds’foreigncurrencyloans.ThenetinterestresultofthecurrencyswapswasalossofHUF14.4billion,andtherewasadeteriorationofHUF12.1billioncomparedto2015.
TheHUF4.8billiondecreaseintheinterestresultoninterestrateswapswascausedbythoseconditionalonlendingactivity(LIRS).Underthefacility,theMNBoffersthebanksafixedrateconstructionbelowthemarketrate,whichisexpectedtopromotelendingbymanagingbanks’interestraterisksarisingfromlending,throughthepartialassumptionofsuchrisksbytheMNB.
HedgeFXswapsincludeshort-termtransactionsconcludedwithforeignpartners,withtheGovernmentDebtManagementAgency,andwithdomesticcreditinstitutions.NetinterestgainsontheseswapsdecreasedbyHUF8.1billioncausedmainlybymaturityin2016oftransactionsrelatedtothephasing-outofhouseholds’foreigncurrencyloans.Interestexpensesontransactionsconcludedwithforeignpartnersincreasedasaresultofthechangeintheirforeignexchangecomposition.
The amount of hedge forward transactions concludedwith foreignpartners increased, but transactionsconcludedwith the Government DebtManagement Agencywere terminated, and therewere no suchtransactionsin2016.Theforeignexchangecompositionofthetransactionsdifferedsignificantlyin2016from2015becausethetransactionswereconcludedwithdifferentpartners.NetinterestgainsonhedgeforwardtransactionsdecreasedbyHUF1.7billion,resultingfromthelessfavourabledifferenceininterest.
NetinterestlossonhedgefuturestransactionsincreasedbyHUF1.3billion,duetothegreateramountandthehigherinterestexpenseonbondfuturestransactions.
Netinterest-relatedincomeonhedgeswaptransactionsincludestheexchangerategainsorlossesofthetransactions.TheHUF3.4billionincreaseinthenetinterest-relatedresultonhedgeswapswascausedmainlybytheexchangerategainsarosefromtheterminationofinterestrateswapsconcludedwithcreditinstitutions.
INDEPENDENTAUDITOR’SREPORT
ANNUAL REPORT • 2016 121
Realised gains/losses from financial operations
HUF millions
P/L line Description 2015 2016 Change
RealisedgainsonbondsissuedbytheHungarianGovernment 2,694 132 –2,562
Realisedgainsoncoveredmortgagebonds 417 0 –417
Realisedgainsoncouponbearingbondsdenominatedinforeigncurrency 15,079 23,568 8,489
RealisedgainsrelatedtoCDStransactions 0 0 0
IV. Realised gains from financial operations 18,190 23,700 5,510
RealisedlossesonbondsissuesbytheHungarianGovernment 0 0 0
Realisedlossesoncoveredmortgagebonds 0 0 0
Realisedlossesoncouponbearingbondsdenominatedinforeigncurrency 2,388 6,123 3,735
RealisedlossesrelatedtoCDStransactions 940 731 –209
XIV. Realised losses from financial operations 3,328 6,854 3,526
IV.-XIV. Net financial gains/losses 14,862 16,846 1,984
Realisedgainsandlossfromfinancialoperationsincludegainsandlossesarisingfromsalesofsecurities,fromsalesofinvestmentsarisingfromsecuritylendingtransactionsandgainsandlossesrelatedtoCDStransactions.
NetrealisedgainsfromfinancialoperationsamountedtoHUF16.8billionin2016,improvingbyHUF2billioncomparedto2015.Theseweremainlyexchangerategainsarisingfromthesalesofcoupon-bearingforeignexchangebonds.
4.19 COMPONENTS OF INCOME FROM THE REVALUATION OF FOREIGN EXCHANGE HOLDINGS
HUF millions
Description 2015 2016
Netincomefromexchangeratechanges(realisedandconversionspread)* 177,677 95,089
Changeinrevaluationreservesinthebalancesheet**(duetounrealisedrevaluationnetincome) –205,385 –130,140
Total effect of exchange rate changes –27,708 –35,051
* P/L line: III.-XII.** Revaluation reserves due to exchange rate changes (balance sheet line XI.4.).
In2016,thetotalexchangeratechangeeffectwasalossofHUF35.1billion,duetothechangesintheexchangerateoftheforint.InthesalesrelatedtodecreasingthedailynetFXposition,theMNBrealisedagainofHUF95.1billion,whiletheamountoftherevaluationreservewasdecreasedbytheunrealisedexchangeratechangeslossesofHUF130.1billionduringtheyear.
