The NBH also maintains an asset swap facility. Under this facility, the counterparties of the NBH are able to obtain foreign currency-denominated securities providing euro denominated securities accepted as collateral by the Eurosystem, which improves access to foreign exchange liquidity.


On 7 July 2015, the NBH announced the introduction of an interest rate swap facility with ten-year maturity, in addition to the three and five-year maturities already available. The NBH decided to extend the maturity of interest rate swaps after consultations with banks. The longer-maturity interest rate swap was intended to fit easily into the self-financing scheme and was expected to contribute to the stabilization of government debt financing.


As of 7 July 2015, the outstanding amount of swaps used by the majority of banks was nearly HUF550 billion. Demand for interest rate swaps increased again following the announcement of changes to the NBH’s monetary policy instruments. Banks have not only increased their holdings of government securities in return for the use of the NBH interest rate swap, but have also undertaken to maintain their existing government securities holdings for a sustained period.


On 10 May 2016, the NBH announced that the interest rate swap tenders introduced as part of the
Self-Financing Program launched in spring of 2014 would be terminated in July 2016. The NBH withdrew the instrument from its operations and held its last interest rate swap tender on 7 July 2016. Banks’ obligation to hold government securities remained valid until maturity of the swaps.


On 20 September 2016, the NBH announced the introduction of two new monetary policy instruments for fine-tuning the liquidity on the interbank market, to be used on an ad hoc basis after October 2016. The two new instruments were an overnight deposit instrument that pays the central bank base rate and a forint liquidity providing swap instrument allocated in a competitive tender.


On 16 March 2020, the NBH announced that it would conduct FX swap auctions on a daily basis. In addition to the 1, 3, 6 and 12-month tenders announced every Monday, the NBH will also announce one-week FX swap tenders providing forint liquidity on a daily basis from 17 March 2020 until further notice in order to maintain the appropriate level of liquidity for the banking sector and to smooth liquidity developments.


On 8 September 2020, the NBH announced a swap instrument providing foreign currency liquidity, with the intention of reducing the volatility of domestic FX swap market yields at the end of the quarter and to achieve yields in line with the level of short-term rates set by the Monetary Council.


In addition to the regular announcement of swap tenders providing forint liquidity, the NBH also expressed that swap tenders providing central bank foreign currency liquidity will be introduced as necessary to facilitate monetary policy transmission.
On 18 September 2020, and on 25 September 2020, the NBH held FX swap tenders providing euro liquidity. The NBH accepted allocated bids in the amount of EUR1.1 billion.


On 30 September 2020 the NBH announced that no bids had been received on FX swap tenders held on 30 September 2020 and 29 September 2020. Due to the activity of the NBH, unlike the previous quarter-ends, no tensions were detected in the swap market.
On 18 January 2018, the NBH held its first MIRS tender, and continued to hold fixed-rate tenders every two weeks, until the end of 2018, when the Monetary Council decided to phase out MIRS tenders.


On 21 September 2021 the NBH announced to gradually phase out the FX swap facility providing forint liquidity.
(i) Regulations to Enhance Financial Stability
In December 2009, the Government introduced regulatory changes in an effort to enhance financial stability through more stringent regulation of the financial sector and lending practices. The Government implemented the following regulatory reforms:  Legislation on strengthening the institutional framework for financial supervision was


approved by Parliament in December 2009. In line with this legislation, the HFSA was upgraded to an autonomous institution accountable to Parliament and controlling its own budget and human resources (including recruitment and lay-off of employees). Also, the Financial Stability Council (“FSC”) was established for the purpose of providing continuous valuation of the markets supervised by the HFSA.


The members of FSC are the Chairman of the HFSA, the Governor of the NBH and the Minister responsible for regulation of financial, capital and insurance markets, which was the Minister for National Economy (now the Minister of Finance). Legislation was also enacted granting the FSC and the NBH the right to propose regulations to the Government or to any member of the Government and to initiate parliamentary legislation at the Government level on a “comply or explain” basis, i.e.


, Government officials are obliged either to adopt the proposal within 15 days, or to publicly explain the rationale for disagreeing with the proposal. When the Central Bank Act of Hungary became effective on 1 October 2013, the NBH assumed the role of the HFSA. The members of the FSC became the Governor of the NBH (as chairman), the Deputy Governors of the NBH and the directors designated by the Governor of the NBH.


The representative of the Minister of Finance (previously the representative of the Minister for National Economy) and other external experts are invited by the Governor participate in meetings of FSC. The
FSC holds meetings once every two months and may schedule additional meetings as needed.
 A set of amendments to the Law on Credit Institutions and Financial Enterprises was also


enacted by Parliament in December 2009. These amendments, among other things, establish a regime for the removal of bank executives that no longer meet “fit and proper” criteria, stipulate an additional lower mandatory threshold for the appointment of a supervisory commissioner by the HFSA (i.e., the capital adequacy ratio falling below 4%), and clarify that only the HFSA has the power to initiate liquidation proceedings with respect to financial institutions.


As described above, this role is now undertaken by the NBH.  Though large-scale defaults on household loans have been avoided, the Government


developed separate regulations to reduce risks related to lending to households in foreign currency. These regulations prescribe lower loan-to-value ratios for foreign currency loans than for forint loans, and prescribe changes to banks’ scoring systems for the approval of household loans, which imply lower monthly installments for foreign currency loans than for forint loans.
(j) Mortgage Lending Regulations


Based on decisions by the Monetary Council, since 2014, the NBH has been helping the Hungarian banking system phase out household foreign currency loans, including their settlement and conversion into Hungarian forint, in order to overcome unfair applications of foreign exchange spreads which increased the payments required under such loans.


Exchange rate risk no longer places a burden on households and, indirectly, on the banking sector. However, significant liquidity risks have arisen in the banking sector as a side effect of the conversion. The reason for this is that the overwhelming majority of mortgage loans converted into forint have maturities of more than ten years, while the banking sector’s forint liabilities, typically in the form of deposits, have maturities of less than one year.


To reduce the maturity mismatch, the NBH introduced the Mortgage Funding Adequacy Ratio (“MFAR”), a prospective requirement for banks to issue long-term securities, which may appear in the market mainly in the form of mortgage bonds, in 2016.


The new ratio is defined on a consolidated level as forint liabilities backed by household mortgage loans (e.g. mortgage bonds, other securities backed by household mortgage loans and refinancing mortgage loans extended by a mortgage bank) divided by the net stock of residential forint mortgage loans with residual maturity of more than one year. The required minimum level for the MFAR was initially set at 15%, i.e. at least 15% of mortgage loans must be financed by long-term liabilities. As of


1 October 2018, the Financial Stability Council increased the required minimum level of the MFAR from 15% to 20%.


On 11 January 2019, the NBH announced a revision of the MFAR regulation. In addition to raising the required MFAR level to 25%, the amendment increased the required minimum maturity of accepted funds to 3 years and strengthened the quality requirements of eligible mortgage bonds. The amendments went into effect in two phases, with the first phase becoming effective on 1 February 2019, and the second phase becoming effective on 1 October 2019.


On 1 July 2021, the NBH revised its regulation on the MFAR so that green mortgage-backed funds with an original maturity of more than five years could be taken into account with a weight of 1.5 (a more preferential weighting) when calculating the MFAR. This revision could steer issuances towards green mortgage bonds, which would support the greening of mortgage loan portfolios that serve as cover assets for these.


With respect to the classification of mortgage bonds as “green”, the NBH requires banks to follow widely accepted and internationally employed standards to support banks’ adjustment and investor orientation.


In addition to the preferential treatment of green mortgage-backed funds, the FSB also made the following changes in the regulation supporting the reduction of the sector-level HUF maturity mismatch: raising the required minimum level of the ratio from 25% to 30%, expecting newly issued mortgage bonds to be listed on a stock exchange, and reintroducing the restrictions on cross-ownership of mortgage bonds by banks that was suspended because of the COVID-19 pandemic in an amended form, from which a discount may be obtained in the case of ownership for market making purposes


.
These changes are expected to take effect on 1 October 2022, in order to ensure adequate preparation
time for banks.
On 6 July 2021, the Monetary Council reviewed and approved the MNB’s Green Monetary Policy Toolkit Strategy. With the aim of boosting green mortgage lending, the Monetary Council launched the Green Mortgage Bond Purchase Program and the FGS Green Home Program as the first steps of the implementation of the new strategy.


The strategic goal of the Green Mortgage Bond Purchase Program is to contribute to the development of the domestic green mortgage bond market through targeted purchases and encourage green mortgage loan activities. This could indirectly support the construction of energy-efficient real estate, thereby contributing to a healthier housing market, while at the same time this may also shape environmentally conscious consumer behavior.


The NBH requires issuers to follow recognized international standards that will help to build a liquid and transparent green mortgage bond market. The program is also in line with the modification of the MFAR; therefore, the NBH would encourage the issuance of green mortgage bonds on both the demand and supply sides. The Monetary Council has decided that the NBH would review the program when the HUF200 billion purchase volume has been reached.


In addition to the launch of the Green Mortgage Bond Purchase Program, the Monetary Council also decided to re-launch the Mortgage Bond Rollover Facility for mortgage bonds without green rating that would help to preserve market stability.


To further encourage green mortgage lending, the NBH plans to launch the Green Home Program in October 2021, with a total limit of HUF200 billion as part of the FGS. As in the previous phases of the FGS, the NBH would provide refinancing operations to credit institutions at 0% interest, which are expected to be lent to residential customers at a maximum, fixed interest rate of 2.5%, until the end of the maturity period.


Under the scheme, loans of up to HUF70 million with a maximum term of 25 years can be granted for constructions or purchases of new, highly energy-efficient residential real estates.


Additionally, to prevent excessive household indebtedness and a renewed build-up of foreign currency loans in the future, the NBH introduced a debt cap regulation on 1 January 2015. Under the debt cap regulation, the payment-to-income ratio (“PTI”) limits the maximum initial debt-servicing burden as a percentage of customers’ regular legal income, thereby moderating the accumulation of household debt. The loan-to-value ratio (“LTV”) caps the maximum amount of secured household lending (e.g.


