2016

Annual Report

2016 BUSINESS REPORT AND FINANCIAL STATEMENTS OF

THE MAGYAR NEMZETI BANK

Annual Report

Ki­ad­ja:­Ma­gyar­Nem­ze­ti­Bank

Fe­le­lős­ki­adó:­Hergár­Eszter

1054­Bu­da­pest,­Sza­bad­ság­tér­9.

www.mnb.hu

ISSN­1216-6197­(print)

ISSN­1585-4604­(on-line)

ANNUAL REPORT • 2016 3

Ki­ad­ja:­Ma­gyar­Nem­ze­ti­Bank

Fe­le­lős­ki­adó:­Hergár­Eszter

1054­Bu­da­pest,­Sza­bad­ság­tér­9.

www.mnb.hu

ISSN­1216-6197­(print)

ISSN­1585-4604­(on-line)

Contents

Part A) 2016 Business report of the Magyar Nemzeti Bank 5

1 The Governor’s foreword­ 7

2 A brief overview of the Magyar Nemzeti Bank­ 122.1­Objectives,­basic­and­other­tasks­of­the­MNB­ 122.2­Bodies­and­management­of­the­MNB­ 132.3­Organisation­of­the­MNB­ 162.4­The­MNB­as­a­member­of­the­European­System­of­Central­Banks­ 16

3 Review of the MNB’s performance in 2016­ 223.1­Monetary­Policy­ 223.2­Stability­of­the­financial­intermediary­system­ 293.3­Supervision­and­consumer­protection­ 333.4­Resolution­ 403.5­Payment­and­securities­settlement­systems­ 413.6­Foreign­exchange­reserves­management­ 453.7­Cash­logistics­activity­ 493.8­Statistical­services­ 533.9­The­MNB’s­activity­in­the­area­of­social­responsibility­ 563.10­Factors­shaping­the­communication­of­the­MNB­ 583.11­The­MNB’s­income­in­2016­ 583.12­Financial­performance­of­the­MNB­ 603.13­Introduction­of­the­ESCB­Committees­ 663.14­The­MNB’s­research­activities­in­2016­ 683.15­Publications­and­conferences­organised­by­the­MNB­in­2016­ 68

4 Additional information on the supervisory activity of the MNB in 2016­ 764.1­Institution­oversight­ 764.2­Inspections­completed­ 764.3­Licensing­and­legal­enforcement­ 774.4­Market­surveillance­ 804.5­Consumer­protection­ 814.6­Administrative­representation­at­proceedings­ 83

5 Explanation of abbreviations and terms specific to central banking­ 84

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Part B Audited financial statements of the Magyar Nemzeti Bank­ 87

1 Independent auditor’s report­ 89

2 Balance sheet of the Magyar Nemzeti Bank­ 92

3 Income statement of the Magyar Nemzeti Bank­ 93

4 Notes to the financial statements­ 944.1­The­MNB’s­accounting­policy­ 944.2­­Effects­of­macroeconomic­trends­on­the­2016­balance­sheet­and­income­statement­

of­the­Magyar­Nemzeti­Bank­ 994.3­­Forint­receivables­from­the­central­government­ 1004.4­­Foreign­currency­receivables­from­the­central­government­ 1004.5­Forint­and­foreign­currency­liabilities­of­the­central­government­ 1004.6­­Net­positions­vis-à-vis­the­central­government­ 1014.7­­Forint­receivables­from­and­liabilities­to­credit­institutions­ 1014.8­­Net­positions­vis-à-vis­credit­institutions­ 1024.9­­Gold­and­foreign­exchange­reserves­of­the­central­bank­ 1034.10­­Other­forint­and­foreign­currency­receivables­ 1054.11­­Other­deposits­and­liabilities­ 1064.12­­Invested­assets­ 1074.13­­Impairment­losses­and­provisions­ 1134.14­Prepaid­expenses/accrued­income­and­accrued­expenses/deferred­income­ 1144.15­­Changes­in­equity­ 1154.16­­Revaluation­reserves­ 1154.17­Off-balance­sheet­liabilities­and­other­significant­off-balance­sheet­items­of­the­MNB­ 1164.18­Net­interest­income­and­realised­net­income­of­financial­operations­ 1184.19­Components­of­income­from­the­revaluation­of­foreign­exchange­holdings­ 1214.20­­Cost­of­issuing­banknotes­and­coins­ 1224.21­­Other­income/expenses­ 1224.22­­Income­other­than­fees­and­commissions­ 1234.23­­Income­from­supervisory­activities­ 1234.24­­Operating­income­and­expenses­ 1244.25­­Information­on­wages­and­number­of­staff­ 126

ANNUAL REPORT • 2016 5

Part A) 2016 Business report of the Magyar Nemzeti Bank

ANNUAL REPORT • 2016 7

1 The Governor’s foreword

The­domestic­real­economic­environment­continued­to­have­a­disinflationary­impact­in­2016,­and­the­annual­average­rate­of­inflation­was­0.4­per­cent.­In­2016,­the­Monetary­Council­of­the­MNB­deployed­additional,­targeted­ monetary­ policy­ instruments­ along­ with­traditional­ interest­ rate­ policy­ to­ respond­ to­ the­challenges­posed­by­ the­ low­ inflation­environment­and­the­country’s­external­vulnerability,­with­a­view­to­ achieving­ the­medium-term­ inflation­ target­ in­ a­sustainable­manner­and­adequately­stimulating­the­real­economy.

As­the­Funding­for­Growth­Scheme­(FGS),­which­was­introduced­as­a­temporary­ instrument,­successfully­achieved­the­market­building­and­growth­objectives­set­upon­its­announcement,­the­Growth­Supporting­Programme­(GSP)­was­ launched­on­1­January­2016­with­a­view­to­gradually­phasing­out­the­FGS.­Part­of­this­ involves­the­third­stage­of­the­FGS,­comprising­two­pillars,­which­allows­more­restricted­and­targeted­financing­than­before,­while­another­part­consists­of­the­Market-Based­Lending­Scheme­(MLS),­a­package­of­instruments­containing­positive­incentives­to­support­banks’­lending­activity­in­other­ways.

The­MNB’s­objective­with­the­MLS,­which­forms­part­of­the­GSP,­was­to­ensure­that­–­even­with­the­gradual­phase-out­of­the­FGS­–­the­credit­market­functions­smoothly­ and­ lending­ increases­ in­ a­ sustainable­manner,­while­being­ less­dependent­on­the­central­bank.­Within­the­framework­of­the­MLS,­in­the­first­quarter­ of­ 2016­ the­MNB­organised­ a­ total­ of­ five­LIRS­tenders.­At­these­tenders,­banks­concluded­LIRS­transactions­with­ a­ total­ value­ of­ HUF­ 780­ billion,­thereby­undertaking­to­increase­their­net­SME­loan­portfolio­by­up­to­one­quarter­of­ their­outstanding­LIRS­portfolio­annually,­ in­the­next­three­years.­The­growth­ in­ the­ portfolio­ amounted­ to­ almost­ HUF­200­billion­annually,­representing­roughly­5­per­cent­growth­in­the­SME­loan­portfolio­in­2016.

As­ regards­ the­ FGS,­ the­ decision­ by­ the­Monetary­Council­in­the­autumn­permitted­the­credit­institutions­to­regroup­their­allocated­credit­lines­between­the­two­pillars­and­prolonged­the­contracting­deadline­until­end­of­March­2017.­Until­the­end­of­2016,­the­credit­

institutions­provided­data­to­the­MNB­on­contracts­in­the­total­amount­of­HUF­473­billion.­With­this,­in­all­of­the­phases­of­the­FGS­more­than­37,000­enterprises­had­access­to­financing­in­the­total­amount­of­almost­HUF­ 2,600­ billion­ since­ 2013.­ In­ recent­ years,­ the­scheme­has­made­a­major­contribution­to­economic­growth­and­higher­employment.

The­ change­ in­ the­ MNB’s­ set­ of­ monetary­ policy­instruments­continued­ in­2016.­As­part­of­ this,­ the­limited­2-week­deposit­instrument­was­phased­out­by­end-April­2016,­and­on­7­July­2016­the­central­bank­ended­ the­ conditional­ interest­ rate­ swap­ tenders,­introduced­as­part­of­the­Self-financing­Programme.­The­ Monetary­ Council’s­ decisions­ on­ 12­ July­ and­20­September­2016­ restricted­banks’­access­ to­ the­3-month­ central­ bank­ deposit­ instrument.­ From­August­ 2016,­ the­ tender­ for­ the­ 3-month­ central­bank­deposit­instrument­was­organised­once­a­month,­instead­ of­ the­ earlier­ weekly­ tenders,­ and­ it­ was­stipulated­that­the­total­deposit­portfolio­of­the­banks­that­may­be­placed­through­the­2016­Q4­tenders­on­3-month­deposits­must­not­exceed­HUF­900­billion.­On­20­September,­the­MNB­also­decided­to­introduce­fine-tuning­instruments­with­a­view­to­offsetting­the­potentially­persisting­and­material­ liquidity­ shocks:­these­instruments­included­the­EUR­swap­providing­forint­liquidity­on­the­asset­side,­and­the­possibility­of­placing­deposits­with­the­central­bank­on­the­liability­side.

The­new­operative­monetary­policy­framework­was­successful­in­2016.­The­quantitative­limitation­of­the­3-month­deposit­efficiently­supported­the­targeted,­unconventional­ easing­ of­ monetary­ conditions,­ as­a­ substantial,­ lasting­ fall­ occurred­ in­ yields­ in­ the­relevant­markets.­At­the­same­time,­the­MLS­facilitated­the­sustainable­expansion­of­market-based­lending­to­small­and­medium-sized­enterprises­through­banks’­quantified­lending­commitments.