Formoredetailsonrevaluationreserves,seeSection4.16.
MAGYAR NEMZETI BANK
ANNUAL REPORT • 2016 122
4.20 COST OF ISSUING BANKNOTES AND COINS
HUF millions
P/L line Description 2015 2016 Change
Costofbanknoteproduction 7,925 11,712 3,787
Costofcoinproduction 3,025 1,988 –1,037
Costofproductionofcommemorativeandcollectorcoins 336 463 127
XIII. Cost of issuing banknotes and coins 11,286 14,163 2,877
ThetotalcostofissuingbanknotesandcoinsamountedtoHUF14.2billionin2016,representinganincreaseofHUF2.9billioncomparedtothefigurefor2015.Thegrowthoriginatedinparticularinthehighermanufacturingneedsresultingfromtheprogrammeforchanginganddevelopingthenewbanknotes,whichcausedanincreaseofHUF3.8billioninthecostofbanknoteproduction.In2016,noincreaseddemandforcoinswasseenaswasthecasein2015,andthereforethecostofcoinproductiondecreasedbymorethanHUF1billioncomparedtothepreviousyear.Thecostofproductionofcommemorativeandcollectorcoinssubstantiallyexceededthefigurefor2015,asdemandforcommemorativecoinsincreasedsignificantly.Thecommemorativecoinforthe5thanniversaryoftheFundamentalLawofHungarywasanunplannedissue,whichalsoraisedthecosts.
4.21 OTHER INCOME/EXPENSES
HUF millions
P/L line Description 2015 2016 Change
v.1. Incomefromfeesandcommissions 1,033 941 –92
Xv.1. Expensesoffeesandcommissions 851 693 –158
Net income from fees and commisssions 182 248 66
v.2. Incomefromotherthanfeesandcommissions 1,380 1,634 254
Xv.2. Expensesofotherthanfeesandcommissions 20,417 4,570 –15,847
Net income from other than fees and commisssions –19,037 –2,936 16,101
V.3. Income from supervisory activities 12,111 14,675 2,564
V.–XV. Other net results –6,744 11,987 18,731
Incomefromfeesandcommissionsmainlyrelatestopaymentservices.In2016,theincomefromfeesandcommissionsdecreasedmainlybecausefrom1January2016thefeeperitemforsubmittedorderssank.Thedeclineinexpensesforfeesandcommissionswascausedbythelowercostsrelatedtothemanagementofforeignsecuritiesaccounts.
Formoredetailsonincomeotherthanfeesandcommissions,seeSection4.22;inrespectofincomerelatedtosupervisoryactivities,seeSection4.23.
INDEPENDENTAUDITOR’SREPORT
ANNUAL REPORT • 2016 123
4.22 INCOME OTHER THAN FEES AND COMMISSIONSHUF millions
P/L line Description 2015 2016 Change
Incomerelatedtocoinsandcommemorativecoins 471 609 138
Dividendsfrominvestments 797 814 17
Incomerelatedtoinvestedfinancialassets 0 24 24
Incomefromassetsassignedfreeofcharge 1 0 –1
Recommitmentoffinancialmoneytransfer 13 93 80
Otherincome 98 94 –4
V.2. Income from other than commissions and charges 1,380 1,634 254
Financialmoneytransfer 15,288 3,697 –11,591
Expensesrelatedtocoinsandcommemorativecoins 458 569 111
Expensesrelatedtopublicproceedings 98 217 119
Expensesfromassetsassignedfreeofcharge 4,545 18 –4,527
XV.2. Expenses from other than commissions and charges 20,417 4,570 –15,847
V.2.–XV.2. Net income/expenses from other than commissions and charges –19,037 –2,936 16,101
Incomeotherthanfeesandcommissionsincludesthefollowingin2016:
–Netincomerelatedtocoinsandcommemorativecoinsdependsonthecommemorativecoinprogramme,andarisesmainlyfromthedifferencebetweentheincomefromsalesofcommemorativecoinsandtheexpensesrelatedtotheremovalofthecoins’facevalue.Relatedincomeandexpensesarealmostequal,sincebyagreement,thesaleofcommemorativecoinsisaccountedwiththePénzverőZrt.atfacevalue,exceptwhentheproductioncostexceedsthefacevalue.
–DividendsfrominvestmentsincreasedbyHUF17millioncomparedto2015.In2016,MagyarPénzverőZrt.paidadividendofHUF80milliontotheMNB,andBISpaidEUR2.3million(HUF734million)totheMNB.