, mortgage loans) as a percentage of the value of collateral (the value of the property).


Banks are required to calculate the PTI ratio for all new borrowing (consumption loans, mortgage loans, car loans, etc.) in excess of HUF200,000. The ratio takes into account repayment amounts in respect of all existing loans of the borrower; and only proven net income (wage, pension, family allowance, etc.) can be included in disposable income. Initially, the PTI ratio for all new forint loans taken out after 1 January 2015 could not exceed 50% and, for high-income borrowers (i.e.


, for those with a HUF400,000 net salary or above), it could not be higher than 60%. If there is more than one debtor, incomes and debt burdens are treated on an aggregate basis. Due to the laxer limits applied to forint loans, the new regulation presumably will not lead to a cut-back on lending; however, if an excessive increase in household borrowing is perceived by the NBH, the limits can be tightened at any time.


PTI limits on euro and other foreign currency loans are much stricter, in order to offset the negative effects of potential exchange rate depreciation: 25% and 10% and, for higher-income customers, 30% and 15%, respectively.


On 18 June 2018, the NBH’s Financial Stability Board (“FSB”) decided to modify the debt cap rules relating to the PTI. Such modifications stipulated that, from 1 October 2018, the amount of monthly installments of HUF-denominated mortgage loans with interest rate fixing periods of less than five years may not exceed 25% – or in the case of monthly income above HUF500,000, 30% – of borrowers’ regular monthly net income.


The ratios for mortgage loans with interest rate fixing periods of more than five years but less than ten years may be 35% and 40%, respectively. Due to the lower interest rate risk, PTI limits on forint mortgage loans with interest rates initially fixed at least for ten years or for the full term of the loan were left unchanged at 50% and 60%, respectively. In the case of lending in currencies other than HUF, lower limits must also be applied to mortgage loans with shorter


interest rate fixing periods. Simultaneously, the preferential 85% weight calculation currently used for installments of mortgage loans with interest rate fixing periods of at least five years would be withdrawn.
The following table sets forth the PTI rules effective from 1 October 2018:
Table 8: PTI Rules


[Table 8: PTI Rules
__________________ Source: NBH]

 Less than five years At least five years, but less than ten years At least ten years or fixed for the whole term

PTI limits for HUF mortgage loans

Monthly net income below HUF 400,000 25% 35% 50%

Monthly net income at least HUF 400,000 30% 40% 60%
__________________ Source: NBH
(k) Loan-to-Value (“LTV”) Ratios


Required LTV ratios have been transposed into the NBH Decree in order to ensure the continuity of the regulation. The NBH consulted with the ECB, which, in its opinion issued on 23 June 2014, gave a positive assessment of the contents of the draft Decree and its expected contribution to strengthening the stability of the domestic financial system.


The NBH also consulted with market participants, and several remarks were incorporated into the draft regulation, thereby facilitating the smooth application of the Decree in the future.
The following table sets forth the required ratios under the NBH Decree:
Table 9: Required Loan-to-Value Ratios


[Table 9: Required Loan-to-Value Ratios
__________________]

"":"PTI"
"":"Under HUF400,000 monthly income"
"HUF":"50%"
"EUR":"25%"
"Other currency":"10%"

At HUF400,000 monthly income or above 60% 30% 15%

Mortgage lending 80% 50% 35%

"":"LTV (1)"
"":"Car loans"
"HUF":"75%"
"EUR":"45%"
"Other currency":"30%"
__________________
Source: NBH
Note:
(1) LTV caps 5 percentage points higher can be applied to financial leasing.
(l) Foreign Funding Adequacy Ratio


The foreign funding adequacy ratio (“FFAR”) was introduced on 1 July 2012, in order to mitigate liquidity risks. The NBH has revised the content of the FFAR, its required level and the range of financial institutions subjected to the regulation. The revision has resulted in a change in the required minimum level of the FFAR and provided for its gradual increase.


The adequacy ratio was raised from 65% to 75% on 1 July 2014, and thereafter by 5 percentage points semi-annually to 100% by 1 January 2017. In addition to the revision of the required minimum level, the effect of the regulation has been extended to Hungarian branches of foreign credit institutions.


On 7 July 2015, the NBH introduced new decrees which enacted regulations intended to reduce external vulnerability. The NBH’s FSB adopted decrees tightening the FFAR and introducing the foreign exchange coverage ratio (“FECR”). After the tightening of the FFAR, outstanding swaps can no longer be included in the ratio. The new FECR regulation limits the on-balance sheet currency mismatch to 15% of the balance sheet total, thereby reducing excessive reliance by banks on the swap market.


These NBH decrees took effect on 1 January 2016.
On 29 June 2018, the NBH announced a modification of the regulation on FFAR. The amendment, which took effect from 1 July 2018, was intended to help banks prepare for the imposition of future EU requirements.
As of 19 March 2020, for purposes of the FFAR calculation, weights attributed to liabilities with more than a one-year maturity are differentiated based on maturity. Additionally, the FECR was decreased from 15% to 10%.


(m) Liquidity Coverage Requirement
On 25 August 2015, the NBH announced that it would accelerate implementation of the Liquidity Coverage Requirement to help enhance the domestic banking sector’s shock-resilience. Credit institutions were required to comply with the requirement from 1 April 2016. As the requirement became effective, the balance sheet coverage ratio and the deposit coverage ratio ceased to function and were phased out from 1 January 2016.
(n) Systemic Risk Buffer


On 18 November 2015, the NBH announced the introduction of the Systemic Risk Buffer (“SRB”) in order to manage the risk arising from the persistently high amount and institutional concentration of problem project loans posing a key financial stability risk. The rate of the SRB was set in proportion to each individual institution’s contribution to systemic risk, and derived from the ratio of problem project loans to the domestic Pillar 1 capital requirement.


The SRB was applied individually, between 0 and 2% of total domestic risk-weighted assets, and credit institutions are required to build it up at consolidated level, from Common Equity Tier 1 (“CET1”) capital, in addition to other capital buffers. A ‘de minimis’ threshold was also introduced in order to take into account systematically relevant assets; as a result, institutions with problem project exposures below HUF5 billion are exempted from the SRB requirement.


The NBH set the SRB for institutions in the form of individual decisions in the final quarter of 2016. Institutions have been required to comply with the new capital buffer requirements from 1 January 2017. This schedule was intended to allow adequate time for banks to accommodate, i.e. to effectively clean up their non-performing project loans.


Even if the clean-up of portfolios did not take place, the additional capital requirement could strengthen the stability of the domestic financial intermediary system by improving the banks’ resilience to shocks. To the extent credit institutions swept out their problem portfolio by 1 January 2017, the new capital requirement was not binding for them. The NBH also held consultations with the European authorities and market participants on these capital requirements.


On 16 September 2019, the Financial Stability Council of the NBH amended the SRB requirement, effective as of 1 January 2020. While calculating the capital requirement, the NBH will take into account not only problem project loans but also non-problem foreign currency project loans in the future to prevent the potential re-emergence of systemic risks related to the unhealthy structure of commercial real estate project financing.


On 16 December 2019, the NBH announced that it would not require any credit institution to maintain an SRB after 1 January 2020.
As part of its COVID-19 mitigation measures, the NBH has exempted exposure to commercial real estate loans from the SRB regulation through the end of 2020.
(o) Capital Buffer Requirements


On 15 December 2015, the NBH introduced the countercyclical capital buffer, applicable to all credit institutions. According to the NBH, no excessive credit growth was observed in the Hungarian banking system at that time, thus the central bank set the countercyclical capital buffer rate to 0% from 1 January 2016.


As of 1 July 2021, the countercyclical capital buffer rate remained unchanged at 0%, and the NBH announced its intention to maintain the countercyclical capital buffer rate of 0% after 1 July 2021.


On 24 October 2016, the NBH’s FSB decided to introduce the capital buffer requirement for other systemically important institutions. The NBH’s FSB identified eight Hungarian banks as other systematically important institutions. The capital add-on for systemically important institutions was introduced in a gradually increasing manner over a four-year period from 2017. The banks required to build the systemic risk buffer to mitigate risks in relation to problem project loans had to meet their


obligations from 1 July 2017, i.e. six months later than originally scheduled. On 30 March 2020, the NBH set the capital buffer rates for other systematically important institutions to 0% from 1 July 2020, until the end of 2020.
On 2 December 2019, the NBH reviewed the list of other systemically important institutions domiciled in Hungary. The following table sets forth the scheduling of capital buffer rates for those institutions:
Table 10: Capital Buffer Rates


CIB Bank Zrt............................................................................................		0.50%
__________________
Source: NBH
On 1 December 2020 the NBH reviewed the list of other systemically important institutions domiciled in Hungary. The following table sets forth the scheduling of capital buffer rates for other systematically important institutions:
Table 11: Revised Capital Buffer Rates


[Table 11: Revised Capital Buffer Rates
__________________ Source: NBH]
2020-2021 2022 2023 2024
"":"Institution"
"Capital Buffer Rate":"(expected)"


On 28 March 2018, the Monetary Council announced the introduction of a subsequent targeted macroprudential measure, the Interbank Funding Ratio (“IFR”). The measure became effective from 1 July 2018. The ratio limits funds from financial corporations, weighted according to currency and residual maturity. The ratio considers all funding received from financial corporations, but exceptions and benefits ensure that the requirement does not materially affect normal banking operations.


Based on available data as of 30 March 2018, the 30% upper limit effective from 1 July 2018, would not require adjustment for the overwhelming majority of institutions; it would nevertheless act as a barrier to the build-up of excessive reliance on wholesale funding.
(q) Mortgage Bond Market Development


In 2010, the NBH implemented a mortgage bond purchase program as a new monetary policy tool to support the development of the domestic forint mortgage lending and mortgage bond. Under the program, the NBH purchased forint mortgage bonds and undertook regulatory initiatives to develop the domestic forint mortgage lending market.