In­2016,­the­vulnerability­of­the­Hungarian­financial­system­ continued­ to­ decrease.­ The­ Hungarian­banking­system’s­shock-absorbing­capacity­is­robust­both­ in­ terms­of­ liquidity­ and­ capital­ stock.­Banks’­lending­activity­recovered­both­in­the­household­and­

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the­ corporate­ segment,­while­ annual­ SME­ lending­growth­reached­the­level­of­5-10­per­cent,­which­is­deemed­ necessary­ for­ sustainable­ growth­ (growth­in­ the­ outstanding­ borrowing­ of­ the­ SME­ sector,­including­ the­ self-employed,­ was­ close­ to­ 12­ per­cent).­However,­ external­ risks­ rose­during­2016.­ In­addition­ to­ the­ severe­ consequences­ of­ the­ crisis,­geopolitical­ developments­ and­ challenges­ posed­by­ the­ persistently­ low­ interest­ rate­ environment­represent­ the­main­ risks­ in­ the­ European­ banking­sector.­Despite­the­persistently­poor­performance­of­the­euro­area­economy­in­past­years,­the­Hungarian­economy­is­still­on­a­growth­path­and­systemic­risks­continued­to­decrease,­as­a­result­of­which­Hungary­was­upgraded­by­the­rating­agencies.

As­a­result­of­the­central­bank’s­active­participation,­the­ratio­of­non-performing­loans­decreased­further.­The­decline­achieved­ to­date­ is­mostly­attributable­to­ regulatory­ measures,­ in­ particular­ the­ active­role­ played­ by­ the­ central­ bank.­ The­ change­ in­lending­ practices­ also­ helps­ resolve­ the­ issue­ of­non-performing­loans,­and­the­central­bank’s­active­involvement­continues­to­encourage­banks­to­reduce­their­non-performing­portfolios.

The­ focus­of­ the­MNB’s­macroprudential­activity­ in­2016­was­on­fine­ tuning­ the­previously­ introduced­macroprudential­instruments,­and­monitoring­market­participants’­ adjustment­and­ risk­developments.­ In­January­2016,­the­central­bank­published­its­strategy­entitled­“Stability­today­–­Stability­tomorrow”,­which­designates­ the­ fundamental­ aspects­ of­ the­ central­bank’s­ operation­ as­ macroprudential­ authority,­ in­line­with­the­MNB’s­Statute.­As­part­of­the­follow-up­of­the­macroprudential­instruments,­in­October­2016­the­MNB­ issued­ its­Macroprudential Report­ for­ the­first­time,­which­can­be­regarded­as­a­novel­initiative­even­by­international­standards.­The­purpose­of­the­report,­which­will­be­published­annually­in­the­future,­is­to­present­to­the­public­the­measures­applied­by­the­MNB­to­prevent­and­address­the­identified­and­communicated­systemic­risks,­as­well­as­the­effects­of­those­and­the­adjustment­of­market­participants.­The­MNB’s­new­macroprudential­instrument,­the­mortgage­funding­ adequacy­ ratio­ (MFAR),­ will­ reduce­ forint­maturity­mismatch­in­the­banking­system­from­2017.­As­a­result­of­the­introduction­of­the­new­indicator,­several­ new­ mortgage­ banks­ were­ established­ in­2016­and­new­mortgage­bond­issuances­took­place.­In­ connection­ with­ the­ fine-tuning­ of­ the­ set­ of­macroprudential­ instruments,­ in­2016­–­taking­ into­

consideration­ the­ increasing­mortgage­ lending­and­property­market­activity­–­minor­changes­were­made­to­the­debt­cap­rules.­The­central­bank­also­reviewed­the­banks’­preliminary­arrangements­for­the­Systemic­Risk­Buffer­(SRB),­which­is­meant­to­reduce­the­risks­of­the­problem­project­loan­portfolios,­and­performed­the­annual­review­of­the­Other­Systemically­Important­Institutions­(O-SII).

The­performance­of­supervisory­duties­in­2016­was­characterised­by­forward-looking­strategic­approach­and­fast­response.­Applying­its­revised­methodology­in­ practice,­ the­ MNB­ performed­ the­ oversight­ of­the­ financial­ intermediary­ system,­ enforcing­ the­requirement­of­proactive­approach.

The­regulatory­system,­which­was­revised­in­respect­of­several­sectors,­and­the­market­ambitions­generated­new­ challenges­ for­ the­ MNB.­ Measures­ fostering­stability­and­sound­growth­included­the­integration­of­ cooperative­credit­ institutions­and­ the­oversight­strategy­ adjusted­ to­ the­ integration­ in­ the­ area­ of­credit­institutions,­the­supervision­of­operations­in­line­with­Solvency­II­in­the­area­of­insurance,­the­measures­taken­ to­ gain­ investors’­ confidence­and­establish­ a­safely­functioning­institutional­system­in­the­capital­market,­and­the­closing­of­the­settlement­inspections­in­the­area­of­consumer­protection.

The­ regulatory­ and­ supervisory­ measures­implemented­in­accordance­with­an­“ethical”­approach­and­the­consumer­protection­measures­facilitated­the­maintenance­of­the­relation­between­the­consumers­and­supervised­institutions­based­on­equilibrium­and­fair­business­conduct.

In­ close­ cooperation­ with­ the­ dominant­ actors­ in­the­ domestic­ market,­ business­ model­ analyses­are­ conducted­ in­ an­ ever­ broadening­ range.­ As­ a­result­of­ the­new­approach,­ the­MNB­can­obtain­a­more­ comprehensive­ picture­ of­ the­ sustainability­of­ the­supervised­ institutions’­profitability,­ strategy­and­ business­ model.­ Furthermore,­ the­ dialogue­conducted­ during­ the­ analyses­ efficiently­ supports­the­institutions’­strategy­development,­planning­and­risk­management­processes.

One­of­the­greatest­achievements­of­the­MNB­in­2016­was­the­successful­closure­of­MKB­Bank’s­resolution­procedure.­In­addition­to­this,­major­milestones­were­reached­in­the­fulfilment­of­the­tasks­relating­to­the­resolution­function­of­the­MNB:­the­MNB­participated­

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ANNUAL REPORT • 2016 9

in­the­resolution­colleges­led­by­the­Brussels-based­Single­Resolution­Board,­as­the­resolution­authority­of­the­Banking­Union,­in­its­capacity­as­a­host­authority,­as­well­as­in­the­work­of­the­various­resolution­colleges­and­ in­ the­ process­ of­ the­ resolution­planning­ as­ a­group-level­resolution­authority­in­respect­of­a­bank­group­domiciled­in­Hungary;­in­addition,­it­played­an­active­role­in­the­development­of­the­EU­resolution­regulatory­changes­and­in­the­introduction­thereof­in­Hungary.­One­major­achievement­during­the­year­was­that­the­MNB­liaised­with­the­resolution­authorities­of­ 46­ non-EU­ countries­with­ a­ view­ to­ developing­professional­cooperation.­The­MNB­also­assumed­a­key­role­in­the­fulfilment­of­the­financial­stability­tasks­related­to­collective­funds­in­2016.

In­2016,­the­MNB­issued­29­resolutions­and­expert­opinions­on­payments,­and­within­the­framework­of­payment­audits­it­launched­19­new­proceedings­and­closed­5­inspections­launched­earlier.­As­a­result­of­the­inspections,­administrative­penalties­were­imposed­in­the­total­amount­of­HUF­61.1­million.

The­ MNB­ once­ again­ paid­ special­ attention­ to­enhancing­ the­ efficiency­ of­ the­ payment­ systems­in­ 2016.­ The­ MNB­ launched­ a­ project­ for­ the­implementation­ of­ the­ instant­ payment­ services­in­ Hungary.­ It­ elaborated­ the­ final­ development­concept­ for­ instant­ payments­ after­ processing­ the­expert­ opinions­ provided­ to­ it­ as­ a­ result­ of­ the­comprehensive­ consultation­ process­ conducted­during­ the­ project.­ The­ MNB’s­ Financial­ Stability­Board­approved­the­rules­of­instant­payments­on­13­December­2016,­which­contain­the­basic­requirements­prescribed­ for­ the­ rendering­ of­ instant­ payment­services­ in­Hungary.­ In­ addition,­ as­ a­ result­ of­ the­development­performed­at­the­MNB’s­initiative,­from­1­ January­ 2016­ all­ forint­ credit­ transfers­ requiring­interbank­clearing,­submitted­to­the­credit­institutions­on­paper,­are­processed­ in­ the­ intraday­settlement­system­of­the­Interbank­Clearing­System,­instead­of­the­formerly­used­overnight­settlement.

Since­ the­ accession­ of­ the­ forint­ to­ the­ CLS­international­foreign­currency­settlement­system­at­the­end­of­2015,­the­infrastructure­worked­smoothly­and­ in­ 2016­ the­ number­ of­ direct­ members­ and­the­ volume­ of­ settled­ forint­ turnover­ increased­dynamically­ in­the­system.­As­a­result­of­accession,­representatives­ of­ the­ MNB­ participated­ in­ the­CLS­ Oversight­ Committee’s­ meetings,­ where­ they­reported,­amongst­other­things,­on­the­experiences­

gained­ since­ the­ accession­ of­ the­ forint.­ In­ 2016,­under­ the­ MNB’s­ supervision,­ domestic­ payment­service­providers­continued­to­prepare­for­compliance­with­the­provisions­of­the­SEPA­final­date­regulation­applicable­to­EUR­credit­transfers­and­direct­debits.­The­service­providers­of­non-euro­area­countries­had­to­ complete­ the­ changeover­ by­ 31­ October­ 2016,­which­was­completed­by­Hungary­smoothly.

In­addition­ to­ the­variety­of­MNB­publications,­ the­MNB’s­publication­entitled­Payment Systems Report 2016,­analysing­the­recent­developments­in­the­central­bank­money­circulation­and­securities­settlement,­was­published­in­June­2016­for­the­fifth­time.

