Opinion of the European Central Bank of 24 February 2014 on the mismatch of maturity and foreign currency positions of credit institutions (CON/2014/15)
Date: 2014-02-24
Institutions: European Central Bank
Subjects: Hungary, central bank, credit institution, financial stability, financial supervision, foreign currency

EN 

ECB-PUBLIC 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 24 February 2014 

on the mismatch of maturity and foreign currency positions of credit institutions 

(CON/2014/15) 

Introduction and legal basis 

On  16  January  2014,  the  European  Central  Bank  (ECB)  received  a  request  from  the  Magyar  Nemzeti 

Bank (MNB) for an opinion on a draft decree regulating the mismatch of maturity and foreign currency 

positions of credit institutions (hereinafter the ‘draft decree’). 

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/EC1, 

as the draft decree concerns rules applicable to financial institutions insofar 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. 

Background information and the purpose of the draft decree 

1.1  From  1  October  2013,  the  MNB  became  the  entity  not  only  responsible  for  macro-prudential 

policy, but also for the micro-prudential supervision of the entire financial market.  As a result of 
changes  in  legislative  competence  pursuant  to  the  new  Law  on  the  Magyar  Nemzeti  Bank2,  the 

Governor  of  the  MNB  is  now  exclusively  authorised  to  adopt  legislation  on  mitigating  systemic 

risk,  inter  alia,  to  regulate  the  maturity  mismatch  and  foreign  currency  position  of  credit 

institutions. 

1.2  The volume of foreign currency-denominated mortgage lending to households expanded rapidly in 

Hungary  until  2008.  Banks  financed  the  fast  build-up  of  foreign  currency  assets  mainly  by: 

(a) raising  foreign  currency-denominated  external  funding;  and  (b)  switching  forint  funding  to 

foreign exchange (FX) funding via FX swaps. The average remaining maturity for foreign currency 

funding and FX swaps became considerably shorter than the average maturity for foreign currency-

denominated  loans.  This  led  to  significant  maturity  mismatches,  and  consequently  increased 
Hungary’s need for foreign currency reserves3. 

1  

2  
3  

Council Decision 98/415/EC of 29 June 1998  on the consultation of the European Central Bank by national authorities 
regarding draft legislative provisions (OJ L 189, 3.7.1998, p. 42). 
See Law CXXXIX of 2013 on the Magyar Nemzeti Bank. 
See  also  Opinions  CON/2011/87  and  CON/2012/27.  All  ECB  opinions  are  published  on  the  ECB’s  website  at 
www.ecb.europa.eu. 

 
 
 
 
                                                           
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1.3  To mitigate this risk, Government Decree 366/20114 introduced the Balance Sheet Coverage Ratio, 

the Asset Coverage Ratio, and the foreign funding adequacy ratio (FFAR). 

1.4  The draft decree will review, update and replace the provisions of Government Decree 366/2011 

which are applicable to the FFAR. This review brings about the following major proposed changes: 

(a) the calculation of the required amount of stable foreign currency funding should change from a 

gross-based  approach  to  a  net-based  approach,  meaning  that  certain  parts  of  the  assets  are  not 

expected to be funded by FX funding as regulated by the draft decree; (b) in accordance with the 

prospective NSFR, the deposits (liabilities) should be divided into stable and less stable categories, 

with  a  proposed  weighting  of  90%  and  80%,  respectively;  (c)  the  weight  of  foreign  currency-

denominated  stakes  in  assets  is  proposed  to  decrease  to  0%;  (d)  the  required  level  of  the  FFAR 

should be set at 75% from July 2014 (it is currently at 65%), and should gradually increase further 

to 100% by January 2017.  

1.5  By introducing these measures, the MNB aims to: 

(a) 

reduce  the  funding  risk  related  to  short-term  foreign  exchange  debt  of  banks  and  maturity 

mismatch, and to prevent further deterioration; 

(b)  mitigate the vulnerability  arising from severe changes in the  short-term funding conditions 

by gradually closing the maturity gap between FX assets and FX liabilities; 

(c) 

provide an opportunity to stakeholders  until 2018 to prepare for the implementation of the 

NSFR. 

2 

General Observations 

The  draft  decree  regulates  the  same  subject  matter  as  the  specific  provisions  of  Government 

Decree 366/2011  that  are  applicable  to  the  FFAR.  Based  on  the  rules  applicable  with  regard  to  the 

hierarchy of legal acts in Hungary, the draft decree cannot repeal the provisions of Government Decree 

366/2011  that  are  applicable  to  the  FFAR.  Since  regulating  this  subject  matter  now  falls  within  the 

competence  of  the  Governor  of  the  MNB,  the  ECB  would  like  to  draw  the  Hungarian  legislator’s 

attention to the need to avoid duplication of relevant legislation by repealing the respective provisions of 

Government Decree 366/2011 in line with the procedural rules applicable to Hungarian legislation. 

3 

Specific Observations 

3.1  The  FFAR  is  similar  in  concept  to  the  NSFR  that  is  currently  being  developed  under  the  Basel 

Committee  on  Banking  Supervision  (BCBS),  since  it  builds  upon  structural  funding  metrics  that 

require  banks  to  hold  stable  funding  in  relation  to  the  composition  of  their  assets.  However,  a 

number of differences between the NSFR and the FFAR remain.  Specifically, in December 2013 

the BCBS agreed in a consultative document to introduce a more granular calibration through the 

4  

See  Government  Decree  366/2011  determining  the  liquidity  requirements  and  regulating  the  provisions  applicable  to 
foreign  currency  maturity  mismatch.  The  ECB  was  not  consulted  on  this  Government  Decree,  and  therefore  it  did  not 
have the opportunity to issue an opinion as regards its provisions. 

2 

 
 
                                                           
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consideration  of  assets  and  liabilities  with  a  maturity  between  six  months  and  one  year.  The 

intention behind this revision was to reduce cliff effects resulting from liabilities falling below the 

one-year  maturity  horizon,  and  to  assign  funding  factors  that  reflect  the  necessary  funding 

requirements for assets and the stability of available funding for liabilities. 

3.2  The current wording of the definition of ‘stable deposit’ in Article 2(32) of the draft decree would 

benefit  from  further  clarification.  In  December  2013,  the  European  Banking  Authority  (EBA) 
published a guideline5 for the identification of retail deposits with different stability characteristics, 

which  could  be  a  point  of  reference  for  such  clarification.  Reflecting  this  guideline  may  also  be 

useful for the differentiation of deposits under the FFAR. While differences between the NSFR and 

the  FFAR  are  to  be  expected,  given  that  the  FFAR’s  aim  is  to  limit  risks  from  foreign  currency 

mismatches,  it  may  be  appropriate  to  adjust  the  FFAR  in  line  with  applicable  international 

standards. 

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

Done at Frankfurt am Main, 24 February 2014. 

[signed] 

The President of the ECB 

Mario DRAGHI 

5  

See Guidelines EBA/GL/2013/1 on retail deposits subject to different outflows for purposes of liquidity reporting under 
Regulation  (EU)  No  575/2013,  on  prudential  requirements  for  credit  institutions  and  investment  firms  and  amending 
Regulation (EU) No 648/2012 (Capital Requirements Regulation – CRR). On overview of the EBA’s regulatory activity 
is available on the EBA’s website at www.eba.europa.eu. 

3