Opinion of the European Central Bank of 4 August 2010 on amendments to various laws regarding the reduction of financial imbalances (CON/2010/62)

Date: 2010-08-04
Institutions: European Central Bank
Subjects: Hungary, financial stability, foreign currency, mortgage, national law, tax

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 4 August 2010 

on amendments to various laws regarding the reduction of financial imbalances 

(CON/2010/62) 

Introduction and legal basis 

On 5 July 2010, the European Central Bank (ECB) received a request from the Hungarian Ministry of the 

National  Economy  for  an  opinion  on  a  draft  law  amending  certain  financial  legal  acts  (hereinafter  the 
‘draft law’)1. 

The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the 

Functioning of the European Union and the sixth indent of Article 2(1) of Council Decision 98/415/EC of 

29 June 1998  on  the  consultation  of  the  European  Central  Bank  by  national  authorities  regarding  draft 
legislative provisions2, as the draft law relates to rules applicable to financial institutions in so far as they 

materially  influence  the  stability  of  financial  institutions  and  markets.  In  accordance  with  the  first 

sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council 

has adopted this opinion. 

1.  

Purpose of the draft law 

On 8 June 2010, Hungary’s Prime Minister announced an action plan containing 29 measures to establish 

a  balanced  budget  and  to  stimulate  economic  growth.  The  provisions  submitted  to  the  ECB  for 

consultation  aim  to  implement  several  of  these  measures,  including  introducing  restrictions  on  foreign 

currency mortgages and earning limits for certain organisations in the public sector; imposing a special 

tax on financial institutions; providing for the repayment of State subsidies on housing saving plans under 

certain  conditions;  introducing  certain  organisational  changes  at  the  Hungarian  Financial  Supervisory 

Authority  and  introducing  certain  amendments  to  the  Law  on  strengthening  stability  of  the  financial 

intermediation system. 

1  

2  

Draft law T/581 on the adoption and amendment of certain economic and financial legal acts, submitted to the Parliament 
by the Minister for the National Economy on 2 July 2010. Articles 81 to 83/A, 95 to 96, 115 to 129, 131, 137 to 138 and 
141 to 143 have been submitted to the ECB. 
OJ L 189, 3.7.1998, p. 42. 

 
 
 
 
 
                                                 
2. 

General observations 

The appropriate time to consult the ECB 

2.1  The consulting authority submitted the relevant Articles of the draft law to the ECB on 5 July 2010, 

requesting the ECB’s opinion as soon as possible. The consulting authority did not set the ECB any 

specific time limit for the submission of its opinion nor provide justified reasons for the urgency. 

The ECB interprets the request in accordance with Article 3(1) of Decision 98/415/EC allowing the 

ECB at least one month for the submission of its opinion. According to information received by the 

ECB, the Parliament expects to adopt the draft law before the extraordinary summer session of the 

parliamentary legislative process ends. According to the information available on the website of the 

Hungarian  Parliament,  the  provisions  of  the  draft  law  sent  for  consultation  have  already  been 

adopted  with  several  substantive  amendments  on  22  July  2010  before  the  ECB  could  adopt  its 

opinion. 

2.2  Recalling  its  relevant  comments  in  its  previous  opinion  on  a  related  issue  in  Hungary3,  the  ECB 

emphasises that the consultation should have taken place at a point in the legislative process which 

would  have  afforded  the  ECB  sufficient  time  to  examine  the  draft  legislative  provisions  and  to 

adopt its opinion in all required language versions, and which also would have enabled the relevant 

national  authorities  to  take  the  ECB’s  opinion  into  consideration  before  the  provisions  were 

adopted.  According  to  Article  3(4)  of  Decision  98/415/EC,  Hungary  should  have  suspended  the 

adoption process for the draft law, pending receipt of the ECB’s opinion. 

2.3   Furthermore, the opportunity to issue an opinion on a draft law within its competence allows the 

ECB  to  express  its  views  on  the  substance  of  the  proposed  legislation,  including  considerations 

such as the importance that the ECB may attach to a particular legislative proposal and its potential 

impact  on  the  European  System  of  Central  Banks.  Therefore,  the  ECB  reiterates  its  position  that 

even cases of particular urgency do not relieve national authorities from their duty to consult the 

ECB  and  to  allow  sufficient  time  to  take  into  account  its  views  in  accordance  with  Decision 

98/415/EC. Any substantive amendments to the draft law – as in the case of the provisions subject 

to this consultation – have to be submitted to the ECB to allow it to issue its opinion based on the 

most recent text. The ECB’s comments on the consulted provisions do not eliminate the breach of 

the obligation to consult the ECB. Even though the provisions have already been enacted, the ECB 

considers that its comments are important for the application and interpretation of the enacted law 

and any future amendments. The ECB also emphasises that it expects the Ministry for the National 

Economy to give due consideration to honouring its obligation to consult the ECB in accordance 

with Decision 98/415/EC. 