The­MNB’s­ foreign­ exchange­ reserves­ dropped­ by­EUR­5.94­billion­during­the­year,­and­thus­at­the­end­of­ December­ 2016­ the­ foreign­ exchange­ reserves­amounted­to­EUR­24.4­billion.­During­the­year,­the­fall­in­the­level­of­foreign­exchange­reserves­was­mostly­attributable­to­repayment­of­debt,­the­conversion­of­the­household­foreign­currency­loans­into­forint,­and­the­payments­related­to­the­foreign­currency­pillar­of­phase­three­of­the­FGS.­These­effects­were­partially­offset­by­the­EU­transfers­received­from­the­European­Commission,­ and­ the­ volume­ of­ foreign­ currency­received­during­the­forint­liquidity­providing­foreign­currency­swap­tenders­announced­from­October.

On­31­December­2016,­ the­ total­ value­of­ currency­in­ circulation­ amounted­ to­ HUF­ 4,580­ billion,­representing­a­6­per­cent­year-on-year­increase­of­HUF­275.7­billion.­The­extremely­intensive­growth­in­forint­cash­holdings­seen­since­2012­eased­off­substantially­in­2016.

The­two­largest­banknote­denominations­still­play­a­dominant­role­in­cash­turnover:­at­the­end­of­last­year­they­jointly­accounted­for­65­per­cent­of­the­volume­of­banknotes­in­circulation.

In­2016,­the­MNB­performed­cash­transactions­for­its­customers,­credit­institutions­and­the­Hungarian­Post­in­a­value­of­HUF­4,130­billion.

In­ 2016,­ 1,549­ forint­ banknote­ counterfeits­ were­identified­ and­ withdrawn­ from­ circulation;­ this­represents­a­ further­decline­even­compared­to­ the­previous­year,­and­thus­it­can­be­stated­that­the­degree­of­the­counterfeiting­of­forint­banknotes­is­favourable.­In­ 2016,­ counterfeiting­ of­ higher­ denominations­(mainly­10,000-forint­ and­20,000-forint­banknotes)­

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remained­most­typical,­accounting­for­87­per­cent­of­counterfeit­forint­banknotes.

In­the­period­between­2014­and­2018,­in­the­context­of­ “Progress­ and­ tradition”,­ the­MNB­ is­ poised­ to­redesign­the­banknote­series­presently­in­circulation.­Of­the­series­comprising­six­denominations,­the­first­banknote­which­was­redesigned­was­the­10,000-forint­bill­in­2014,­followed­by­the­20,000-forint­banknote­in­2015.­The­next­two­denominations­are­the­2,000-forint­and­ 5,000-forint­ banknotes,­ which­ became­ legal­tender­from­15­November­2016;­they­will­appear­in­the­circulation­gradually,­from­March­2017,­after­the­proper­ preparation­ of­ the­ participants­ of­ the­ cash­supply­chain.

Pursuant­to­the­MNB­Act,­and­in­the­spirit­of­the­sales­policy­–­aimed­at­fostering­coin­collection­–­valid­since­2014,­ the­ central­ bank­ issued­ 19­ commemorative­coins­ on­ nine­ topics­ in­ 2016.­ Three­ of­ these­were­gold­ coins,­ seven­were­ silver­ coins­ and­ nine­were­non-ferrous­ metal­ collector­ coins.­ The­ security­feature­appearing­in­the­mint­mark­featuring­in­the­coins­is­a­technological­innovation­introduced­in­the­commemorative­coin­programme­ in­2016.­ In­2016,­the­MNB­also­put­into­circulation­the­commemorative­version­of­a­new­50-forint­circulation­coin.

In­ 2016,­ the­ MNB­ made­ preparations­ for­ the­acceptance­ and­ processing­ of­ harmonised­ data­reporting­by­credit­institutions­applying­the­Hungarian­and­ international­ accounting­ standards­ (IFRS),­satisfying­both­supervisory­and­statistical­objectives.­The­MNB­Decree­on­data­reporting,­which­is­effective­from­2017­and­contains­the­credit­institutions’­data­reporting­in­a­new­structure,­with­more­details­than­before,­was­promulgated­in­the­first­half­of­2016.

The­MNB­developed­the­consolidated­risk­monitoring­system­ for­ bank­ groups­ employing­ both­ the­ new­uniform­ European-level­ data­ supply­ standard­ and­the­data­content­ordered­by­the­MNB­Decree,­in­the­framework­of­which­a­quarterly­risk­evaluation­of­the­activities­of­all­bank­groups­is­prepared­starting­from­2016.­ The­ statistics­ prepared­ from­ the­ supervisory­data­reporting,­consolidated­at­the­sector­level,­are­also­published­on­the­MNB’s­website­in­the­form­of­time­series.

In­2016,­the­MNB­also­successfully­implemented­the­insurers’­new­supervisory­data­reporting­connected­to­the­introduction­of­the­standard­Solvency­II­rules­of­the­European­Union.

In­2016,­the­MNB­realised­a­profit­of­HUF­54.3­billion.­Both­net­interest­income­and­income­from­financial­transactions­developed­favourably,­which­was­mostly­attributable­to­the­fall­in­interest­expenses­resulting­from­the­base­rate­cutting­cycle­and­the­central­bank’s­self-financing­programme.

Actual­ operating­ costs­ amounted­ to­ HUF­ 35,395­million­in­2016,­which­exceeded­the­expenses­incurred­in­the­previous­year­by­7.3­per­cent.

The­ increase­ in­ expenses­ compared­ to­ 2015­ was­partially­due­to­personnel­costs,­primarily­owing­to­the­rise­in­the­average­headcount­primarily­through­the­filling­of­vacancies,­and­also­to­the­performance­new­tasks­(e.g.­resolution­and­reorganisation­activity,­and­extra­duties­of­the­Financial­Arbitration­Board,­as­mandatory­enforcement­forum).

The­general­ operating­expenses,­mostly­within­ the­expenses­of­upkeep,­also­rose,­which­ is­due­to­ the­rise­in­the­costs­of­armed­guarding­and­protection,­as­the­costs­of­security­guarding­outsourced­in­2015­were­incurred­in­respect­of­the­full­year­in­2016.

The­ financially­ realised­ value­ of­ investments­implemented­ in­ 2016­ was­ HUF­ 4,910­ million­ –­including­advance­payments­for­investment­purposes­–­ the­majority­of­which­were­capital­expenditures,­mostly­IT,­related­to­the­usual­course­of­business.

In­ 2016,­ the­ environmental­ activity­ of­ the­ MNB­was­once­again­determined­by­the­ implementation­of­ the­ medium-term­ (2014-2016)­ environmental­strategy­adopted­by­the­Executive­Board.­The­focus­of­ the­ strategy­was­ on­ the­ environmentally­ sound­development­ of­ the­ MNB’s­ buildings­ and­ further­improvement­ in­the­environmental­performance­of­the­cash­supply­chain.

In­ the­ medium-term­ strategy,­ the­MNB­made­ the­commitment­in­respect­of­its­buildings­that­within­3­years­it­would­obtain­a­one-grade­higher­rating­of­the­international­environmental­assessment­method­and­rating­system­(BREEAM­In-Use)­for­the­headquarters­building,­classified­as­a­national­monument.­At­ the­end­of­2016­it­managed­to­obtain­the­“very­Good”­assessment­rating,­which­is­unique­by­international­standards­as­well.

In­ relation­ to­ improving­ the­ environmental­performance­ of­ the­ cash­ supply­ chain,­ based­ on­the­ detailed­ environmental­ review­ of­ the­ MNB’s­

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subsidiaries­ involved­ in­ cash­ production,­ in­ 2016­Pénzjegynyomda­ Zrt.­ and­ Diósgyőri­ Papírgyár­ Zrt.­started­ preparing­ for­ the­ implementation­ of­ the­MNB’s­environmental­management­system­(KÖvHIR).­Preparations­are­proceeding­on­schedule,­and­in­2017­the­subsidiaries­will­obtain­the­EMAS­certificate­–­the­international­accreditation­recognising­environmental-friendly­operation.

Compliance­with­the­laws­in­the­area­of­environmental­protection­ was­ ensured­ in­ 2016,­ and­ the­ MNB­renewed­its­EMAS­certificate­in­2016.

The­review­and­updating­of­the­MNB’s­medium-term­environmental­strategy­is­due­in­2017.­The­review­will­cover­the­MNB’s­environmental­management­system,­and­particularly­the­assessment­of­its­environmental­performance,­ the­ identification­ of­ the­ significant­environmental­ factors­ and,­ as­ a­ result­ of­ this,­ the­review­ of­ the­ Environmental­ Policy,­ as­well­ as­ the­definition­of­the­objectives­to­be­achieved­in­2017-2019.

The­MNB­regards­it­as­its­mission­to­serve­the­public­good­ by­ utilising­ its­ sustainable­ positive­ financial­result,­ without­ jeopardising­ its­ primary­ objective­and­basic­tasks,­and­by­supporting,­as­far­as­possible,­the­realisation­of­professional­and­social­goals­ that­reflect­credibility,­create­value­and­strengthen­social­cohesion.­ The­main­pillars­of­ the­MNB’s­Corporate­

Social­Responsibility­Strategy­–­i.e.­the­improvement­of­ financial­ literacy,­ the­ development­ of­ economic­education­and­ research­ infrastructure,­ the­ support­for­ national­ cultural­ and­ contribution­ to­ charitable­activities­–­reflect­these­principles.­The­results­of­the­programme­in­2016­contributed­to­the­realisation­of­the­goals­set­out­in­the­Corporate­Social­Responsibility­Strategy­to­a­substantial­degree.