On 15 February 2012, the NBH announced the introduction of (i) a two-year collateralized credit facility, (ii) a new universal mortgage bond purchase scheme, and (iii) an expansion of the range of eligible collateral, all to offset a weakening in banks’ lending capacity. According to the announcement, the NBH intended to provide two-year variable-rate refinancing to credit institutions at its prevailing policy rate against securities delivered as collateral.


The conditions for the provision of such refinancing were designed to facilitate an expansion in bank lending to the corporate sector. The new instrument conforms to international practice adopted to offset a weakening in the banking sector’s lending capacity and allows banks to access financing at maturities of limited availability in the market without the need to pay a term premium on longer-term funding.


By providing a long-term lending facility, the NBH expected to contribute to a strengthening in banks’ balance sheets through an improvement in the maturity match between assets and liabilities, and in turn, offset the decline in lending activity.


The NBH intended to promote lending to the household sector by introducing a universal mortgage bond purchase program. According to the statement, mortgage bonds are a key factor contributing to an improvement in the maturity match between assets and liabilities. In the view of the NBH, a universal structure for mortgage bond issuance may foster the development of a more efficient mortgage bond market.


Additionally, by increasing the outstanding amount of mortgage bonds accepted as eligible collateral, the NBH expected to alleviate liquidity constraints potentially impeding lending to the corporate and household sectors through an increase in banks’ liquidity buffers. Finally, linking the minimum credit rating limit for bank and corporate bonds to the lower rating of government debt instead of the then-current “BBB-” was expected to result in a further easing in conditions.


The program was successful in supporting the objectives set and, as a result, the amount of mortgage bonds issued in the domestic market increased significantly. On 18 September 2018, the Monetary Council made a decision to phase out the mortgage bond purchase program by the end of 2018. The mortgage bond program ended in two stages: purchases in the primary market continued until 31 December 2018, and purchases in the secondary market continued until 30 September 2018.


In May 2020, the NBH relaunched its mortgage bond purchase program to increase the banking sector’s access to long-term, stable funding. The new, second phase of the mortgage bonds purchase program was launched with broadly identical strategic parameters to those of the successful program of 2018. The NBH also makes purchases in the primary and the secondary markets.


Assets to be purchased under this program are fixed-rate forint mortgage bonds, with its total amount being a maximum of 50% of the issued stock.


As of May 2020, mortgage bonds meeting the eligibility criteria for inclusion in the program were issued to the tune of nearly HUF250 billion, significantly exceeding the total amount of fixed-rate bonds issued between the end of the purchase program in 2018 and the relaunch of purchases in May 2020, thereby providing long-term, stable forint funding to the banking sector.


The program contributed significantly to the management of economic and financial risks arising in connection with the COVID-19 pandemic.


In addition to the mortgage bond purchase program, the NBH’s monetary policy instruments had been extended with other schemes to provide long-term funding, primarily long-term credit facilities, which facilitate access for the banking sector to long-term, stable funding looking ahead. The extended set of the NBH’s policy instruments and the resulting changes in the market environment made it possible to further improve the mortgage bond purchase program and to make it more targeted.


As discussed above, in connection with its Green Program, a key priority for the NBH is the integration of long-term sustainability considerations into its monetary policy. As part of this effort, the Monetary Council decided that the NBH would begin to purchase green bonds as part of its mortgage bond purchase scheme. Green bonds eligible for purchase should contribute to environmental sustainability and should promote financing aimed at improving energy efficiency.


The NBH consulted with the Hungarian Banking Association and mortgage banks on the operative details of green mortgage bond purchases and in particular on the qualification criteria for green bond status being a requirement for participation in the program, in order to ensure that green bonds are issued as soon as possible.


From 16 November 2020, the NBH ceased purchasing bonds under its mortgage bond purchase program on the primary market and withdrew the opportunity to roll over mortgage bonds until the program for purchases of green mortgage bonds begins.


However, the NBH remains active in the market, continuing its purchases in the secondary market during the transitional period to maintain the liquidity of the mortgage bond market, and is ready to raise the amount of liquidity available for allocation under its long-term lending facility to support the banking sector’s access to long-term, stable funding.
(r) Corporate Bond Market Development


The Monetary Council launched its corporate bond purchasing program, known as the Bond Funding for Growth Scheme (“BGS”) with a total amount of HUF300 billion, on 1 July 2019. The objective of the BGS is to promote the diversification of the funding to the domestic corporate sector. Under the program, the NBH will purchase bonds with a good rating issued by domestic non-financial corporations with an original maturity between 3 years and 10 years.


The NBH will neutralize excess liquidity arising from the bond purchases by using the preferential deposit facility bearing interest at the central bank base rate. The new program complements the FGS Fix launched at the beginning of 2019. On 17 December 2019, the Monetary Council increased the original total amount of HUF300 billion to HUF450 billion from 1 January 2020, with all other conditions left unchanged.


As of November 2019, participating credit institutions concluded loan contracts with domestic SMEs totaling more than HUF340 billion under the BGS.
On 7 April 2020, the NBH announced that the total amount available under the BGS would remain unchanged at HUF450 billion. Half of the total amount had already been utilized previously, and as a result, about HUF200 billion was still available for the NBH to purchase bonds issued by non-financial corporations headquartered in Hungary.


The maximum amount of exposure to a given group of corporations was raised from HUF20 billion to HUF50 billion, and maturities of securities eligible for purchase under the scheme were increased from 10 years to 20 years, and the NBH began sterilizing the additional money created under the FGS Go! and BGS using the preferential deposit facility.


The NBH announced an interest rate of 4% (higher than the base rate) for additions to the stocks of loans and bonds made after 7 April 2020 under the FGS Go! and the BGS.
On 30 April 2020, the NBH announced that the ten largest asset managers headquartered in Hungary managing public and open-ended investment funds would be included in the group of counterparty institutions participating in the BGS and the government securities purchase program.


In addition, investment funds were given access to collateralized central bank loans of all maturities, including loans with three and five-year maturities, and the range of eligible collateral was extended to include forint-denominated securities and mutual fund shares issued by investment funds.


On 22 September 2020, the Monetary Council raised the amount available under the BGS to HUF750 billion. On 26 January 2021, the Monetary Council raised the amount available under the BGS from HUF750 billion to HUF1,150 billion and altered some conditions of the scheme. The NBH continues to sterilize the resulting surplus liquidity issued under the programs in full using the preferential deposit instrument.
(s) Government Securities Purchase Program


On 7 April 2020, the Monetary Council announced the launch of a government security purchase program in the secondary market to restore the stable liquidity position of the government securities market.


On 6 October 2020, the Monetary Council decided to change certain parameters of the program of government securities purchases to promote the effectiveness the NBH’s programs affecting long-term yields. Under the measures, the amount available for purchase of certain series of government securities had been raised from 33% to 50%.


Furthermore, the range of assets available for purchase had been extended to government-guaranteed debt securities issued, using the same strategic parameters as those of government securities purchases. In addition to the introduction of the new fine-tuning measures, the NBH had decided to take a flexible approach to the amount of its weekly purchases, focusing its purchases on longer maturities. Purchases should take place at regular weekly


tenders as well as out of tender. The Monetary Council would use the government securities purchase program through a lasting market presence to the extent required. In accordance with its previous decision, the NBH would carry out a technical review if the purchased amount increases by HUF1,000 billion from the initial amount set at the start of the program.


On 17 November 2020, the Monetary Council performed the technical revision of its government securities purchase program. According to the assessment of the Monetary Council, the program was successful. The Monetary Council would perform the next technical revision when the stock of purchases reaches HUF2,000 billion while continuously monitoring the implementation of its asset purchase program.


On 23 February 2021, the Monetary Council announced that, in line with its January decision, the NBH had reduced the weekly new liquidity provided through the collateralized lending facility from HUF30 billion to HUF10 billion, while raising the weekly purchases of the government securities purchase program to HUF60 billion. According to the announcement, the stock of government securities in the NBH’s balance sheet had increased by over HUF1,300 billion since May 2020.


On 9 March 2021, the NBH announced technical changes to the government securities purchase program. According to the announcement, the Monetary Council would stand ready to conduct purchases under its government securities purchase program flexibly, without limits on individual series. If warranted by the stability and liquidity position of the government securities market, the NBH’s purchases could exceed the 50% share of individual series.


This modification did not affect weekly amounts of purchases, only the structure of purchases, and therefore the NBH’s monetary policy stance would remain unchanged.


On 27 April 2021, the Monetary Council performed the revision of its government securities purchase program. According to the announcement, the Monetary Council would still not set a total amount for its government securities purchase program. In addition to continuously monitoring the implementation of the program, the Monetary Council would perform the next revision when stocks reach HUF3,000 billion.


On 24 August 2021 the NBH announced that the Monetary Council decided to begin gradually withdrawing the government securities purchase program and consequently government securities purchases would decrease from a weekly amount of HUF60 billion to HUF50 billion.
On 21 September 2021 the NBH announced to decrease the weekly purchases of government securities to HUF40 billion.
(t) Relationship with the Chinese Capital Market


On 27 June 2015, the PBOC and the NBH signed the Memorandum of Understanding on the establishment of RMB clearing arrangements in Hungary, and the Agency Agreement for PBOC to Manage NBH’s Investment on China’s Interbank Bond Market. The PBOC also decided to extend the pilot scheme of RMB Qualified Foreign Institutional Investors to Hungary with a total investment quota of 50 billion yuan. On 28 June 2015, the PBOC designated Bank of China as the RMB clearing bank in Hungary.


On 19 February 2015, the NBH launched its Renminbi program in connection with the foreign exchange swap agreement concluded with the PBOC. On 12 September 2016 the NBH announced that the bilateral currency swap line agreement between the PBOC and the NBH was renewed for three years with a maximum value of RMB 10 billion.


On 10 January 2020, the NBH announced that the bilateral currency swap line agreement between the PBOC and the NBH was renewed for a further three-year period with a doubled maximum value of RMB 20 billion. The renewal of the swapline fosters bilateral economic and trade relations and promotes further developments of the renminbi financial markets.
On 12 December 2016, the NBH announced that the direct trading between RMB and HUF is launched on the onshore Chinese foreign exchange market.