–Theitem‘Incomerelatedtoinvestedfinancialassets’includesthepricedifferencebetweenthebookvalueandthetransactionalvalueoftherealpropertyatTiszarofftransferredascontributiontotheMNB-JólétiKft.(seeSection4.12).
–In2016,theitem‘Financialmoneytransfer’includestheHUF600millionallocationoffounders’financialassets related to the Pallas Athena Public Thinking Programme andmoney transfers for financial andprofessionalpurposes,mainlytofoundations,professionalorganisationsandtoschools,aswellasdonationsforcharitablepurposes.AfterthesettlementdonationsnotallocatedareremittedtotheMNB.
–Expensesrelatedtopublicproceedingsarisingmainlyfromremittanceofpenaltiesrelatedtoinoperativedecisionsandaccountedearlierasincome,moreovercancellationofpenalties.
4.23 INCOME FROM SUPERVISORY ACTIVITIES
HUF millions
P/L line Description 2015 2016 Change
Supervisoryfeeanddefaultinterest 8,940 9,119 179
Receivedpenaltiesandreimbursementfrompublicproceedings 2,913 5,255 2,342
Administrativeservicingfeefrompublicproceedings 180 281 101
Latepaymentsurchargeforsupervisoryclaims 23 10 –13
Otherincomearisingfromadministrativeprocedures 55 10 –45
V.3. Income from supervisory activities 12,111 14,675 2,564
MAGYAR NEMZETI BANK
ANNUAL REPORT • 2016 124
Themain itemof incomefromsupervisoryactivities is thesupervisory feereceivedfromthesupervisedinstitutionsobligedtopaythisfee.In2016,theincomearisingfromtheassessmentoftheminimumchargesfortheentireyearandofthequarterlypayablevariable-ratefeesamountedtoHUF9.1billion,whilein2015thedeclaredobligationamountedtoHUF9billion.PenaltiesimposedbytheMNB,whichbecamefinalandfromreimbursementsaddeduptoHUF5.3billion.Inconnectionwithpenalties,animpairmentofHUF3.4billionwasalsocreatedintheperiodunderreviewfortherecoveries,aswellasforlitigationitemsbasedontheprobabilityoflosingalawsuit(seeSection4.13).AdministrativeservicingfeesandmagisterialexamfeesamountedtoHUF0.3billionin2016.
4.24 OPERATING INCOME AND EXPENSES
HUF millions
P/L line Description 2015 2016 Change
Incomefromassetsandinventories 62 20 –42
Incomefromsubcontractedservices 454 224 –230
Incomefrominvoicedservices 931 1,052 121
Otherincome 19 41 22
VIII. Total operating income 1,466 1,337 –129
Expensesofmaterials 11,677 12,372 695
Costofmaterials 464 432 –32
Cervicescontracted 11,182 11,899 717
–Maintenance,operationandrentofproperties 1,944 1,806 –138
–Maintenanceandrentofequipments 649 675 26
–Postalandtelecommunicationservices 618 684 66
–Consultancyservices 1,657 1,138 –519
–ITsecurityservices 1,338 1,375 37
–Membershipfees 487 606 119
–Guardingservices,transportofbanknotesandcoins 2,726 4,132 1,406
–Advertisements,marketresearch 757 505 –252
–Other,nonsignificantservices* 1,006 978 –28
Otherservices 31 41 10
Personnel-relatedcosts 19,712 21,146 1,434
Depreciation 2,671 2,954 283
Transferofcostsofotheractivities –1,086 –1,077 9
Total operating costs 32,974 35,395 2,421
Expensesincurredonassetsandinventories 60 30 –30
Expensesincurredonsubcontractedservices 452 223 –229
Expensesincurredoninvoicedservices 1,036 1,013 –23
Otherexpenses 430 370 –60
Total operating expenses 1,978 1,636 –342
XVIII. Total operating costs and expenses 34,952 37,031 2,079
VIII.–XVIII. Net operating expenses –33,486 –35,694 –2,208
* Other, non-significant services contains in particular preparation of publications, travel and hotel services, services for education, translation and audit, as well as distribution of commemorative coins.
INDEPENDENTAUDITOR’SREPORT
ANNUAL REPORT • 2016 125
NetoperatingexpensesamountedtoHUF35.7billionin2016,representinganincreaseofHUF2.2billion(6.6percent)comparedto2015.
Operatingexpensesin2016were7.3percent(HUF2.4billion)higherthanpreviousyear.Themainreasonforthiscostincreasewashigheramountofcostofmaterialsandpersonnel-relatedexpenses.
Thecostofmaterialsinthereportingyearwas6percent(nearlyHUF0.7billion)higherthanpreviousyear.