In­order­to­supply­the­general­public­with­continuous­and­professional­information,­in­2016­the­MNB­issued­a­total­of­413­press­releases,­held­48­press­conferences­and­published­93­professional­articles­in­the­printed­press­and­online,­as­well­on­its­own­website.

Within­ the­ framework­ of­ statements­ and­ press­conferences,­the­MNB­presented­the­most­important­central­bank­decisions,­the­outcomes­of­the­Monetary­Council’s­ meetings,­ the­ decisions­ and­ information­regarding­ monetary­ policy­ and­ the­ stability­ of­the­ financial­ system,­ the­ findings­ of­ supervisory­inspections­ and­ the­ related­ resolutions,­ as­well­ as­essential­statistical­data­and­news­on­cash­circulation­and­ the­ issuance­ of­ commemorative­ coins.­ The­presentation­and­introduction­of­the­targeted­central­bank­ programmes­ and­ measures­ supporting­ the­economic­policy­of­ the­government­and­Hungarian­economic­growth,­along­with­the­demonstration­of­activities­serving­whole­society­goals­was­once­again­a­key­objective­in­2016.

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2 A brief overview of the Magyar Nemzeti Bank

Company name: Magyar­Nemzeti­Bank

Registered Office: 1054­Budapest,­Szabadság­tér­8–9.

Form of operation: company­limited­by­shares.­The­form­of­operation,­i.e.­the­‘company­limited­by­shares’­designation­or­its­abbreviation­need­not­be­included­in­the­company­name­of­the­Magyar­Nemzeti­Bank.

Year of foundation: 1924

Owner (shareholder):­the­Hungarian­State,­represented­ by­the­minister­in­charge­of­public­finances

Scope of activities:­as­defined­by­Act­CXXXIX­of­2013­on­the­Magyar­Nemzeti­Bank­(hereinafter:­MNB­Act).

Subscribed capital:­HUF­10­billion

2.1 OBJECTIVES, BASIC AND OTHER TASKS OF THE MNB

The­Magyar­ Nemzeti­ Bank­ (hereinafter:­ MNB,­ the­central­bank)­ is­a­ legal­entity­operating­as­a­special­company­ limited­ by­ shares,­ which­ conducts­ its­operations­in­accordance­with­the­provisions­of­the­MNB­Act.

In­accordance­with­Article­127­of­the­Treaty­on­the­Functioning­of­the­European­Union,­the­MNB­Act­–­which­establishes­the­MNB’s­primary­objectives­and­basic­ tasks­ as­well­ as­ its­ institutional,­ operational,­personnel­and­financial­independence­and­operation­–­stipulates­ that­ the­primary­objective­of­ the­MNB­is­ to­ achieve­ and­maintain­ price­ stability.­Without­prejudice­to­its­primary­objective,­the­MNB­supports­the­ maintenance­ of­ the­ stability­ of­ the­ system­ of­financial­ intermediation,­ the­ enhancement­ of­ its­resilience­and­its­sustainable­contribution­to­economic­growth,­and­the­MNB­supports­the­economic­policy­of­the­government­using­the­instruments­at­its­disposal.

The­ MNB­ Act­ also­ stipulates­ the­ independence­ of­the­ central­ bank­ in­ accordance­ with­ Article­ 130­

of­ the­ Treaty­ on­ the­ Functioning­ of­ the­ European­Union.­On­ the­basis­of­ central­ bank­ independence,­the­ MNB­ and­ the­ members­ of­ its­ bodies­ shall­ be­independent­in­carrying­out­their­tasks­and­meeting­their­obligations­ conferred­upon­ them­by­ the­MNB­Act,­and­shall­neither­seek­nor­take­instructions­from­the­Government,­the­institutions,­bodies­and­offices­of­the­European­Union,­the­governments­of­its­Member­States­or­any­other­organisations­or­political­parties,­except­from­the­European­Central­Bank­and­as­required­based­on­its­membership­in­the­European­System­of­Financial­Supervision.­The­Government­or­any­other­organisation­shall­adhere­to­this­principle,­and­shall­not­attempt­to­influence­the­MNB­or­any­member­of­its­bodies­in­the­course­of­performance­of­their­tasks.

The­basic­tasks­of­the­MNB­are­the­following:

–­­it­defines­and­implements­monetary­policy;

–­­it­ has­ the­ exclusive­ right­ to­ issue­ banknotes­ and­coins,­ including­ commemorative­ banknotes­ and­coins,­which­shall­be­the­legal­tender­of­Hungary;

–­­it­has­the­exclusive­right­to­hold­and­manage­official­foreign­ exchange­ and­ gold­ reserves,­ in­ order­ to­preserve­ the­ external­ stability­ of­ the­ Hungarian­economy;

–­­it­has­the­exclusive­right­to­conduct­foreign­exchange­operations­in­relation­to­the­management­of­foreign­exchange­reserves­and­the­implementation­of­the­exchange­rate­policy;

–­­it­has­the­exclusive­right­to­oversee­payment­and­securities­settlement­systems,­including­overseeing­the­operation­of­the­system­and­the­operation­of­the­organisation­performing­ central­ counterparty­activities­in­order­to­ensure­the­sound­and­efficient­operation­ of­ these­ systems­ and­ the­ smooth­circulation­of­money.­Within­the­scope­of­its­powers­set­ forth­ in­ the­ MNB­ Act,­ it­ participates­ in­ the­development­of­payment­and­securities­settlement­systems;

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–­­it­collects­and­publishes­the­statistical­information­required­for­carrying­out­its­tasks­and­fulfilling­its­statistical­reporting­obligations­toward­the­European­Central­Bank­as­defined­in­Article­5­of­Protocol­(No.­4)­on­the­Statute­of­the­European­System­of­Central­Banks­and­of­the­European­Central­Bank­attached­to­the­Treaty­on­the­Functioning­of­the­European­Union;

–­­it­ establishes­ the­ macroprudential­ policy­ for­the­ stability­ of­ the­ entire­ system­ of­ financial­intermediation­and­with­the­objective­to­enhance­the­resilience­of­the­system­of­financial­intermediation­and­ to­ ensure­ its­ sustainable­ contribution­ to­economic­growth.­To­that­end­and­within­the­limits­specified­ in­ the­MNB­ Act,­ the­MNB­ explores­ the­business­and­economic­risks­threatening­the­system­of­ financial­ intermediation­ as­ a­whole,­ promotes­the­prevention­of­the­development­of­systemic­risks­and­the­reduction­or­elimination­of­evolving­systemic­risks;­furthermore,­in­the­event­of­disturbances­to­the­ credit­ market­ it­ contributes­ to­ the­ balanced­functioning­ of­ the­ system­ of­ intermediation­ in­financing­ the­ economy­ by­ stimulating­ lending­and­–­in­the­event­of­excessive­credit­outflow­–­by­restraining­lending.

Tasks­of­the­MNB­above­and­beyond­its­basic­tasks­are­the­following:

–­­it­acts­as­a­resolution­authority;

–­­it­ acts­ as­ the­ sole­ supervisor­ of­ the­ financial­intermediary­system,­in­order­to

a) ensure­ the­ smooth,­ transparent­ and­ efficient­functioning­ of­ the­ system­ of­ financial­intermediation;

b) facilitate­ the­prudent­operation­of­ the­persons­and­ organisations­ forming­ part­ of­ the­ system­of­financial­ intermediation­and­supervision­the­prudent­exercise­of­owners’­rights;

c) discover­undesirable­business­and­economic­risks­to­individual­financial­organisations­or­individual­sectors­thereof,­reducing­or­eliminating­specific­or­sectoral­risks­which­have­evolved,­and­taking­preventive­ measures­ to­ ensure­ the­ prudent­operation­of­individual­financial­organisations;

d) protect­ the­ interests­ of­ users­ the­ services­provided­by­financial­ organisations­ in­ order­ to­

strengthen­ public­ confidence­ in­ the­ financial­intermediary­system;

–­­it­ performs,­ via­ the­ Financial­ Arbitration­ Board,­the­ out-of-court­ resolution­ of­ disputes­ related­to­ the­ establishment­ and­ fulfilment­ of­ contracts­for­ services,­ established­ between­ the­ consumer­and­ the­ entities­ or­ persons­ covered­ by­ the­ acts­defined­ in­ Article­ 39­ of­ the­ MNB­ Act­ relating­to­ the­ establishment­ and­ performance­ of­ legal­relationships­for­the­use­of­services.

Any­further­tasks­of­the­MNB­shall­be­defined­by­acts­and,­ in­relation­to­the­supervision­of­the­system­of­financial­intermediation,­by­legal­regulations­adopted­pursuant­ to­ the­authorisation­of­an­act.­Such­tasks­of­ the­MNB­ shall­ comply­with­ the­ basic­ tasks­ and­responsibilities­of­the­MNB­as­defined­in­the­MNB­Act.

2.2 BODIES AND MANAGEMENT OF THE MNB

The­MNB­operates­as­a­legal­person­functioning­in­the­form­of­a­single-member­company­limited­by­shares.­The­general­rules­pertaining­to­companies­limited­by­shares­and­the­relevant­provisions­of­Act­v­of­2013­on­the­Civil­Code­are­applicable­to­the­MNB,­with­the­exceptions­laid­down­by­the­MNB­Act.

The­Hungarian­State­as­the­shareholder­is­represented­by­the­minister­in­charge­of­public­finances.­The­MNB­operates­without­a­General­Meeting.

The­shareholder is­entitled­to­pass­decisions,­by­way­of­a­shareholder’s­resolution,­on­the­establishment­and­on­the­amendment­of­the­Statutes­as­well­as­on­the­appointment,­dismissal­and­remuneration­of­the­auditor.

As­ a­ guarantee­ of­ independence,­ in­ contrast­ to­ the­practice­ of­ other­ companies­ limited­ by­ shares,­ the­remuneration­of­the­MNB’s­Governor,­Deputy­Governors­and­other­members­of­the­Monetary­Council­as­well­as­the­members­of­the­Supervisory­Board­are­determined­by­the­MNB­Act­rather­than­by­the­shareholder.