(u) Recent Developments in Monetary Policy
The NBH implemented coordinated measures to mitigate the COVID-19 pandemic’s negative economic effects and to ensure the required level of liquidity.


On 16 March 2020, the NBH called on Hungarian credit institutions to apply a moratorium on repayments to companies in view of the extraordinary situation caused by the ongoing COVID-19 pandemic. The NBH announced a moratorium on repayment of loans provided through the FGS program allowing banks to restructure these loans and to reschedule payments. The NBH announced that it would accept corporate loans as collateral, with a haircut of 30%.


As of 23 March 2020, loans to large companies could be placed as collateral. By expanding the scope of collateral coverage with loans to large corporations, the NBH increased liquidity potentially available for the banking sector by around HUF2,500 billion. In accordance with the proposal of the NBH, the Government announced a moratorium on corporate and household loan repayments as a precautionary restructuring measure to address the temporary difficulties faced by debtors.


On 23 September 2020, the term of the moratorium was extended from 31 December 2020 to 30 June 2021 for parents raising children, pensioners, people without a job, participants in public work schemes and businesses that have experienced a revenue decline of more than 25%.
On 19 March 2020, the FSB of the NBH announced seven measures to mitigate the impacts of the emergency situation related to the COVID-19 pandemic on the financial intermediary system:


1) Exposure to commercial real estate loans was exempt from systemic risk buffer (SRB) regulation until the end of 2020.
2) Monitoring of banks’ internal capital adequacy (ICAAP) was suspended until 30 September 2020.
3) Violating Pillar II capital recommendations (P2G) would not cause supervisory action.
4) Minimum requirements for solvency capital (MREL) for the year 2020 were postponed for six months.


5) On-site monitoring was postponed by two months, and only the most important off-site monitoring would be performed.
6) On-site monitoring of adequacy of internal liquidity evaluation procedures (ILAAP) was postponed until 31 December 2020.
7) Requirements in case of ongoing retail mortgage loan applications for real estate evaluations
and notarial deeds were suspended but required to be obtained after settlement.
In addition, the NBH made the following decisions:


1) Dividend payments were suspended until the end of September 2020.
2) In calculating FFAR, weights attributed to liabilities with more than a one-year maturity would be differentiated based on maturity.
3) FECR was decreased from 15% to 10%.


The measures taken by the FSB of the NBH aimed to mitigate the effects of the COVID-19 pandemic on the financial intermediary sector. This package of measures reduced banks’ administrative burden related to bank supervision and provided flexible adjustment to prudential requirements, e.g. capital requirements, on a temporary basis. Furthermore, the NBH strengthened banks’ capital position and provided a stable funding structure for banks by modifying macroand microprudential regulations.


The Monetary Council also took further liquidity-providing measures to enhance the effectiveness of monetary policy. The Monetary Council decided to introduce a new fixed-rate collateralized loan instrument with maturities of three, six and twelve months as well as three and five years, to be provided at a fixed interest rate by the NBH with unlimited liquidity.


On 1 April 2020, the NBH announced that publicly available open-ended investment funds would be eligible for the new fixed-rate collateralized loan instrument. In September 2020, the NBH decided that it would only


announce tenders of its long-term collateralized lending facility with three and five-year maturities. Weekly tenders with maturities of up to one year, including three, six and twelve-month maturities, would no longer be announced. To achieve technical simplification, investment funds’ indirect access (i.e. through banking sector participants) to the collateralized lending facility would be discontinued. However, direct access would remain available for the investment funds involved.


In addition, the NBH released domestic counterparty credit institutions from their reserve requirements beginning with the reserve maintenance period in March 2020. Subsequently, on 8 September 2020, due to a significant expansion in interbank liquidity, the Monetary Council decided to restore the requirements suspended in March 2020, as well as the sanctions to be applied in the event of credit institutions’ reserve deficiency, with effect from 1 October 2020.


The Monetary Council also decided that from 1 October 2020, the interest rate on the portion above the reserve requirement on reserve accounts would be the lower of (i) the current central bank overnight deposit rate, or (ii) 0%.


On 7 April 2020, the Monetary Council took the following actions to help protect and restart the economy: (i) made the interest rate corridor symmetrical; (ii) left the base rate and the overnight deposit rate unchanged at 0.90% and (0.05)% percent, respectively; (iii) raised the overnight and one-week collateralized lending rates to 1.85%; and (iv) decided to allow the interest rate on the one-week deposit rate (equal to the 0.


90% base rate at the time of the announcement) to deviate from the base rate upward or downward within the interest rate corridor. Further, the Monetary Council announced that beginning with the second quarter of 2020, the NBH would not set a target amount of banking sector liquidity to be crowded out of the instruments bearing interest at the base rate.


On 28 April 2020, the Monetary Council announced that, effective 4 May 2020, it would (i) launch a government security purchase program in the secondary market to restore the stable liquidity position of the government securities market, and (ii) relaunch its mortgage bond purchase program to improve the long-term supply of funding to the banking sector. The government security purchase program involves fixed-rate forint government securities.


To prevent the NBH from becoming a dominant market participant regarding a given government securities series, the amount to be purchased of any securities series may not exceed 33% of stocks outstanding, in line with the European Central Bank’s practices.


Consistent with the relevant Hungarian and EU regulations and leading central banks’ practices, the MNB’s government securities purchases take place in the secondary market at regular weekly auctions and in individual secondary market transactions outside the auctions. The NBH makes these purchases at market prices. The NBH will not restrict the scope of maturities of government securities to be purchased;


however, the purchases will be focused on securities with a minimum maturity of three years. The range of counterparty institutions, eligible to participate in the program, includes banks and non-banks playing a key role in the government securities market. The Monetary Council considers the government securities purchase program as a safety net, which it intends to use if and to the extent necessary.


The NBH also makes purchases of fixed-rate forint mortgage bonds with a minimum original maturity of three years, in the primary and secondary markets.
The new, second phase of the mortgage bonds purchase program was launched with broadly identical strategic parameters to those of the successful program of 2018.


These programs will continue to run as long as warranted by economic and financial developments resulting from the COVID-19 pandemic. The Monetary Council did not set a total amount of purchases for either program. The NBH will perform a technical revision when stock increases reach HUF1,000 billion in case of government securities and HUF300 billion in case of mortgage bonds while continuously monitoring the implementation of the asset purchase programs.


The NBH is ready to fine-tune the programs, when necessary, based on updated information.


On 25 August 2020, the NBH announced that, through its government securities purchases program, it had successfully managed to stabilize developments in the government securities market and to reduce yields. After a temporary break, the NBH made targeted government securities purchases in the segment of over 15-year maturities to ensure that the base rate cut affected the longer segment of the yield curve as well. To maintain the effectiveness of monetary transmission and the stable liquidity


position of the government securities market, the Monetary Council deems it necessary to increase the amount of weekly government securities purchases, in addition to keeping the long-term collateralized lending facility. The NBH will continue to make purchases in the long-term segment to support an extension in the maturity structure of government debt.


On 24 August 2021 the Monetary Council increased the central bank base rate from 1.20% to 1.50%. According to the announcement, the Monetary Council decided to begin gradually withdrawing the GSP while considering aspects of maintaining market stability. In the future, the Monetary Council will not set a revision limit applicable to the entire stock purchased under the program. Instead, the Council will set a target amount for weekly purchases.


As a first step, the NBH’s purchases will decrease from a weekly amount of HUF60 billion to HUF50 billion from the week starting on 23 August 2021. The NBH may depart from this arrangement in a flexible manner, depending on the supply and other market conditions. Subsequently, the Monetary Council will perform a comprehensive assessment of the GSP at the end of each quarter, starting in September 2021.


As part of this, the Monetary Council will take a decision on the next step of the withdrawal, and it will set a target amount for weekly purchases over the next quarter.
The NBH will also start reducing purchases of shorter-term government securities. As a result, the share of longer-term government securities within weekly purchases will increase. The NBH will not sell the stock of government securities on its balance sheet; purchased government securities will be held to maturity.


As it will be phased out gradually, the NBH will continue to use the GSP program, taking a flexible approach to changing the quantity and structure of weekly purchases, to the extent and for the time necessary. In the Monetary Council’s assessment, a stable liquidity position in the government securities market remains crucial from a monetary transmission perspective;


therefore, the NBH stands ready to temporarily raise the volume of weekly purchases at any given time to maintain market stability.
At its June 2021 interest rate decision, the Monetary Council indicated that instruments supporting long-term sustainability would persistently remain part of the MNB’s set of instruments, while crisis management tools are being withdrawn. In order to support sustainability, the MNB successfully launched its Green Mortgage Bond Purchase Program.


At its meeting dated 24 August 2021, the Monetary Council increased the available amount under the Bond Funding for Growth Scheme by HUF 400 billion to a total of HUF 1,550 billion.


The Monetary Council is committed to maintaining price stability and will perform a comprehensive assessment of the results achieved by the cycle of interest rate hikes and identify risks to the inflation projections. The Monetary Council will continue the cycle of interest rate hikes until the outlook for inflation stabilizes around the central bank target in a sustainable manner and inflation risks become evenly balanced on the horizon of monetary policy.
(3) Exchange Rate Development


According to the National Bank Act, the NBH and the Government jointly determine the framework of the exchange rate regime. The NBH then decides on the exchange rate policy within that framework. Since 25 February 2008, a floating exchange rate regime has been applied.
In 2018, the foreign exchange rate of the forint versus the euro weakened significantly, mainly as a result of deteriorating global investor sentiment. On 31 December 2018, the HUF/EUR exchange rate was HUF321.51/EUR.


In 2019, the foreign exchange rate of the forint versus the euro weakened significantly partly as a result of adverse global investor sentiment. On 31 December 2019, the HUF/EUR exchange rate was HUF330.52/EUR.


