The Hungarian FSA disagrees with a central bank proposal – supported by the country’s commercial banks – to move away from a specialist bank model for covered bonds to one allowing universal banks to issue, while the government is weighing the pros and cons of such a move.

The National Bank of Hungary (MNB) announced on 15 February that it expects to launch a covered bond purchase programme after removing a principle of only allowing mortgage banks to issue covered bonds from the country’s legislation, in favour of opening up issuance to universal banks.

“Personally I believe this is a good direction, but the Hungarian Financial Supervisory Authority seems to have had a bit of a different view,” said a treasury official at a Hungarian bank with a large mortgage portfolio. “It said it sees risks in changing current mortgage bond legislation.”

He said any change to the prevailing mortgage bond model would depend on an agreement between the central bank, FSA, and Ministry for National Economy

The FSA responded to the MNB’s announcement one day later, on 16 February, in a press release, stating that it does not agree with the plan.

The treasury official said that FSA chairman Károly Szász was quoted in an interview as saying that according to his knowledge, in Germany, where a universal model was introduced, those experts who supported the change now consider it to have been a mistake.

The treasury official said the FSA views the prevailing system as transparent, the legislation as strong, and noted that is has been perceived as strong by investors.

“The FSA claims that ring fencing the mortgage portfolio to a covered bond in a universal bank is a complicated exercise,” he said. “Legislation should be changed (for example the banking act and bankruptcy act).

“Hungary’s FSA also claims that it is not proved that fulfilling all potential additional requirements for a universal bank will necessarily be cheaper than establishing a standalone mortgage bank.”

A spokesperson for the Ministry for National Economy told The Covered Bond Report that the government had made no decision regarding a new law, but said the ministry was analysing the potential costs and benefits of restructuring the current system of covered bond issuance.

“The ministry has been monitoring the developments in the Hungarian market, including the bond market,” said the spokesperson. “Further developments of the covered bond market can increase competition which is favourable for customers. Moreover, it may help commercial banks to get access to medium and long term funding and therefore support and increase their lending, which has a potential positive systematic impact.

“On the other hand, potential risks may arise when changing the legislation. As a consequence, the government is currently analysing this possibility.”

The spokesperson said there was some, though minor, coordination between the MNB and the government.

“The decision of the central bank was its own responsibility,” he said. “Given that the representative of the government attends the meetings of the monetary council (without voting rights), the government was aware of the central bank’s proposal.”

Although Hungary’s mortgage banks and their parents have criticised the MNB’s planned move, it has won support from the country’s other commercial banks.

János Müller, chief advisor at the Hungarian Banking Association (HBA), said the MNB announcement was positive.

“It’s a measure that should be in place,” he said. “It is supposed to help promote the ability of Hungarian banks to lend – banks that have had lending activity squeezed.”

He said that he did not know how many Hungarian banks were planning to take advantage of the opportunity, or to what extent.

“We just really hope it will happen,” he said.

Csaba Pásztor, director at MKB, said he hopes the legislation would move swiftly.

“I hope that during the course of this year we will see this happen,” he said. “I don’t know how much cooperation there is between the central bank and the government on this, but I just hope it will happen soon.”

MKB has the fifth or sixth largest mortgage loan portfolio of Hungarian banks, according to Pásztor. He said that in 2010, when the central bank originally looked at a move to allow universal banks to issue covered bonds but rejected the idea, commercial banks were all behind the move. Pásztor added that he was not sure why the central bank concluded it was not the right time to change the law in its earlier decision.

“There has been only a small increase, if any, in the number of mortgages in commercial banks’ portfolios,” he said. “The main reason why the issue is on the table again is that medium to long term covered financing is important for the universal commercial banks.”

The bank had considered establishing a mortgage bank to issue covered bonds, according to Pásztor, but he said setting up a mortgage bank is expensive, and “these days it is not easy to get the necessary capital amount”.

“We were positive that the National Bank of Hungary would initiate this measure sooner or later,” he said.