Likewise,­ the­ bodies­ of­ the­MNB­ are­ specified­ by­the­MNB­Act­as­follows:­the­Monetary­Council,­the­Financial­Stability­Council,­the­Executive­Board,­and­the­Supervisory­Board.

The­ MNB’s­ supreme­ decision-making­ body­ is­ the­Monetary Council.

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The­scope­of­competence­of­ the­Monetary­Council­includes:

–­­strategic­decisions­concerning­monetary­policy,­the­issue­of­legal­tender,­the­holding­and­management­of­ foreign­exchange­and­gold­ reserves,­ as­well­ as­strategic­ decisions­ relating­ to­ foreign­ exchange­transactions­ in­ the­ context­ of­ foreign­ exchange­reserve­ management­ and­ implementation­ of­exchange­rate­policy­including­and­strategic­decisions­concerning­statistical­tasks,­ in­particular,­decisions­regarding­the­level­of­the­reserve­ratio,­interest­rate­payable­ on­ the­ minimum­ central­ bank­ reserves,­decisions­related­to­define­the­exchange­rate­regime­and­determining­the­central­bank­base­rate;

–­­in­relation­to­macroprudential­tasks,­the­oversight,­the­supervision­of­the­financial­intermediary­system­and­ the­ MNB’s­ role­ as­ a­ resolution­ authority,­decision­on­the­strategic­framework­within­which­the­Financial­Stability­Council­makes­its­decisions;

–­­establishing­the­rules­of­procedure;

–­­decisions­ on­ any­ other­ matter­ in­ the­ exclusive­competence­of­the­Monetary­Council­as­defined­by­law.

Members­of­the­Monetary­Council­are:­the­Governor­of­ the­MNB­as­Chairman­of­ the­Monetary­Council,­the­Deputy­Governors­of­the­MNB­and­the­members­elected­ by­ Parliament­ for­ six­ years.­ The­Monetary­Council­has­at­least­five­and­at­most­nine­members.

At­ the­ first­ meeting­ of­ each­ year,­ the­ Monetary­Council­elects­a­Deputy­Chairman­ from­among­ the­Deputy­Governors­of­the­MNB,­who­substitutes­for­the­governor­of­the­MNB­in­the­event­of­his­absence­–­with­the­exception­of­the­issuance­of­decrees.­In­2016,­the­Monetary­Council­elected­Márton­Nagy,­Deputy­Governor,­as­deputy­chairman.

In­2016,­the­members­of­the­Monetary­Council­were:

–­­Dr­ György­ Matolcsy,­ Governor,­ Chairman­ of­ the­Monetary­Council­from­4­March­2013,

–­­Márton­Nagy,­Deputy­Governor­from­1­September­2015,

–­­Dr­Ferenc­Gerhardt,­Deputy­Governor­from­22­April­2013,

–­­Dr­László­Windisch,­Deputy­Governor­from­2­October­2013,

–­­Dr­Gusztáv­Báger,­from­6­July­2015,

–­­Andrea­Bártfai-Mager,­from­21­March­2011­to­6­July­2016,

–­­Dr­János­Béla­Cinkotai,­from­22­March­2011,

–­­Dr­Kolos­Kardkovács,­from­12­September­2016,

–­­Dr­György­Kocziszky,­from­5­April­2011,

–­­Gyula­Pleschinger,­from­5­March­2013.

The­Financial Stability Council­acts­as­the­decision-making­ body­ of­ the­MNB­ in­ relation­ to­ oversight,­macroprudential­tasks­and­resolution­authority­duties,­as­well­as­prudential­supervision­within­the­framework­defined­by­the­Monetary­Council.­In­relation­to­these­responsibilities,­ the­ Financial­ Stability­ Council­ acts­on­behalf­of­the­MNB­in­administrative­proceedings.­Within­ this­ scope­ of­ competence,­ the­ Financial­Stability­Council

–­­continuously­monitors­ the­ stability­of­ the­ system­of­financial­ intermediation­as­a­whole­and­of­ the­financial­markets,­in­order­to­maintain­the­stability­of­the­system­of­financial­intermediation­as­a­whole;

–­­takes­account­of­risk­factors­threatening­the­system­of­financial­intermediation­as­a­whole;

–­­analyses­ the­ risks­ related­ to­ certain­ types­ of­institutions­or­products­or­to­the­spread­of­these­which­ may­ represent­ a­ threat­ to­ the­ system­ of­financial­intermediation­as­a­whole;

–­­monitors­ developments­ on­ international­ and­European­markets­and­risks­which­may­represent­a­threat­to­the­stability­of­the­system­of­financial­intermediation­ as­ a­ whole,­ and­makes­ decisions­on­ the­ necessary­ measures­ within­ the­ strategic­framework­defined­by­the­Monetary­Council;

–­­discusses­strategic,­regulatory­and­risk-related­issues­affecting­the­system­of­financial­intermediation­as­a­whole­and­issues­opinions­if­necessary;

–­­in­situations­threatening­the­stability­of­the­system­of­financial­intermediation,­assesses­systemic­risks­

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and­decides­on­the­measures­required­to­mitigate­or­eliminate­such­risks;

–­­places­ on­ its­ agenda,­ as­ necessary,­ the­recommendations,­opinions­and­risk­warnings­of­the­European­Systemic­Risk­Board­relevant­to­the­system­of­financial­intermediation­as­a­whole;

–­­discusses­ the­ recommendations­ and­ decisions­issued­by­the­European­Supervisory­Authorities­as­needed,­including­decisions­addressed­to­national­supervisory­authorities­calling­for­specific­measures­in­the­event­of­serious­risks­to­the­stability­of­the­European­financial­system­and­expresses­its­opinion­on­the­tasks­arising­from­such­decisions;

–­­publishes­non-binding­recommendations­for­persons­and­organisations­supervised­by­the­MNB­describing­the­ basic­ principles­ of­ the­ legal­ enforcement­practices­of­the­MNB;

–­­annually­ defines­ the­ priority­ target­ areas­ of­ the­MNB’s­control­activities;­and

–­­makes­ decisions­ in­ administrative­ proceedings­relating­ to­ the­ exercise­ of­ supervision­ over­ the­system­ of­ financial­ intermediation­ and­ to­ the­performance­of­resolution­tasks.

Members­of­the­Financial­Stability­Council:

–­­the­Governor­of­the­MNB­as­its­chairman,

–­­the­ Deputy­ Governor­ responsible­ for­ monetary­policy,­financial­stability­and­lending­incentives,­and­the­Deputy­Governor­responsible­for­the­financial­supervision­and­consumer­protection,­and

–­­as­an­executive­appointed­by­the­Governor­of­the­MNB,­the­Deputy­Governor­responsible­for­statistics,­cash­logistics­and­the­financial­infrastructures,

–­­as­ an­ executive­ appointed­ by­ the­ Governor­ of­the­MNB,­the­Executive­Director­Monetary­Policy,­Financial­Stability­and­Lending­Incentive,

–­­as­an­executive­appointed­by­the­Governor­of­the­MNB,­the­Executive­Director­Financial­ Institutions­Supervision,­and

–­­from­28­February­2016,­the­Director­General.

In­accordance­with­ the­MNB­Act,­ responsibility­ for­implementing­the­decisions­of­the­Monetary­Council­and­ the­ Financial­ Stability­ Council,­ as­ well­ as­ for­managing­the­operation­of­ the­MNB­rests­with­the­Executive Board.

The­ scope­ of­ competence­ of­ the­ Executive­ Board­includes:

–­­managing­the­implementation­of­the­decisions­of­the­Monetary­Council­and­the­Financial­Stability­Council;

–­­approving­ the­accounting­report­of­ the­MNB­and­adopting­decisions­on­the­payment­of­dividends;

–­­approving­ the­ draft­ report­ to­ be­ sent­ to­ the­shareholder­on­the­management­and­assets­of­the­MNB;

–­­approving­matters­related­to­the­organisation­and­internal­management­of­the­MNB;

–­­approving­study­plans­and­programmes­relating­to­the­operation­of­the­MNB­and­the­performance­of­its­tasks,­including­the­costs­of­the­development­and­operational­plan;

–­­managing­ the­ MNB’s­ internal­ audit­ organisation­in­ respect­ of­ tasks­ falling­ outside­ the­ scope­of­ competence­ of­ the­ Supervisory­ Board,­ and­discussing­the­observations­and­plans­of­the­internal­audit;

–­­amending­ the­ collective­ agreement­ in­ respect­ of­employment­rights­and­obligations,­the­exercise­and­performance­of­these­rights­and­obligations,­and­the­associated­procedures;­and

–­­adopting­decisions­in­respect­of­the­central­bank’s­powers­to­manage­accounts­and­other­financial­and­auxiliary­financial­services,­as­well­as­certain­auxiliary­services­supplementing­investment­service­activities.

The­members­of­ the­Executive­Board,­which­ is­ the­executive­body­of­the­MNB,­are­the­Governor,­as­the­Chairman­of­the­Board,­and­the­Deputy­Governors­of­the­MNB.

Provisions­relating­to­the­functions­and­operational­procedures­ of­ the­Monetary­ Council,­ the­ Financial­Stability­Council­and­the­Executive­Board­are­set­forth­in­the­MNB­Act,­the­MNB’s­Statutes,­Organisational­

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and­Operational­Rules­as­well­as­the­rules­of­procedure­formulated­by­these­bodies.

In­ addition­ to­ the­ auditor­ appointed­ by­ the­shareholder,­ the­MNB­ is­ also­ audited­ by­ the­ State­Audit­Office­and­the­Supervisory­Board.