In 2020, the foreign exchange rate of the forint versus the euro weakened significantly mainly as a result of deteriorating global investor sentiment. The ongoing COVID-19 pandemic played a significant role in the worsening of global investor sentiment. On 31 December 2020, the HUF/EUR exchange rate was HUF365.13/EUR.
In the nine-month period ended 30 September 2021, the foreign exchange rate of the forint


strengthened versus the euro, mainly as a result of improving global investor sentiment and the increase of the central bank base rate. By the end of September 2021, the HUF/EUR exchange rate
was HUF360.52/EUR.
(a) Foreign Exchange and Convertibility of the Forint
Since 1996, Hungarian foreign exchange regulations have been consistent with the convertibility standards of Article VIII of the IMF and OECD regulations.


Since January 1998, Hungarian residents have been able to purchase shares and debt instruments with a maturity of at least one year issued by all OECD-based issuers, and non-residents have been able to issue such instruments denominated in foreign currency in the Hungarian securities market.


Hungarian companies and individuals have also been able to receive foreign exchange denominated loans with a maturity of more than one year (with certain reporting obligations) and have been able to take out foreign exchange denominated loans with a maturity of less than one year, with approval from the NBH.


In accordance with the continuing liberalization of restrictions on capital movements, the forint has been fully convertible since June 2001, both in terms of current transactions and capital transactions.


All principal restrictions relating to foreign investment have been removed, so non-residents have unrestricted access to Hungarian short-term securities, HUF-denominated accounts and the onshore derivatives market, and residents have unrestricted access to offshore financial services and short-term foreign securities. Certain minor restrictions have remained, the principal objectives of which are the prevention of money laundering.


The full convertibility of the forint meets all current EU requirements.
(4) The Hungarian Banking System


In April 2000, the supervisory agencies for commercial banks, investment activities, pension funds and insurance activities were integrated under a single agency—the HFSA (in Hungarian: Pénzügyi Szervezetek Állami Felügyelete). The HFSA later merged with the NBH, which became the sole entity responsible for supervision of the banking system. However, there are separate legislative regimes for banking, insurance, pension funds and investment services.


Currently, the laws for insurance, banking and pension funds are well established and generally comply with all applicable EU directives and regulations.


Since 1991, Hungary’s banking system has been subject to a regulatory and supervisory framework based on principles and guidelines of the BIS. Act CXII of 1996 on Credit Institutions and Financial Enterprises, was in effect between 1 January 1997 and 1 January 2014, and endeavored to facilitate harmonization of the Hungarian banking system with EU uniform banking standards. As of 1 January 2014, the new Act CCXXXVII of 2013 on Credit Institutions and Financial Enterprises (the “Credit Institutions Act”) went into effect, which serves to implement the relevant EU legislation of “Basel


III.”
(a) Supervision of the Hungarian Banking System
As of 1 October 2013, the NBH became solely responsible for the supervision of the banking system through the merger of NBH and HFSA.
(b) Role of the NBH
On 4 July 2014, Parliament adopted legislation to implement the European Bank Recovery and Resolution Directive in Hungary.


The Act addresses the development of the institutional framework for recovery and resolution procedures for financial institutions (such as credit institutions and investments firms, financial holding companies and financial enterprises seated in Hungary and subject to consolidated supervision), the role of the NBH acting as the supervisory authority for recovery and resolution, and the establishment of the Resolution Fund.


Every financial institution subject to the Act is obliged to participate in the Resolution Fund and pay fees (0.05% of its registered share capital as a joining fee and an annual fee), which is applied toward financing the costs and measures related to recovery and resolution.


Other than credit institutions having their seat in an EU member state (which are regulated by their respective home supervisory authority), all financial institutions operating in Hungary are required to procure a license from the NBH before they may establish themselves, commence operations, establish a representative office or a subsidiary abroad, elect management, acquire shares representing a qualifying holding (10%) or terminate operations.


The NBH is responsible for verifying compliance by credit institutions operating in Hungary with the Credit Institutions Act and applicable banking regulations. The NBH is entitled to impose various sanctions on credit institutions, including issuing warnings of non-compliance, withdrawing licenses, instituting liquidation proceedings and imposing fines on credit institutions and the managers of such credit institutions.
(c) Banking Regulations


The president of the NBH has the power to issue regulatory decrees in the scope set forth in Act CLVIII of 2010 on the HFSA, in Act CXX of 2001 on the Capital Markets (the “Capital Markets Act”) and the Credit Institutions Act.


The Capital Markets Act and the Credit Institutions Act and Act CXXXVIII of 2007 on Investment and Commodity Exchange Service Providers and their Activities also set forth matters upon which the Government or Minister of Finance (previously the Minister for National Economy) may issue regulatory decrees.


The Credit Institutions Act requires Hungarian credit institutions to maintain a solvency ratio of 8%. Pursuant to its authority under the Credit Institutions Act, the Finance Minister has issued a decree on the calculation of the solvency ratio. The decree adopts BIS standards prescribing how the ratio of a bank’s regulatory capital and risk-weighted assets (onand off-balance sheet items) must be calculated.


In addition, the Finance Minister has issued decrees requiring credit institutions to create provisions based both on the quality of their assets (which include loans, investments and off-balance sheet items) and on certain foreign country risks present in their assets.


Portfolio risk provisions are calculated by categorizing the assets of a credit institution into the following categories: standard, watch, sub-standard, doubtful and bad. Assets are placed in the categories based on the performance of the asset and the financial condition of the debtor. Provisions are made based on the asset category: for standard assets, 0%; for watch assets, from 0% to less than or equal to 10%; for sub-standard assets, greater than 10% to less than or equal to 30%;


for doubtful assets, greater than 30% to less than or equal to 70%; and for bad assets, greater than 70% to 100%.


Hungary has harmonized its guidelines on capital adequacy requirements for investment firms and commercial banks with EU Council Directive 93/6/EEC on the capital adequacy of investment firms and credit institutions. The adaptation of EU Directive 2006/48 and EU Directive 2006/49 (Basel II) was finalized in early 2008 and, as mentioned above, the adaptation of EU Directive 2013/36 and EU Directive 575/2013 (Basel III) was finalized in January 2014.


Individual banks are required to create their own guidelines, which are to be reviewed annually.
On 11 November 2014, the Government submitted a bill on the fair banking system to Parliament. According to the bill, loans with a maturity exceeding three years must either be fixed-rate loans or the interest rate should be based on a reference rate. Parliament adopted the bill as law later that year. The law defines stricter conditions for unilateral changes in interest rates, charges and fees;


it also regulates the terms of providing information prior to the conclusion of a contract and the terms of modifying contract conditions, in line with the Curia’s resolution on uniformity of the law. According to the law, only conditions such as loan interest rates, interest premia, charges and fees may be modified unilaterally in a way that adversely affects consumers. If a contract does not fulfill criteria on unilateral lender modifications, it can be declared void.


On 17 November 2014, the Government submitted a bill on converting FX loans into local currency denominated loans to Parliament. The bill was approved on 25 November 2014. On 1 February 2015, the law on the conversion of foreign exchange loans into forint-denominated instruments entered into force. The law fixed conversion rates at CHF/HUF256.47, EUR/HUF308.97 and JPY/HUF2.163 for purposes of the conversion scheme.


The converted forint loans became three-month Budapest Inter-Bank Offered Rate-linked
(“BUBOR-linked”) floating rate instruments. According to the decision of Parliament, the interest rate premium must be changed to the one used at the time of taking out the loan, but it cannot be less than 1%, or more than 4.5% for a home mortgage or 6.5% for a home equity loan.


Borrowers are entitled to request an exemption from the conversion scheme provided they fulfill one of four criteria: for example, if they have a contract that expires by the end of 2020 or if they would be obliged to pay a higher interest rate on the new instrument compared to the old one. Bank clients with regular income in the same currency in which their loan is denominated are also exempt, as are those who are permitted to take out a foreign exchange denominated loan based on the PTI.


Since 2010, the Government has introduced several measures in order to reduce the macroeconomic risks related to households’ indebtedness denominated in foreign currencies, including a fixed-rate repayment scheme and a fixed-rate early prepayment scheme.


On 19 August 2015, the Government and the Hungarian Banking Association concluded an agreement on converting foreign exchange denominated retail car and consumption loans into forint denominated loans. On 18 September 2015, the Government presented a bill to Parliament to convert the loans on 1 December 2015, based on the foreign exchange rates applicable on 19 August 2015 of HUF309.20/EUR1.00 and HUF287.20/CHF1.00.


The burden caused by the difference between the foreign exchange rate referred to in the bill on converting FX loans into local currency denominated loans adopted by Parliament on 25 November 2014, and the foreign exchange rates of 19 August 2015 was shared equally by the state and the banking sector. For Swiss franc denominated loans, the difference is close to HUF31 per CHF1.


Also on 19 August 2015, the NBH and the Hungarian Banking Association concluded an agreement which regulates the terms and conditions of the transactions related to forint conversion. As part of this agreement, the NBH provides all financial institutions access to its Swiss franc sale tenders. The NBH’s counterparty credit institutions can access the Bank’s facility directly, while other financial institutions have access to it indirectly, through umbrella banks.


The first Swiss franc sale tender was held on 24 August 2015. Credit institutions were able to make foreign currency conversions with the NBH of up to CHF0.9 billion in spot transactions unconditionally, in accordance with their agreed needs, at the latest official NBH exchange rate effective at the time of the tender. During the tender, CHF591.9 million were allocated. Subsequently, the NBH held three Swiss franc sale tenders on 31 August 2015, 7 September 2015 and 21 September 2015.


During the three tender a total amount of CHF13.1 million were allocated.
(d) Structure of the Hungarian Banking System
According to the methodology of the NBH, the Hungarian banking sector consists of three types of supervised credit institutions:  Banking groups: Credit institutions registered in Hungary, the supervision of which is


performed by the NBH on a consolidated basis. Among others, it also covers subsidiary banks registered in Hungary, which operate under the control of a parent bank with a registered office in another EU member state and are supervised jointly by the NBH and the supervisory authority having competence on the basis of the parent bank's European registered office (home-host distribution of competence).  Solo credit institutions: Credit institutions registered in Hungary, the supervision of which is


performed by the NBH on an individual rather than on a consolidated basis.  Branches: Hungarian branch offices of credit institutions registered abroad, the supervision of
which is performed by the NBH jointly with the authority having competence based on the credit institution’s registered office.


