Hungary Central Bank and Lenders Reach Deal on FundingZoltan Simon and Edith Balazs
Hungary’s central bank has agreed with commercial lenders to increase the margin allowed on loans funded by its zero-interest lending plan, designed to end a recession, Magyar Nemzeti Bank President Gyorgy Matolcsy said.
After discussions with the lenders, the monetary authority agreed to raise the banks’ margin on the 250 billion forint ($834 million) of funding to 2.5 percent from 2 percent, including a guarantee fee, Matolcsy told reporters in Budapest today. The MNB also agreed to raise the upper limit for individual loans to 3 billion forint from 400 million forint, he said. The bank may start the so-called Funding for Growth program on June 1.
“We have high hopes that at least two-thirds of the domestic financial industry, a critical mass, will participate in the plan according to preliminary forecasts,” Matolcsy said.
The central bank’s plan, modeled on the Bank of England’s Funding for Lending Scheme, seeks to spark growth by boosting lending to small- and medium-sized companies. Prime Minister Viktor Orban’s policies that included retroactive corporate taxes and the European Union’s highest bank levy damaged investments and credit and contributed to the country’s second recession in four years.
The forint weakened 0.2 percent to 300.17 per euro by 2:37 p.m. in Budapest after strengthening as much as 0.9 percent as Matolcsy began to speak today. It gained 1.4 percent against the euro in the past month, the most of 31 major currencies tracked by Bloomberg. That pared a 2.9 percent drop in March, the most in the world, as Matolcsy took over the central bank after serving as economy minister since 2010.
The central bank will favor “small banks” with its preferential loans as it wants to help them boost their market share, central bank Managing Director Marton Nagy said. The MNB will penalize commercial lenders that don’t disperse the preferential loans if they receive interest-free funding, he said.
OTP Bank Nyrt., Hungary’s largest lender, competes mostly with units of international banks including Erste Group Bank AG, Raiffeisen Bank International AG, UniCredit SpA, Bayerische Landesbank AG, KBC Groep NV, and Intesa Sanpaolo SpA. OTP will match the amount of central bank interest-free funds allocated to the bank for extending preferential loans, Chairman Sandor Csanyi said April 26.
The central bank also wants to reduce the amount of funds commercial banks keep in its two-week bills, which pay the benchmark rate, to 3.6 trillion forint from 4.5 trillion forint, Vice President Adam Balog said. The MNB wants to reduce the stock by early August in cooperation with commercial lenders, Balog said.
The central bank will probably bar lenders that don’t have a banking presence in Hungary from investing in the the central bank’s two-week facility, Matolcsy said, adding that no decision was made on this today.
The MNB supports converting the two-week bill, the main instrument in managing liquidity, into a deposit facility, which tightens the eligibility to banks that are active in Hungary, Matolcsy told the state news service MTI on April 18.
The funding plan has three pillars, including the preferential loans, the cut in the two-week bills aimed at reducing the country’s short-term debt and allowing for a reduction in foreign-currency reserves. A third pillar is 250 billion forint from the central bank to help small- and medium-sized companies convert foreign-currency debt to forint at market exchange rates.
While Matolcsy started the funding plan, the central bank has continued to reduce its benchmark interest rate. The MNB cut the two-week deposit rate to a record-low 4.75 percent on April 23, the ninth quarter-point cut in as many months.
“We are pursuing a conservative and responsible monetary policy,” Matolcsy said, adding that the central bank will continue its “step-by-step approach” in rate policy based on its assessment of “price stability, financial stability, economic policy and the external economic environment.”