The­supervisory­competence­of­the­State Audit Office over­the­MNB­is­set­forth­in­the­Act­on­the­State­Audit­Office.­The­State­Audit­Office­supervises­the­financial­management­ of­ the­Magyar­ Nemzeti­ Bank­ and­ its­activities­that­are­not­ included­ in­ its­basic­ tasks.­ In­this­regard,­the­State­Audit­Office­examines­if­the­MNB­operates­ in­accordance­with­ the­applicable­ law,­ its­Statutes­and­the­shareholder’s­resolutions.

The­ auditor­ of­ the­ MNB­ can­ be­ appointed­ for­ a­maximum­ of­ 5­ years.­ The­ shareholder­ decides­ on­the­ appointment,­ dismissal­ and­ remuneration­ of­the­auditor­by­way­of­a­shareholder­resolution.­Prior­to­the­appointment­or­proposal­for­dismissal­of­the­MNB’s­auditor,­the­Governor­of­the­MNB­consults­the­President­of­the­State­Audit­Office.

As­set­forth­in­the­MNB­Act,­the­Supervisory Board­is­the­ body­ responsible­ for­ the­ continuous­ supervision­of­ the­MNB­on­behalf­of­ the­owner.­The­supervisory­competence­of­the­Supervisory­Board­defined­by­the­MNB­Act­does­not­cover­the­supervision­of­the­MNB’s­performance­of­its­basic­tasks,­its­actions­as­a­resolution­authority­and­its­supervisory­activity­in­respect­of­the­financial­ intermediary­system,­or­ their­ impact­on­the­MNB’s­profit­and­loss.­Accordingly,­the­Supervisory­Board­compiles­the­report­on­the­annual­accounts­as­specified­in­the­Act­on­Accounting­within­the­above­limitations.

Members­of­the­Supervisory­Board­as­defined­in­the­MNB­ Act­ are­ its­ Chairman­ elected­ by­ Parliament,­three­ additional­ members­ elected­ by­ Parliament,­the­representative­of­the­minister­in­charge­of­public­finances­ and­ an­ expert­ appointed­ by­ this­minister.­The­ Chairman­ of­ the­ Supervisory­ Board­ elected­by­ Parliament­ is­ nominated­ by­ the­ parliamentary­panels­of­ the­governing­parties,­whereas­the­other­members­ elected­ by­ Parliament­ are­ nominated­ by­parliamentary­panels.­The­mandate­of­the­members­of­ the­Supervisory­Board­ is­ for­ the­duration­of­ the­mandate­of­the­Parliament,­and­lasts­until­the­end­of­the­mandate­of­the­Parliament.

Parliament­elected­the­members­of­the­Supervisory­Board­on­6­July­2015,­as­the­mandate­of­the­previous­Supervisory­Board­expired.

Members­of­the­Supervisory­Board­in­2016:

–­­Dr­Ferenc­Papcsák,­Chairman,–­­László­Madarász,–­­Dr­Gábor­András­Szényei,–­­Dr­László­Nyikos,–­­István­Molnár,­and–­­Dr­Attila­Simon­Tóth.

2.3 ORGANISATION OF THE MNB

The­organisation­of­the­MNB­is­based­on­the­operating­and­ operational­ governance­ model­ introduced­on­ 1­ July­ 2013­ and,­ in­ respect­ of­ the­ integrated­organisation,­ on­ 1­ October­ 2013.­ Although­ the­organisational­ structure­has­ changed­ several­ times­since­then,­these­changes­did­not­fundamentally­alter­the­organisational­structure­developed­in­2013.

Fulfilment­of­the­statutory­and­operational­tasks­of­the­MNB­is­controlled­and­supervised­by,­in­addition­to­the­Executive­Board­and­the­members­thereof,­the­Director­General,­and,­in­their­capacity­as­the­top­level­executors­of­the­decisions,­the­executive­directors.

In­2016,­modifications­of­ the­MNB’s­organisational­structure­ were­ introduced­ in­ relation­ to­ areas­controlled­ by­ the­ Governor,­ the­ Deputy­ Governor­Monetary­ Policy­ Financial­ Stability­ and­ Lending­Incentives,­the­Deputy­Governor­Financial­Institutions­Supervision­and­Consumer­Protection,­as­well­as­by­the­Director­General.­ The­primary­objective­of­ the­modifications­was­to­enhance­efficiency.

The­ work­ organisation­ as­ at­ 31­ December­ 2016,­developed­as­a­result­of­the­organisational­changes­and­ destined­ for­ the­ fulfilment­ of­ the­ tasks,­ is­illustrated­by­the­organisation chart.

2.4 THE MNB AS A MEMBER OF THE EUROPEAN SYSTEM OF CENTRAL BANKS

Hungary’s­ accession­ to­ the­ European­ Union­ also­entailed­ the­ MNB’s­ membership­ in­ the­ European­System­of­Central­Banks­(ESCB).­The­ESCB­comprises­the­ European­ Central­ Bank­ (ECB),­ which­ was­established­ in­ June­1998­with­ its­ seat­ in­Frankfurt,­and­ the­ national­ central­ banks­ of­ the­ EU­Member­States.­Its­governing­bodies­are­the­Executive­Board­and­ the­Governing­Council,­ the­ latter­ consisting­of­the­members­of­the­ECB’s­Executive­Board­and­the­governors­ of­ the­ central­ banks­ of­ the­ euro­ area­

A­BRIEF­OvERvIEW­OF­THE­MAGyAR­NEMZETI­BANK

ANNUAL REPORT • 2016 17

Member­States.­The­ third­decision-making­body­of­the­ECB­is­the­General­Council,­which­is­responsible­for­maintaining­an­institutional­relationship­between­the­Eurosystem­and­ the­ central­ banks­of­non-euro­area­Member­States.­The­General­Council­holds­ its­meetings­ quarterly­ and­ consists­ of­ the­ President­and­the­vice-President­of­the­ECB­and­the­governors­of­ the­ central­ banks­of­ all­ EU­Member­ States.­ The­key­ responsibilities­ of­ the­ General­ Council­ include­consultancy­concerning­preparations­for­accession­to­the­euro­area,­approval­of­the­convergence­reports­of­the­ECB­and­monitoring­the­functioning­of­ERM­II.­Within­the­framework­of­the­latter­activity,­it­assesses­the­sustainability­of­the­bilateral­exchange­rate­of­non-euro­currencies­participating­in­ERM­II­against­the­euro­and­provides­a­forum­for­the­alignment­of­monetary­and­ exchange­ rate­ policies­ and­ the­ management­of­ intervention­ and­ financing­mechanisms­ in­ ERM­II.­ In­ addition,­ the­ General­ Council­ is­ involved­ in­verifying­whether­the­central­banks­of­EU­Member­States­ and­ the­ECB­ comply­with­ the­prohibition­of­monetary­ financing­ of­ the­ budget­ and­ privileged­access­of­ the­public­ sector­ to­financial­ institutions.­The­ General­ Council­ also­ contributes­ to­ the­ ECB’s­advisory­functions­and­to­the­collection­of­statistical­information;­ it­must­be­consulted­ in­respect­of­any­changes­in­the­rules­of­accounting­and­financial­data­reporting,­as­well­as­issues­related­to­the­adjustment­of­the­keys­for­subscriptions­to­the­ECB’s­capital.­The­mandate­of­ the­General­ Council­will­ expire­ on­ the­date­when­all­of­the­Member­States­have­adopted­the­ euro.

The­number­of­ESCB­members­did­not­change­in­2016.

The­ESCB­members­are­also­the­owners­of­the­ECB.­The­respective­ownership­shares­of­Member­States­are­determined­according­to­their­shares­in­the­GDP­and­total­population­of­the­EU­(on­the­basis­of­statistical­data­compiled­by­the­European­Commission).­Since­1­July­2013,­the­paid-up­capital­of­the­ECB­amounts­to­EUR­10.825­billion.

Currently,­euro­area­central­banks­subscribe­to­70­per­cent­of­the­ECB’s­capital,­while­the­remaining­30­per­cent­ is­divided­among­the­central­banks­of­non-euro­area­Member­States.­These­latter­central­banks­pay­a­pre-defined­minimum­percentage­of­ their­ respective­subscriptions­to­the­ECB’s­capital­as­a­contribution­to­the­operational­ costs­of­ the­ECB­which­ are­ incurred­in­ connection­ with­ their­ ESCB­ membership.­ With­effect­from­29­December­2010,­this­contribution­was­defined­as­3.75­per­cent­of­the­respective­subscriptions­(previously­it­had­been­7­per­cent).­As­set­forth­in­the­Statute­of­the­ESCB­and­of­the­ECB,­the­capital­keys­are­adjusted­every­five­years,­or­whenever­a­new­Member­State­joins­the­EU.­The­last­adjustment­of­the­capital­keys­was­made­in­the­second­half­of­2013.­Consequently,­on­1­January­2014,­the­share­of­the­MNB­in­the­ECB’s­paid-up­capital­increased­from­1.3740­per­cent­to­1.3798­per­cent­and­remained­unchanged­in­2015-2016.

The­ESCB­Committees­play­an­ important­ role­ in­ the­work­of­the­ECB’s­decision-making­bodies.­The­basic­role­of­these­committees­is­to­prepare­decisions­and­facilitate­coordination­as­per­the­horizontal­division­of­various­central­bank­duties,­covering­all­areas­of­central­banking­ operations­ from­ monetary­ policy­ through­communication­ to­ statistical­data­ reporting.­ Experts­from­ the­ central­ banks­ of­ non-euro­ area­ Member­States­attend­those­committee­meetings­whose­agenda­includes­items­affecting­the­ESCB­as­a­whole­and­which­fall­within­the­competence­of­the­General­Council.­(For­a­detailed­description­of­the­ESCB­Committees­and­the­activities­of­the­various­fora­assisting­them,­see­Chapter­3.13.)­The­committees­meet­and­discuss­current­issues­relevant­to­their­professional­areas­in­ESCB­composition,­4–5­times­a­year­on­average;­according­to­a­schedule­determined­for­a­year­in­advance.