As of 31 December 2020, the Hungarian banking sector supervised by the NBH consisted of 12 banking groups, 13 solo credit institutions, and 8 branch offices of foreign credit institutions. Total assets of the banking sector amounted to HUF60,606 billion as of 31 December 2020, according to non-audited data. Total assets of banking groups amounted to HUF50,844 billion, total assets of solo credit institutions amounted to HUF5,892 billion and total assets of branches of foreign credit


institutions amounted to HUF3,870 billion.
Only credit institutions are entitled to collect deposits from the public and provide money transmission services. In addition, banks are entitled to provide the full range of financial services listed in the Credit Institutions Act, including making loans, issuing guarantees, trading foreign currencies, issuing bank cards and providing depository services.


Banks may also engage, for their own account or for the accounts of customers, in trading in government and corporate securities and derivatives, and may also provide investment services.


According to data compiled by the NBH, the number of credit institutions amounted to 33 as of 31 December 2020. Specialized credit institutions are limited with respect to the scope of services they may provide and with respect to the types of clients to which they may provide such services. Specialized credit institutions in Hungary include housing savings associations and mortgage banks.


There are two special state-owned institutions: the MFB (Hungarian Development Bank) and the Hungarian Eximbank.


On 5 July 2013, Parliament approved a bill on the integration of co-operative credit institutions. On the basis of the Act, a new organization, the Integration Institution of Cooperative Credit Institutions, was established. Co-operative credit institutions, the MFB and Magyar Takarékbank Zrt. are members of this institution. Membership for co-operative credit institutions is obligatory. Magyar Takarékbank Zrt. is a financial institution established by certain co-operative credit institutions.


Co-operative credit institutions and other banks have a majority stake and the MFB and other investors have a minority stake in Magyar Takarékbank Zrt. According to the new Act, MFB will contribute HUF1 billion as capital for the establishment of the institution, and the capital of Magyar Takarékbank Zrt. will also be increased to at least HUF3.39 billion by a contribution from Magyar Posta Zrt. (Hungarian Post).


As a result of the planned capital increase, the Hungarian State will obtain an indirect majority stake in Magyar Takarékbank Zrt., through the MFB and Magyar Posta Zrt holdings. The core activity of the new institution will be the adoption, publication and enforcement of regulations binding on its members. In the case of non-compliance, a member can be stripped of its membership. The Act enables Magyar Takarékbank Zrt.


to act as a central credit institution for the members and set rules on core activities including risk management, strategic decisions, IT management and marketing.


On 26 February 2014, the Government declared that the merger of Magyar Takarékbank Zrt and the Hungarian Co-operative Credit Investment and Asset Management Pte. Ltd. (in Hungarian: Magyar Takarék Befektetési és Vagyongazdálkodási Zrt, “Magyar Takarék”) had national strategic importance. On 10 March 2014, MFB and Hungarian Post announced that they had sold their 54.8% share in Magyar Takarékbank Zrt. to Magyar Takarék.


Co-operative credit institutions own the majority of the shares of Magyar Takarék, while FHB Jelzálogbank Nyrt. owns 25% of the shares of Magyar Takarék.
The consolidation of co-operative credit institutions was a gradual process. By the end of August 2019, the number of credit institutions dropped to 11. A new credit institution named Takarékbank was set up through the merger of three credit institutions. By the end of October 2019, the remaining 11 credit institutions merged into Takarékbank.


On 26 May 2020, Budapest Bank joined the strategic cooperation between Takarékbank and Magyar Külkereskedelmi Bank Zrt. (“MKB”), in which experts are examining and preparing the framework for setting up a new, domestically owned banking group with significant market power.


On 15 December 2020, with the approval of the NBH, the controlling shareholders of Budapest Bank Zrt., MKB and Takarékbank transferred their bank shares to and thus formed Magyar Bankholding Zrt. via apport. Hungary holds qualifying interest in Magyar Bankholding Zrt. via Corvinus Nemzetközi Befektetési Zrt.; the share of state ownership in Magyar Bankholding Zrt amounts to 30.35%.


In addition to the credit institutions discussed above, several other financial entities play an important role in strengthening the Hungarian banking and financial sectors. These entities include:  the National Deposit Insurance Fund, which credit institutions are required to join, and insures
deposits up to HUF13 million per depositor, but does not cover the deposits of the Government or certain other entities;


 the Credit Guarantee Corporation, which guarantees loans to SMEs;  the National Savings Cooperatives Institutions Protection Fund, which is a voluntary
consortium of cooperative institutions designed to further such institutions’ mutual interests; and  the Hungarian Export Credit Insurance Corporation, which provides insurance for export credits and exchange rate risks.


Total loans amounted to HUF44,354 billion as of 31 December 2020, indicating a 23.5% increase compared to the end of 2019. The amount of non-performing loans amounted to HUF1,573 billion as of 31 December 2020. The ratio of non-performing loans (“NPL ratio”) amounted to 3.5% as of 31 December 2020.
As of 31 December 2020, the Total Capital Ratio (“CAR”) amounted to 19.4%. As of 31 December 2020, the loans-to-deposit ratio (“LTD”) amounted to 81.6%.


According to audited data, credit institutions accumulated a net profit of HUF644 billion in 2018 and a net profit of HUF694 billion in 2019. According to audited data, credit institutions accumulated a net profit of HUF385 billion in 2020.
(e) Ownership Structure of the Banking Sector


Following the dynamic growth of foreign share ownership in the banking sector in the second half of the 1990s, the proportion of registered capital held by foreign investors stabilized in 2002. According to data compiled by the NBH, approximately 40% of the total assets of the Hungarian banking sector (excluding the MFB and the Hungarian Eximbank, which are owned by the Hungarian state) was held by non-residents as of the end of December 2020.


On 24 July 2014, the Government announced that Hungary had reached an agreement to purchase MKB Bank Zrt. from Bayerische Landesbank at a purchase price of EUR55 million. Bayerische Landesbank agreed to sell 99% of MKB shares to the state of Hungary and to increase capital by EUR270 million prior to the transfer.
On 4 December 2014, the Government announced that Hungary had reached a preliminary contract to purchase Budapest Bank Zrt. from General Electric.


On 18 December 2014, the NBH announced that it had taken control of MKB, a state-owned bank and would reorganize the credit institution, including its subsidiaries in order to restore the profitability of MKB.
On 9 February 2015, the Government of Hungary and the EBRD each purchased a 15% stake in Erste Bank Hungary Zrt., a Hungarian bank owned by Erste, an Austrian bank. The deal settled on 29 June 2015.
On 29 June 2016, NBH sold MKB to private entities at a price of HUF37 billion.


The only banks (other than the NBH) in which Hungary currently holds controlling interests are the Budapest Bank Zrt., the MFB and the Hungarian Eximbank.
(5) Capital Markets


During the course of its transition to a market economy, Hungary attached great importance to the development of a sound capital market in order to promote economic development and to finance Hungarian enterprises. The Capital Markets Act regulates the offering and trading of securities (including government securities) and the institutional framework of the Hungarian capital market (including stock exchanges, investment funds and clearing houses).


State control and supervision of the capital markets was delegated to the NBH. In line with the trend in other international markets generally, Hungary has moved towards a universal financial system when regulating the relationship between investment and banking services. Banks with proper authorization may carry on investment and financial services activities within the same organizational frameworks, thereby offering universal banking services.


By the end of 2007, regulation of the capital markets in Hungary was substantially in compliance with applicable EU regulations and guidelines. The Investment Institutions Act went into
effect on 1 June 2008, which implemented 2004/39/EC Directive on markets in financial instruments and investment services. Hungary implemented MiFID II 3 on 3 July 2017, through the amendment of the Investment Institutions Act and other related pieces of legislation.
Stock Exchange


The Budapest Stock Exchange (the “BSE”) opened in 1990 and is a self-governing and self-regulating organization that selects its own governing bodies and officials, adopts its own regulations, defines its operating rules and fixes the fees charged for its services.


In February 2004, the BSE and the Budapest Commodity Exchange (the “BCE”) agreed to integrate their respective activities. The integration was completed in November 2005, and all exchange products formerly traded on the BCE and all members of the BCE were transferred to the BSE.
As of 20 October 2020, the NBH has owned the controlling majority (81.4% of shares) of BSE.
6. Public Finance
(1) General Information


The public finance sector in Hungary consists of the central government budget, social security funds (pension and health funds), extra-budgetary funds and local government budgets, which together are referred to as the general government budget.
(2) Methodology


The fiscal year for the Government is the calendar year. The general government budget data are compiled in several stages by the Ministry of Finance (prior to May 2018, the Ministry for National Economy had this responsibility). In the fall of each calendar year, the Ministry of Finance is required to compile the first preliminary budget (called the “planned budget”) for the following calendar year in accordance with the budget act approved by Parliament for that year.


In January of each given calendar year, the Ministry of Finance compiles the first version of the general government budget for the previous year. This budget (compiled according to data available in January) is called the “preliminary budget.” During the course of the year, the Ministry of Finance collects additional information concerning the revenues and expenditures related to the previous year.


In light of this additional information, the Ministry of Finance revises the preliminary budget (compiled in January) and compiles the second version of the general government budget for the previous year. This budget (compiled according to data available in May of a given calendar year) is called the “fact budget.


” The main reason for the differences between the preliminary and fact budgets is the uncertainty in the exact amounts of revenues and expenditures of the central governmental institutions, as the balance sheets of these institutions are not compiled until May of a given calendar year. The Ministry of Finance is obligated to compile the final account by the end of August of a given calendar year using the fact budget.


The final account is submitted to Parliament, and Parliament approves the final account by a simple majority vote. However, the final account submitted to Parliament may differ from the final account approved by Parliament due to amendments. After the final account is approved by Parliament, the Ministry of Finance compiles the third version of the general government budget for the previous year, known as the “final budget.