Legislation subject to consultation 

2.4  Although  the  draft  law  amends  several  legal  acts,  this  opinion  only  covers  the  provisions  of  the 

draft law that the consulting authority has submitted for consultation. ECB Opinion CON/2010/56 

3  

ECB Opinion CON/2010/56. All ECB opinions are published on the ECB’s website at www.ecb.europa.eu. 

2 

                                                 
has already addressed Article 95. The ECB also advises that this opinion is without prejudice to any 

other ECB opinions concerning any other legal acts possibly affected by the draft law and falling 

under the ECB’s competence. The ECB expects to be consulted on all such matters. 

3. 

Financial stability 

Restrictions on foreign currency mortgages 

3.1  Articles 81 and 82 of the draft law amending respectively the Hungarian Civil Code and the Law 

on  the  Land  Register  with  future  effect  prohibit  entering  into  or  claiming  a  right  as  a  result  of 

foreign currency mortgages contracted by individuals in the Land Register. Article 82(2) introduces 

the possibility of a collateral swap or refinancing operations in case of all such mortgages entered 

into the Land Register before the draft law enters into force. Under Article 262 of the Civil Code 

real property may be pledged as security only in the form of a mortgage, and a mortgage is valid 

only  if  contracted  in  writing  and  recorded  in  the  Land  Register.  Therefore,  the  practical 

consequence  of  Articles  81  and  82  of  the  draft  law  is  that  after  the  draft  law  enters  into  force, 

claiming a new right as the result of mortgages contracted by individuals in a foreign currency is no 

longer possible since it cannot serve as adequate security because its entry in the Land Register will 

be prohibited.  

3.1.1  The ECB notes that high levels of foreign currency loans to unhedged borrowers are an important 

vulnerability in Hungary, as they convert direct exchange rate exposure of the banking system into 

credit risk and expose the economy to significant macro-financial risks. Furthermore, a high level 

of  foreign  currency  debt  may  restrict  the  room  for  monetary  policy  manoeuvre  and  its 

effectiveness.  Given  these  negative  side  effects  associated  with  foreign  currency  lending,  it  is 

important for policymakers to take measures to avoid its excessive build-up in the banking system. 

3.1.2  To  contain  foreign  currency  lending,  policymakers  are  strongly  encouraged  to  create  an  overall 

environment  for  economic  agents  which  encourages  prudent  and well-informed  decision  making. 

This  involves  the  pursuit  of  sound  and  stability-oriented  macroeconomic  policies  and  policies  to 

strengthen  financial  literacy  and  appropriate  financial  regulation  and  supervision.  If  this  proves 

insufficient, additional policies to prevent an excessive build-up of foreign currency debt, such as 

moral suasion and administrative measures, could be considered.  

3.1.3  Against this background the ECB welcomes the general objective of the Hungarian authorities of 

limiting the building up of further macro-financial imbalances and takes note of the recent changes 
in Hungary’s regulation of foreign currency lending. In particular, Government Decree 361/20094 

has  already  tightened  credit  standards  substantially  by  defining  relative  lending  limits  and 

maximum  loan-to-value  ratios  and  by  introducing  additional  stricter  criteria  for  foreign  currency 

mortgages, depending on the currency of denomination. The efficient implementation and thorough 

4  

361/2009. (XII. 30.) Korm. rendelet. a körültekintő lakossági hitelezés feltételeiről és a hitelképesség vizsgálatáról. 

3 

 
                                                 
assessment  of  the  measures  laid  down  by  Government  Decree  361/2009,  as  well  as  the 

improvement in banks’ risk management practices, should be emphasised. More generally, there is 

a  need  to  ensure  that  strict  and  prudent  regulatory  and  administrative  measures  are  in  place  for 

lending  to unhedged  domestic  borrowers  in  a  foreign  currency.  In  addition,  banks  should  always 

hold  sufficient  capital  to  reflect  the  specific  risks  associated  with  foreign  currency  lending,  in 

particular as regards the transformation of exchange rate risk into credit risk. 