The­senior­executives­and­relevant­experts­of­the­MNB­continue­to­play­an­active­role­in­the­activities­of­these­committees­and­their­working­groups.­ In­2016,­ the­ESCB­committees­continued­to­be­very­useful­fora­for­the­exchange­of­professional­experience.

MAGYAR NEMZETI BANK

ANNUAL REPORT • 2016 18

Dr György MatolcsyGovernor,­

Chairman­of­the­Monetary­Council

Márton NagyDeputy­Governor,

Deputy­Chairman­of­the­Monetary­Council

Dr Ferenc GerhardtDeputy­Governor,

Member­of­the­Monetary­Council

Dr László WindischDeputy­Governor,

Member­of­the­Monetary­Council

Members of the Executive Board and the Monetary Council of the Magyar Nemzeti Bank

A­BRIEF­OvERvIEW­OF­THE­MAGyAR­NEMZETI­BANK

ANNUAL REPORT • 2016 19

Members of the Monetary Council of the Magyar Nemzeti Bank

Andrea Bártfai-MagerMember­of­the­Monetary­Council

Dr Gusztáv BágerMember­of­the­Monetary­Council

Dr György KocziszkyMember­of­the­Monetary­Council

Gyula PleschingerMember­of­the­Monetary­Council

Dr János Béla CinkotaiMember­of­the­Monetary­Council

Dr Kolos KardkovácsMember­of­the­Monetary­Council

MAGYAR NEMZETI BANK

ANNUAL REPORT • 2016 20

Members of the Supervisory Board of the Magyar Nemzeti Bank

Left­to­right:­Dr­Attila­Simon­Tóth,­Dr­László­Nyikos,­László­Madarász,­Dr­Ferenc­Papcsák­(Chairman),­Dr­Gábor­András­Szényei,­István­Molnár

A­BRIEF­OvERvIEW­OF­THE­MAGyAR­NEMZETI­BANK

ANNUAL REPORT • 2016 21

Organisation Chart

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16

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ANNUAL REPORT • 2016 22

3 Review of the MNB’s performance in 2016

3.1 MONETARY POLICY

In­2016,­the­Monetary­Council­of­the­MNB­deployed­additional,­ targeted­ monetary­ policy­ instruments­along­ with­ the­ traditional­ interest­ rate­ policy­ to­respond­to­the­challenges­posed­by­the­low­inflation­environment­and­the­country’s­external­vulnerability,­with­a­view­to­achieving­the­medium-term­inflation­target­ in­ a­ sustainable­ manner­ and­ adequately­stimulating­the­real­economy.­Over­the­long­term,­the­central­bank­can­contribute­to­economic­growth­and­a­predictable­macroeconomic­environment­by­achieving­and­maintaining­price­stability­and­by­ensuring­the­stability­of­the­financial­system.

International financial market developments

Global­ financial­ market­ sentiment­ was­ volatile­ in­the­ first­ half­ of­ the­ year.­ At­ the­ beginning­ of­ the­half-year,­ global­ investor­ sentiment­deteriorated­ in­connection­with­concerns­about­global­growth­due­to­ the­ deceleration­ of­ the­ Chinese­ economy­ and­the­future­path­of­oil­prices.­On­the­other­hand,­the­macroeconomic­ releases­ by­ the­ United­ States­ in­the­first­half­of­the­period­had­a­favourable­ impact­on­ global­ risk­ appetite,­ which­ was­ also­ bolstered­by­ the­ ECB’s­ comprehensive­ easing­ programme­that­ was­ announced­ in­ March.­ At­ the­ end­ of­ the­half-year,­ international­ market­ sentiment­ was­influenced­by­news­related­to­the­referendum­on­the­United­Kingdom’s­EU­membership.­Global­financial­market­ sentiment­ was­ also­ volatile­ in­ the­ third­quarter­ of­ 2016,­which­was­mostly­ shaped­ by­ the­macroeconomic­ releases­ of­ the­ USA­ and­ the­ euro­area,­the­expectations­with­regard­to­the­next­steps­of­ developed-country­ central­ banks­ and­ the­ news­about­ the­ European­ banking­ system.­ By­ the­ end­of­ the­year,­ the­ focus­was­on­oil­market­news,­ the­expectations­related­to­the­US­presidential­elections­and­the­monetary­policy­of­the­developed­countries.­The­monetary­policy­decisions­by­the­Fed­and­the­ECB­in­December­reflected­different­stances.­The­Fed,­in­line­with­expectations,­decided­to­raise­the­interest­

rate,­ and­ shifted­ to­ a­ tighter­ path­ looking­ forward­as­well.­By­contrast,­the­ECB­decided­to­prolong­ its­asset­purchase­programme­and­thus­to­continue­with­further­easing.

Domestic economic environment

The­domestic­real­economic­environment­continued­to­have­a­disinflationary­impact­in­2016,­and­the­annual­average­rate­of­inflation­was­0.4­per­cent.­Consumer­prices­ in­ 2016­ showed­ historically­ low­ dynamics,­which­fell­short­of­the­central­bank’s­target.­Underlying­inflation­ indicators­ capturing­ the­ medium-term­outlook­indicated­a­moderate­inflationary­environment­throughout­the­year.­Following­a­temporary­slowdown­early­ in­ the­ year,­ the­ pick-up­ in­ the­ Hungarian­economy­ continued­ during­ the­ rest­ of­ the­ year.­Hungary’s­strong­external­financing­capacity­and­the­decline­in­external­debt­contributed­to­the­sustained­reduction­in­the­vulnerability­of­the­economy.­These­also­made­a­major­contribution­ to­ the­ fact­ that­all­of­ the­ three­ leading­ international­ credit­ agencies­upgraded­the­rating­of­Hungarian­government­debt­to­ investment­ grade.­ According­ to­ the­ perception­of­the­Monetary­Council,­ there­ is­still­some­degree­of­ unused­ capacity­ in­ the­ economy,­ but­ looking­ahead,­ the­ disinflationary­ impact­ of­ the­ domestic­real­economic­environment­ is­gradually­dissipating.­Inflation­will­rise­over­the­forecast­period­and­reach­the­ central­ bank­ target­ in­ the­ first­ half­ of­ 2018.

Traditional monetary policy measures

Within­the­framework­of­traditional­monetary­policy­instruments,­ in­ the­ first­ half­ of­ 2016­ the­Monetary­Council­restarted­its­easing­cycle,­during­which­it­further­reduced­the­central­bank­base­rate­in­prudent­steps.­From­March­2016,­the­Monetary­Council­reduced­the­central­bank­base­rate­by­45­basis­points­in­three­steps,­each­of­which­was­15­basis­points,­brining­the­base­rate­to­0.9­per­cent.­With­this­measure,­the­Monetary­Council­ intended­ to­ respond­ to­ the­ underlying­processes­which­were­far­below­the­ level­consistent­with­the­inflation­target,­to­the­actual­inflation­which­

REvIEW­OF­THE­MNB’S­PERFORMANCE­IN­2016

ANNUAL REPORT • 2016 23

Chart 2Underlying inflation indicators

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Demand sensitive inflationSticky Price Inflation

Core inflation excluding indirect tax effect

Source: MNB

was­falling­significantly­short­of­the­target­and­to­the­monetary­conditions­which­on­the­whole­may­still­be­deemed­ accommodating­ at­ the­ global­ and­ regional­level.­Since­the­end­of­May­2016­the­central­bank­base­rate­had­been­at­a­historic­ low­level,­ i.e.­at­0.90­per­cent.­ At­ the­ end­of­ the­ year,­ the­Monetary­ Council­was­of­the­opinion­that­if­the­assumptions­underlying­the­ central­bank’s­projections­hold,­maintaining­ the­current­level­of­the­base­rate­for­an­extended­period­and­ loosening­monetary­conditions­by­changing­ the­monetary­policy­instruments­was­consistent­with­the­medium-term­achievement­of­the­inflation­target­and­a­corresponding­degree­of­support­for­the­economy.­The­credibility­of­ the­persistent­maintenance­of­ the­central­bank­base­rate­by­the­MNB­at­the­present­level­is­also­confirmed­by­the­market­expectations,­as­the­yield­expectations­are­at­a­low­level.

Unconventional monetary policy measures

Along­with­gradual­interest­rate­cuts,­the­MNB­also­applied­other,­targeted­monetary­policy­instruments­to­address­the­monetary­policy­transmission­difficulties­caused­ by­ the­ crisis,­ to­ reduce­ Hungary’s­ external­vulnerability­ and­ to­ ease­ monetary­ conditions.­The­ Funding­ for­ Growth­ Scheme,­ introduced­ as­ a­temporary­ instrument,­ achieved­ the­ objectives­ set­out­ upon­ announcement­ of­ the­ programme,­ and­thus,­ pursuant­ to­ the­ decision­ of­ the­ Monetary­Council,­ it­ was­ gradually­ phased­ out­ by­ 31­March­2017.­ The­ Self-financing­ Programme­ and­ the­corresponding­transformation­of­the­set­of­monetary­policy­ instruments­provided­substantial­support­for­the­decline­ in­ yields­on­ the­ long-term­government­securities­ and­ the­ decrease­ in­ Hungary’s­ external­vulnerability.­ With­ a­ view­ to­ mitigating­ extreme­

fluctuations­ in­ interbank­ interest­ rates,­ the­ MNB­maintains­ an­ asymmetric­ interest­ rate­ corridor­ for­the­ overnight­maturity,­ the­ asymmetry­ of­which­ it­has­changed­in­several­steps.­In­accordance­with­the­announcement­made­in­July­2016,­at­its­September­rate-setting­meeting­the­Monetary­Council­limited­the­volume­of­the­3-month­deposit­facility­outstanding­at­the­end­of­2016­to­the­amount­of­HUF­900­billion.­The­Monetary­Council­considers­the­limit­on­the­3-month­deposit­stock­and­ its­potential­ future­change­as­an­integral­component­of­its­monetary­policy­instruments­and­will­decide­on­the­limit­quarterly.­At­its­December­2016­meeting,­the­Monetary­Council­set­a­HUF­750­billion­upper­ limit­on­ the­ stock­of­3-month­central­bank­ deposits­ outstanding­ at­ the­ end­ of­ the­ first­quarter­2017.­The­programme­operated­successfully­and­ achieved­ the­ expected­ results­ in­ the­ money­markets,­since­the­liquidity­that­could­not­be­invested­in­the­deposit­facility­as­a­result­of­the­limit,­pushed­down­ yields.­ By­ the­ end­ of­ the­ year,­ the­ 3-month­BUBOR­ fell­ to­ 0.37­ per­ cent,­ while­ the­ 3-month­discount­Treasury­Bill­yield­was­down­to­0.06­per­cent.