” During the course of the year in light of intra-year information, the Ministry of Finance compiles on an ad hoc basis budgets containing the expected revenues and expenditures on a best effort basis. This budget is the “expected budget”.


On 26 May 2020, the Government submitted the budget for 2021 to the Parliament. According to the budget bill, the general government deficit according to ESA methodology (including local governments) would amount to 2.9% of GDP for the year 2021. On 3 July 2020, the Parliament approved the budget for the year 2021. According to the approved budget, GDP growth rate was planned to be 4.8%, the general government deficit was planned to be 3% of GDP and the government


3 Directive 2014/65/EU of the European Parliament and of the Council of Europe of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU.


debt was planned to fall below 70% of GDP in 2021. On 20 April 2021, Minister of Finance Mihály Varga submitted an amendment to the 2021 budget. The amendment projected 4.3% economic growth in 2021, and set Hungary’s deficit target at 7.5% of GDP. This amendment would allow a reduction of Government debt to 79.9% of GDP by the end of 2021 from 80.4 percent of GDP in 2020. The amendment entered into force on 27 May 2021.


The original budget for 2021 approved in 2020 is called the “approved budget”. The new budget for 2021 as amended in 2021 is called the “modified budget”.
The information included in this document with respect to the budgets for 2016, 2017, 2018, 2019 (final), 2020 (preliminary) and 2021 (approved budget and modified budget) was derived from the budgets for 2016, 2017, 2018, 2019, 2020 and 2021 as calculated by the Ministry of Finance using data available in October 2021.


On 5 May 2021, Minister of Finance Mihály Varga presented the budget proposal for 2022 to the Parliament. In the proposal, the Government targeted economic growth of 5.2%, with a deficit target of 5.9% of GDP and public debt of 79.3% of GDP.


According to the Minister, the budget was aimed at relaunching the economy, supporting families, reintroducing the 13th month pension, providing tax exemptions for earners under 25, and further reducing the tax burden on employers and supporting investments that create jobs. On 9 June 2021, the Parliament passed into law the main figures of the Government’s 2022 budget, together with amendments by the Parliament’s budget committee. Targeted central revenues would total HUF25,393.


8 billion as against expenditures of HUF28,546.5 billion, with a projected shortfall of HUF3,152.6 billion. The Parliament also adopted tax cuts, under which employers will pay a 15.0% social security contribution, 0.5% less than in 2021. Tax paid by individual entrepreneurs would be further simplified with the option of a flat rate if their revenues do not exceed ten times the annual minimum wage, or up to fifty times the minimum wage in case of retail traders.


Taxpayers in this system will be exempt from personal income tax up to half of the minimum wage. Subsequently, on 22 June 2021 the budget proposal was approved by the Parliament.
(a) Central Government Budget Process


The Ministry of Finance is responsible for preparing the central government budget on a calendar year basis for the Government. The Government submits the central government budget to Parliament for consideration and ultimate approval. The annual central government budget for each coming year should be approved prior to the beginning of the relevant year.


If Parliament does not approve the budget by such time, the Government is obligated to propose an interim central government budget without delay.


If the interim central government budget is not approved by Parliament either, the Government is entitled to collect revenues due to the central government budget in accordance with the laws then in force and to make expenditures in line with the central government budget for the preceding calendar year, which includes uncapped appropriation for debt service, subject to generally applicable budgetary rules.


Within eight months of the end of each calendar year, the final accounts for the preceding year are compiled by the Government and are submitted to Parliament for final approval.


The major components of revenue under the central government budget comprise taxes imposed on consumption (including VAT), enterprise taxes and taxes on households (primarily personal income taxes). The major expenditure items of the central government budget comprise debt service and transfers to the social security funds, budgetary institutions, local governments and extra-budgetary funds.
(3) Budget Trends


According to data available in October 2021, the general government deficit (local governments included) amounted to HUF5,422.5 billion (11.3% of GDP) for the year 2020, according to the GFS methodology. The general government deficit for the year 2020 (local governments included), according to the ESA methodology, was HUF3,822.6 billion, equaling 8.0% of GDP for the year 2020.
According to the approved budget, the 2021 planned general government deficit (local governments


included) was originally planned to be HUF1,689.3 billion (3.3% of GDP) according to the GFS methodology. The 2021 planned general government deficit (local governments included) was originally planned to be HUF1,476.2 billion (2.9% of GDP) according to the ESA methodology.


According to the modified budget, the 2021 expected general government deficit (local governments included) is expected to be HUF2,485.8 billion (4.8% of GDP) according to the GFS methodology. The 2021 expected general government deficit (local governments included) is expected to be HUF3,859.6 billion (7.5% of GDP) according to the ESA methodology.


In 2016, total general government revenues amounted to HUF16,405.1 billion. In 2017, 2018 and 2019, revenues increased by 5.7%, 6.4% and 9.8%, respectively, reaching HUF17,348.1 billion, HUF18,462.6 billion and HUF20,273.6 billion respectively. In 2020, revenues increased by 2.0%, reaching HUF20,685.8 billion. According to the approved budget, revenues were planned to reach HUF20,261.9 billion in 2021, a decrease of 2.0% compared to the previous year.


According to the modified budget, revenues are expected to reach HUF20,918.5 billion in 2020, an increase of 1.1% compared to the previous year.


In 2016, total general government expenditures amounted to HUF16,945.1 billion. Expenditures reached HUF18,662.6 billion in 2017, HUF19,664.7 billion in 2018, and HUF21,477.9 billion in 2019, an increase of 10.1%, 5.4%, and 9.2%, respectively, compared to the previous year. In 2020, expenditures increased by 21.6% reaching HUF26,108.3 billion. According to the approved budget, expenditures were planned to reach HUF21,951.3 billion in 2021, a decrease of 15.9% compared to the previous year.


According to the modified budget, expenditures are expected to reach HUF23,404.4 billion in 2021, a decrease of 10.4% compared to the previous year.
For a detailed description of revenues and expenditures of the general government budget see “Central Government Budget” – “Central Government Revenues and Expenditures”; “Social Security and Extra-Budgetary Funds”; and “Local Government Finance”.
(4) Central Government Budget


(a) Roles of the Ministry of Finance, the Hungarian State Treasury and the Government Debt
Management Agency
As of May 2018, the Ministry of Finance assumed responsibility from the Ministry for National Economy for supplying information to support the Government’s decision-making and for co-coordinating issues falling within the Government’s scope of authority in relation to public finances. See “Overview of Hungary – Political System – Government.


” Specific responsibilities include the preparation of the Bill on the final accounts of the central government and the central government budget, which is presented to Parliament each calendar year.


The Ministry of Finance is required to ensure the execution of the central budget, the solvency of the central government, the financing of the central government and the recording of government debt, including guarantees granted and sureties undertaken by the Government, and loans and claims of the central government.


These tasks are executed through the Treasury, and debt and liquidity management tasks are carried out by Államadósság Kezelő Központ Zártkörűen Működő Részvénytársaság, a special government debt management agency (the Government Debt Management Agency Private Company Limited by Shares or “GDMA Pte Ltd.”).


The Treasury was established on 1 January 1996 as a central budgetary organization. The legal and professional supervision of the Treasury is performed by the Ministry of Finance. Within its budget execution responsibilities, the Treasury’s main task is the management of budget appropriations and government cash flows and the determination of the daily financing needs of the central government.


The management of budget appropriations includes the registration of annual appropriations, the monitoring of their changes and the right to authorize payments from appropriated amounts. The cash management duties of the Treasury include account management for the budgetary institutions, which, in accordance with the Act on Public Finances, are obligated to keep their accounts with the Treasury.


The Treasury administers the Single Treasury Account, which is the cash account of the Treasury held at the NBH.
The Treasury’s responsibilities also include the provision of funds for public investments, the transfer
of contributions and subsidies to municipalities, and the management and collection of loans and other claims of the central government.


The Government’s borrowing needs are financed by the GDMA Pte Ltd. The Finance Minister established the GDMA Pte Ltd. in order to concentrate debt management functions into one organization. Accordingly, the GDMA Pte Ltd. manages, renews and records the forint and foreign exchange debt of the central government and, since 2003, manages the liquidity of the Single Treasury Account. For purposes of liquidity management, the GDMA Pte Ltd.


introduced new secondary market operations (such as repurchase transactions on the domestic securities market).


In the domestic market, the responsibilities of the GDMA Pte Ltd. include the administration of auctions and subscriptions, and the development of the institutional framework and structure of government securities markets. Further, the GDMA Pte Ltd. provides easily accessible, up-to-date information on the government securities markets and on financing of Hungary’s borrowing needs in order to encourage transparency. With respect to foreign debt management, the GDMA Pte Ltd.


acts in the name of Hungary in raising funds, manages the foreign exchange debt of the central government, ensures promptness and accuracy in respect of debt service payments and effects hedging transactions to reduce risks.
(5) Taxation


The current Hungarian taxation system was introduced in 1988. The most important elements of the Hungarian tax system are corporate profit tax, personal income tax, value added tax, excise duty and local taxes. The Hungarian tax system has undergone moderate changes in recent years in an effort to improve competitiveness and to harmonize the Hungarian tax system with EU standards.


Hungarian tax law distinguishes between domestic and foreign taxpayers. The tax liability of a domestic taxpayer extends to income originating from both Hungary and abroad, while the tax liability of a non-Hungarian taxpayer is restricted to its Hungarian source income as defined by the relevant Hungarian tax law and also as may be affected by an applicable double taxation treaty.


Hungary has entered into a double taxation treaty with more than 60 countries, including almost all of the OECD countries. Of the OECD countries, Hungary does not have a double taxation treaty with New Zealand.


Hungary, like many developing countries, has a substantial “shadow” economy that avoids paying taxes. However, the “shadow” economy has diminished in recent years, as evidenced by an increase in tax receipts that have outpaced GDP growth. Further improvement is expected as larger companies and multinational enterprises assume a greater role in the Hungarian economy.