Theincreaseincostsrelatedtoarmedguardingandprotectionweremainlyobservedamongthematerialnature-relatedexpenses.Thisismostlytheresultoftheimpactofoutsourcingofguardingactivitiesandtheenforcementofhighersafetyrequirements,whicharoseonlyfromMarch2015,whilein2016hasalreadyappliedfortheentirereportingperiod.Inaddition,from1January2016thecostsofguardingincreased.
Withinthecostsofmaterials,consultancycostsandlegalexpensesdeclined.ThemainreasonwasthatthecostsassociatedwiththeBank’sassetmanagementmainlyarosein2015,andsignificantlyfewercasesrequiredlegalresolutionsbyFinancialArbitrationBoardpursuanttotheNationalBankActin2016comparedtothenumberofcasesin2015.
In2016advertisingandmarketresearchcostsalsofell,mainlyduetodelaysinpublicprocurementproceduresrelatedtocommunicationtasks.
Personnel-related costs increased by 7.3 per cent (HUF 1.4 billion) compared to the previous year. Theaverageheadcountrose4.1percent,duetounfilledpositionsandsupplyofnewtasks(e.g.resolutionandreorganisationactivities,andtheFinancialArbitrationBoard’sactivities).Thecostofthehealthprogramme(generalmedicalscreening)in2016accountedforasmallerpartofthisgrowth,duetothelongerdurationandgreaternumberofemployeeswhohadrecoursetothisexamination.
Depreciationincreasedby10.6percent(byHUF0.3billion)in2016versusthepreviousyear,mainlyduetotheinvestmentsrealisedin2015.
Thetransfer of costsisintendedtoensurethatthetotalamountofoperatingexpensesreflectsonlytheactualexpensesincurredbytheMNB.Theabsolutevalueoftransfersin2016wasHUF1.1billion,whichis99.2percentofthetotalin2015.OntheonehandthetransferreddepreciationofleasedareasoftheEiffelPalaceofficebuildingpurchasedduringtheyearappearsinthisitem,andontheotherhanditalsoincludestherentpaidbyMagyarPénzverőZrt.totheMNBforthepartialuseoftheLogisticCenterarea.Theself-developedsoftwarecostsalsoappearinthisitem,asthesecostsbysoftwareactivationwillbepartofassets.
Therevenueofinvoicedmediatedservicescomesprimarilyfrompropertyrentalincome.Rentsandre-invoicedoperatingcostsarereportedasrevenue,operationalandamortizationcosts–relatedtorentalactivity–transferredfromoperatingactivitiesarereportedasexpenditures.
MAGYAR NEMZETI BANK
ANNUAL REPORT • 2016 126
4.25 INFORMATION ON WAGES AND NUMBER OF STAFF
HUF millions
Description 2015 2016 Change (%)
Payrollcostsincurredonstaff 12,484 13,144 5
Otherstaffcosts* 470 530 13
Payroll 12,954 13,674 6
Other payments to personnel 2,362 2,853 21
Socialcontributiontax 3,544 3,749 6
Healthcontribution 588 595 1
Contributiontovocationaltraining 197 208 6
Contributiontorehabilitation 61 61 0
Sick-allowance 6 6 0
Taxes on personnel related payments 4,396 4,619 5
Payments to personnel 19,712 21,146 7
* Other wage costs include payments on termination and in exchange for vacation time used and amounts paid to non-staff and non-MNB workers.
Persons
Description 2015 2016 Change (%)
Averagenumberofstaff 1,274 1,326 4
Remuneration and loans of executive officers
HUF millions
Bodies Compensation
MonetaryCouncil* 315
SupervisoryBoard 156
* Includes the salaries and employer’s voluntary pension fund contributions of external members of the Monetary Council in an employment relationship with the MNB, pursuant to Article 9 (4) c) of the MNB Act.
BodiesAmount of loans Outstanding
at 31 Dec 2016 Final maturity Rate of interestHUF millions
MonetaryCouncil 48 19 01Dec2018 Floating*
SupervisoryBoard – – – –
* The preferential interest rate for housing loans is the central bank base rate, the interest rate for personal loans is the central bank base rate +1 per cent.
24April2017,Budapest
DrGyörgyMatolcsy GovernoroftheMagyarNemzetiBank
ANNUAL REPORT
2016 BUSINESS REPORT AND FINANCIAL STATEMENTS OF THE MAGYAR NEMZETI BANK
Print:Prospektus–SPLconsortium
6Tartuu.,veszprémH-8200