3.1.4  If the proposed complete ban on individuals taking foreign currency mortgages in Articles 81 and 

82 of the draft law has a cross-border effect, it may raise issues of compliance with Article 63 of 
the  Treaty  on  free  movement  of  capital  and  payments5.  The  ECB  appreciates  that  the  free 

movement of capital and payments is without prejudice to, inter alia, ‘measures which are justified 

on grounds of public policy or public security’, as laid down in Article 65(1)(b) of the Treaty. As in 

the case of exceptions based on the principle of general good, the exemption in Article 65(1)(b) of 

the  Treaty  is  narrowly  interpreted  by  the  Court  of  Justice  of  the  European  Union,  with  the 

implication that any such measure would, for example, need to meet the proportionality test. Under 

this  test,  restrictions  are  justified  only  if  no  less  restrictive  measure  would  suffice  to  reach  the 

desired  end.  The  final  assessment  of  whether  the  complete  ban  on  individuals  taking  foreign 

currency mortgages is in breach of the free movement of capital and payments is entrusted to the 

Union institutions ensuring the application and observance of the Treaties.  

Special tax imposed on financial institutions 

3.2  Articles 115 to 120 of the draft law amending the Law on a special tax and contribution to balance 

the State budget impose a special tax on financial institutions. According to Article 116, financial 

institutions whose annual report closed on 1 July 2010 will be subject to a special tax in 2010. The 

rate will depend on the form of the financial institution. 

3.2.1  The ECB notes that the feasibility of a tax on financial institutions should be considered in relation 

to the objectives of covering the public cost arising from their failure and of addressing the risks 

posed by them. The proceeds raised by the tax  should preferably accrue to the deposit guarantee 

schemes  or  to  resolution  funds  set  up  ex-ante  that  would  need  to  be  supported  by  a  robust 

resolution framework. Furthermore, the proceeds  from  a bank tax should be ring-fenced to avoid 

their use for general fiscal consolidation purposes. In this context, the draft law raises the following 

concerns. 

3.2.2  First, using the proceeds for general budget purposes is not desirable as it does not serve the general 

objective  of  enhancing  financial  stability.  In  particular,  given  the  magnitude  of  the  proposed 

measure,  the  marked  deterioration  of  the  financial  sector’s  capital  accumulation  ability  may 

weaken  its  solvency  position,  thereby  making  the  financial  system  more  vulnerable  to  potential 

further shocks.  

5  

See Case C-464/98, Westdeutsche Landesbank Girozentrale v Stefan and Republik Österreich [2001] ECR I-173. 

4 

                                                 
Second,  the  tax  may  hamper  the  provision  of  bank  credit  to  the  non-financial  private  sector  and 

result in extra charges to customers. In particular, banks which aim to partly offset the unexpected 

taxes may increase their margins, thus making credit to households and enterprises more expensive. 

This, in turn, would lead to even weaker domestic  demand growth, thereby delaying recovery of 

the Hungarian economy. 

Third, as a response to the substantial increase in the tax burden, some banks and other financial 

institutions  may  cut  back  their  activities  in  Hungary,  thus  further  limiting  the  availability  of 

financing. 

Finally,  such  ad  hoc  taxing  of  an  industry  may  create  uncertainty  for  business  and  thus  have  a 

detrimental impact on long term growth.  

Given  these  concerns,  the  ECB  strongly  recommends  a  comprehensive  impact  assessment  of  the 

proposed measure. 

3.2.3  Article  118(7)  stipulates  only  the  total  amount  of  levy  to  be  paid  by  the  financial  sector  in  2011 

without  specifying  the  details  of  the  tax.  In  addition,  Article  118(8)  does  not  specify  the  total 

amount of tax to be imposed on the financial sector in 2012. These measures will be laid down in a 

separate  law,  which  creates  additional  uncertainty.  For  the  sake  of  legal  clarity  and  the 

predictability  of  the  business  environment,  the  ECB  would  welcome  defining  the  actual  tax 

measures for 2011 and 2012 in the draft law. 

This opinion will be published on the ECB’s website.  

Done at Frankfurt am Main, 4 August 2010. 

[signed] 

The President of the ECB 

Jean-Claude TRICHET 

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