Effective 1 July 2020, the Ministry of Finance announced that four types of tax contributions paid by employees were merged. The pension contribution, the in-kind and in-cash health insurance contributions, and the job market contribution (all paid by the employee) were merged into a single tax. The rate of the new unified contribution paid by the employee, the social security contribution, was set at 18.5%.


Moreover, the rate of social contribution tax paid by the employer was decreased from 17.5% to 15.5%. In addition, all working pensioners were exempt from paying contributions beginning 1 July 2020.
(a) Corporate Profit Tax and Corporate Dividend Tax


Effective 1 January 2017, the corporate tax was reduced to a flat rate of 9%, based on a tripartite agreement signed between the Government, employers, and employees represented by trade unions. Domestic entities receiving dividends are exempt from Hungarian dividend tax. Foreign entities receiving dividends, interest and royalties from local sources are not subject to withholding tax.


The rate of small business tax (“KIVA”) was cut from 13% in 2018 to 12% in 2020. The fixed-rate tax on small businesses (“KATA”) is applicable for enterprises with revenues of up to HUF12 million per year, instead of the previous amount of HUF6 million.
(b) Personal Income Tax
Since 2013, Hungary has had a flat-rate personal income tax, subject to a family allowance. Since 1
January 2016, the flat tax rate on personal income has been 15%.


For 2019, based on the number of children in the household, the personal income tax paid by an employee can be reduced by the respective amount set forth in the following table:
Table 12: Family Personal Income Tax Allowance
[Table 12: Family Personal Income Tax Allowance
__________________]
"Number of Children":"One child............................................................................................................................."
"":""
"HUF (1)":"10,000"


allowance for two children is HUF15,000, as of 1 January 2018, the tax allowance for two children was HUF17,500, and as of 1 January 2019, the tax allowance for two children was HUF20,000.
As of 1 January 2014, the family personal income tax allowance may be applied as a deduction not only for purposes of personal income tax, but also for purposes of the healthcare contribution and pension contribution paid by the employee.


As of 1 January 2020, personal income tax for mothers with four or more children was reduced to zero.
(c) Value Added Tax


As of 1 January 2012, the standard VAT rate was set to 27%. A reduced 18% VAT rate was introduced with respect to certain basic food items, and a 5% rate was set on special needs items (e.g., medicine and books). Currently, there is no tax imposed on certain services (e.g., postal and financial services). The current Hungarian VAT system is fully harmonized with all relevant applicable EU Directives.


The VAT rate on live pigs and half-carcasses was cut to 5% as of 1 January 2014. Subsequently, the VAT rate on live and slaughtered cattle, sheep and goats was cut to 5% as of 1 January 2015, and the VAT rate on unprocessed pork was cut to 5% as of 1 January 2016. Subsequently, the VAT rate on poultry, egg and milk was cut to 5%; and the VAT rate on restaurant and internet service was cut to 18% as of 1 January 2017.


VAT on newly built homes was reduced to 5% for the years 2016, 2017, 2018 and 2019. As part of Government’s action plan to relaunch the economy, the VAT on new home constructions was further reduced. See “Public Finance – Developments in Public Finance during the COVID-19 Pandemic”.
(d) Registration Tax


Registration tax has been levied on the registration of cars since February 2004; however, in line with a relevant decision of the European Parliament, the registration tax was decreased significantly for all passenger cars. For environmental reasons, the largest reduction in tax has been for the most environment-friendly cars.
(e) Excise Duty


An excise duty is levied on the manufacturing, importing, warehousing, storage and distribution of mineral oils, alcoholic products, beer, wine, champagne, intermediary alcohol products and tobacco products.


On 10 April 2014, the ECJ declared that Hungary failed to fulfill its obligations under EU legislation relating to excise duties on alcoholic beverages. As a result, an excise duty was introduced on these items effective from 1 January 2015. The excise duty has been gradually increased since then in line with EU requirements.
(f) Surtax on Financial Institutions


On 22 July 2010, Parliament adopted an Act imposing a special tax on financial institutions on their 2010 income or adjusted balance sheet as of 31 December 2009 or the sum of the net value of managed funds and other managed portfolio assets (the “Surtax on Financial Institutions”).


The Surtax on Financial Institutions was originally levied for the year 2011 and was applicable to all financial institutions (both domestic and foreign) with at least one set of annual financial statements prepared by 1 July 2010, including banks, insurance companies and other financial sector enterprises (e.g., investment companies, stock exchanges, commodity exchange service providers, venture capital fund managers, and investment fund managers), including their branches.


The Government decided to establish the Surtax on Financial Institutions as a permanent tax.
An agreement concluded on 15 December 2011, allowed for the Surtax on Financial Institutions to be reduced by certain loss items arising from the fixed-rate repayment schedule.


In 2015, the Government submitted to Parliament an amendment to the Surtax on Financial Institutions in line with the informal guidelines of the European Commission and in accordance with the Memorandum of Understanding concluded with the EBRD. The bill reduced the highest surtax rate by 0.07 percentage points, from 0.31% to 0.24% effective as of 1 January 2016. The lower surtax rate remained unchanged at 0.15%, up to HUF50 billion.


The tax base remained the modified balance sheet total of 2009. On 15 December 2015, Parliament adopted the amendment, setting a surtax rate of 0.15% to be applied to up to HUF50 billion on the adjusted balance sheet, and a rate of 0.24% above this threshold. As of 1 January 2017, the surtax rate was decreased from 0.24% to 0.21%, and, as of 1 January 2019, the surtax rate was decreased from 0.21% to 0.20% on adjusted balance sheet totals exceeding HUF50 billion.


In June 2015, the Government implemented tax relief of up to 30% of the Surtax on Financial Institutions, effective as of 2016, for lenders that had increased their volume of corporate lending since 2009. The tax relief equaled the increased amount of corporate loans outstanding, but could not exceed 30% of bank tax payable by the lender. The total reclaimable amount was capped at HUF10 billion.


If requested refunds breached the HUF10 billion ceiling, the amount of refunds would be proportionately distributed among lenders that, instead of deleveraging, opted to increase lending after 2009.
The tax base and rate vary according to the type of institution and are currently as follows:
Table 13: Tax Base and Rate


[Table 13: Tax Base and Rate
__________________]
"Type of Institution":"Banks....................................................."
"Tax Base and Rate":"0.15% of the adjusted balance sheet total up to HUF50 billion and 0.20% (1) of amounts in excess of such threshold"


"Type of Institution":"Insurance companies ............................."
"Tax Base and Rate":"— (2)(3)"


"Type of Institution":"Financial enterprises.............................."
"Tax Base and Rate":"6.5% of interest and 6.5% of fees and commission income"


"Type of Institution":"Investment companies..........................."
"Tax Base and Rate":"5.6% of the adjusted net income"


"Type of Institution":"Stock exchanges...................................."
"Tax Base and Rate":"5.6% of the adjusted net income"


"Type of Institution":"Commodity exchange service providers ............................................."
"Tax Base and Rate":"5.6% of the adjusted net income"


"Type of Institution":"Venture capital fund managers.............."
"Tax Base and Rate":"5.6% of the adjusted net income"
"Type of Institution":"Investment fund managers ...................."
"Tax Base and Rate":"— (4)"
__________________
Source: Act No. LIX of 2006 on special tax and charge enhancing the balance of public finances.
Notes:
(1) In 2016 the tax rate was 0.24%, and until 1 January 2015, the tax rate was 0.53%. As of 1 January 2019, the tax rate was decreased to 0.20%.


(2) In 2011 and 2012, the tax rate was replaced by a three-tier progressive tax rate structure with rates of 1.5%, 3.0% and 6.4%. The lowest tier extended up to HUF1 billion, the middle tier from HUF1 billion to HUF8
billion, and the highest rate on income exceeding HUF8 billion.
(3) As of 1 January 2013, surtax on insurance companies has been abolished, and uniform insurance tax has been introduced.


(4) Prior to 1 January 2015, the tax rate was 0.028% levied on the sum of the net value of managed funds and
other managed portfolio assets. As of 1 January 2015, investment fund managers are exempt from the surtax on financial institutions; simultaneously, a new special tax was introduced.
(g) Uniform Insurance Tax


On 9 July 2012, Parliament adopted the Act on Uniform Insurance Tax to decrease the number of taxes imposed on insurance companies. The tax base is the insurance fee. The rate of the tax is 15% for all-risk vehicle insurance fees and 10% for property and accident insurance fees. The amount of the tax is calculated, declared and paid by the insurance companies monthly.


This Act went into effect on 1 January 2013, and with the introduction of this new type of tax, the surtax imposed on insurance companies and the fire protection contribution were abolished.
(h) Surtax on Telecommunications and Energy Sectors


On 20 October 2010, Parliament adopted an Act approving a surtax on retail businesses, telecommunications companies and energy supply companies. Telecommunication companies are subject to a 4.5% tax on annual net sales revenues between HUF500 million and HUF5 billion and 6.5% on the excess above HUF5 billion.


Energy supply companies, which are already subject to a special surtax of 8% on adjusted net profits in addition to the standard corporate income tax rate, are now subject to an additional 0.3% tax on annual net sales revenues up to HUF5 billion and 1.05% on revenues exceeding HUF5 billion.
Surtax on Certain Products Endangering Public Health


As of 1 September 2011, an Act went into effect that introduced a surtax on certain products containing high levels of sugar or salt. The surtax is imposed on the person or legal entity selling the product for the first time in Hungary (e.g., the Hungarian manufacturer or the importer). The following table sets forth the tax rates applicable since 1 January 2014:
Table 14: Surtax Rates on High Sugar or Salt Products


"Type of Product":"Salted snacks (e.g. chips) .............................."
"Tax Rate":"HUF250 per kilogram"


"Type of Product":"Food flavoring mixes ...................................."
"Tax Rate":"HUF250 per kilogram"


"Type of Product":"Flavored beer or alcoholic beverages............"
"Tax Rate":"HUF20 or 100 or 300 or 500 or 700 or 900 per liter (1)"