Inflation developments in 2016

The­consumer­price­index­continued­to­remain­below­3­per­cent,­ the­value­set­as­a­price­stability­ target;­however,­ in­ the­ past­months­ an­ upward­ drift­ was­observed,­in­line­with­expectations.­Average­annual­inflation­in­2016­was­0.4­per­cent,­while­in­December­2016­it­was­1.8­per­cent.

Underlying­inflation­developments­are­still­restrained,­which­is­mostly­attributable­to­low­imported­inflation­and­ inflation­ expectations­ which­ stabilised­ at­ a­moderate­level.

Chart 1Inflation target and inflation developments since the adoption of continuous inflation targeting

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Continous inflation target

Tolerance band

Actual inflation

Source: HCSO and MNB.

MAGYAR NEMZETI BANK

ANNUAL REPORT • 2016 24

Changes in monetary policy instruments

Funding for Growth Scheme

As­the­Funding­for­Growth­Scheme­(FGS),­which­was­introduced­as­a­temporary­ instrument,­successfully­achieved­the­market­building­and­growth­objectives­set­ out­ upon­ its­ announcement,­ in­ autumn­ 2015­the­Monetary­Council­decided­on­its­gradual­phase-out.­The­Growth­Supporting­Programme­(GSP)­was­launched­in­the­spirit­of­this­on­1­January­2016.­Part­of­this­involves­the­third­stage­of­the­FGS,­comprising­two­pillars,­which­facilitates­more­restricted­and­targeted­financing­than­before;­another­part­of­it­consists­of­the­Market-Based­Lending­Scheme­(MLS),­which­is­a­package­of­instruments­containing­positive­incentives,­which­support­banks’­lending­activity­in­other­ways.

In­ the­ third,­ phase-out­ stage­ of­ the­ FGS­ only­ new­investment­loan­and­financial­lease­transactions­may­be­ concluded.­ Pillar­ I­ (forint)­was­ launched­with­ a­facility­amount­of­HUF­300­billion,­which­ the­MNB­raised,­ in­ line­ with­ market­ demand,­ to­ HUF­ 400­billion­in­June­2016.­The­facility­amount­of­HUF­300­billion­under­Pillar­II­(foreign­currency)­was­available­in­ the­ form­of­ foreign­ currency­financing­ for­ small­and­medium-sized­ enterprises­ (SMEs)­with­ natural­foreign­currency­cover.­In­order­to­ensure­the­more­efficient­absorption­of­the­full­facility­amount,­on­11­October­ 2016­ the­Monetary­ Council­ provided­ the­credit­ institutions­with­HUF­60­billion­ in­ the­ forint­pillar­from­the­unutilised­facility­amount­of­the­foreign­currency­ pillar,­ and­with­ its­ decision­ passed­ on­ 22­November,­it­permitted­the­use­of­the­unutilised­part­of­the­facilities­allocated­in­the­foreign­currency­pillar­in­either­pillar,­but­the­aggregate­facility­amount­of­the­two­pillars­remained­HUF­700­billion.­In­addition,­on­

22­November­2016­the­Monetary­Council­also­decided­on­extending­the­contracting­period­of­phase­three­until­31­March­2017.

In­2016,­the­credit­institutions­participating­in­phase­three­of­the­programme­reported­data­to­the­MNB­on­contracts­in­the­amount­of­HUF­473­billion,­related­to­ roughly­16,600­contracts­and­more­ than­11,000­enterprises.­The­loans­effectively­outstanding­at­the­end­of­the­year­–­not­including­already­repaid­loans­and­ the­ undrawn­ loans­ (tranches)­ –­ amounted­ to­HUF­359­billion­(Chart­3).­To­date,­in­the­three­phases­of­the­FGS­altogether­more­than­37,000­enterprises­received­financing­in­an­amount­of­roughly­HUF­2,600­billion.­ As­ a­ result,­ the­ scheme­ not­ only­ reversed­the­ previous­ downward­ trend­ in­ the­ outstanding­borrowing­of­SMEs­(based­on­transactions),­but­also­made­a­major­contribution­to­economic­growth­and­the­expansion­of­employment­in­recent­years.

Table 1Consumer price index and its components(percentage change, year-on-year)

2014 2015 20162016

Q1 Q2 Q3 Q4

Core­inflation 2.2 1.2 1.4 1.4 1.3 1.3 1.6

Unprocessed­food –3.7 4.8 0.4 4.2 –0.4 –0.7 –1.6

Fuel­and­market­energy –2.1 –11.0 –6.3 –9.5 –10.0 –8.5 2.7

Regulated­prices –6.6 –0.7 0.2 0.2 0.2 0.1 0.3

Inflation –0.2 –0.1 0.4 0.3 –0.1 0.1 1.3

Inflation­with­constant­tax­­rate –0.2 –0.2 0.6 0.5 0.1 0.3 1.3

Note: In the case of price indices with constant tax rate, the HCSO adjusts the consumer price index for the technical effect of changes in indirect taxes. The time series of certain inflation groups may differ, even retroactively, from those published in earlier years due to the reclassification of some partial items at the beginning of 2012.Source: HCSO

Chart 3Utilisation of the third phase of the FGS

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Monthly contracted loan amount (left-hand scale)Cumulated contracted loan amount (right-hand scale)

Note: Amount of the contracts concluded until the end of 2016 and submitted to the MNB.Source: MNB.

REvIEW­OF­THE­MNB’S­PERFORMANCE­IN­2016

ANNUAL REPORT • 2016 25

The MNB’s set of monetary policy instruments

On­12­January­2016,­the­Monetary­Council­decided­on­ the­ gradual­ phase-out­ of­ the­ 2-week­ deposit­facility,­ serving­ liquidity­ management­ purposes,­ending­in­April­2016.­This­phase-out­was­in­line­with­the­2014-2015­transformation­of­the­central­bank’s­set­of­monetary­policy­instruments,­and­the­purpose­of­ it­was­ to­provide­additional­ support­ to­ the­Self-financing­Programme,­ease­the­monetary­conditions­and­further­mitigate­external­vulnerability.­The­2-week­deposit­facility­was­available­for­banks­from­December­2015­subject­to­a­volume­limit­of­HUF­1,000­billion,­and­between­March­and­end-April­2016­the­auctioned­portfolio­gradually­decreased­to­zero.­Thereafter,­i.e.­from­May­2016,­the­3-month­deposit­facility­became­the­MNB’s­only­longer-term­sterilisation­instrument.

The­central­bank’s­interest­rate­swap­(IRS)­instrument,­diverting­ the­ banks’­ funds,­was­ key­ to­ the­ success­of­ the­ Self-financing­ Programme,­ the­ added­ value­of­which­fell­significantly­with­the­phase-out­of­the­2-week­deposit­in­April­2016.­Accordingly,­on­10­May­2016­ the­Monetary­ Council­ decided­ to­ phase­ out­the­IRS­from­its­set­of­monetary­policy­instruments,­and­the­MNB­held­the­last­tender­for­this­facility­on­7­ July­2016.­The­banks’­obligation­arising­ from­the­IRS­portfolio­is­valid­until­the­maturity­of­the­swaps.­At­the­end­of­the­year,­the­outstanding­IRS­portfolio­amounted­ to­HUF­ 1,731­billion,­ of­which­HUF­ 652­

billion­ was­ of­ 3-year­ maturity,­ HUF­ 904­ billion­ of­5-year­maturity­and­HUF­175­billion­of­10-year­agreed­maturity.­In­addition,­the­MNB’s­total­IRS­portfolio­is­supplemented­with­ the­ 3-year­ interest­ rate­ swaps­conditional­on­lending­activity­(LIRS)­concluded­within­the­framework­of­the­MLS­in­the­amount­of­HUF­780­billion­ in­ the­ first­ quarter­ of­ 2016,­which­was­ still­outstanding­at­the­end­of­2016.

In­2016,­the­Monetary­Council­cut­the­base­rate­and­reduced­ the­width­ of­ the­ interest­ rate­ corridor­ on­several­occasions.­On­22­March­2016,­in­addition­to­reducing­the­base­rate­to­1.20­per­cent,­the­interest­on­the­overnight­central­bank­loan­changed­from­base­rate­+75­basis­points­to­base­rate­+25­basis­points,­i.e.­to­1.45­per­cent­(equalling­a­cut­of­50­basis­points).­Meanwhile,­ simultaneously­ with­ the­ interest­ rate­cut­ in­March,­the­O/N­deposit­rate­fell­to­-0.05­per­cent,­as­a­result­of­which­bank­ liquidity­held­ in­the­overnight­deposit­facility­declined­substantially.­From­27­ April­ and­ 25­May,­ after­ additional­ interest­ rate­cuts,­the­base­rate­declined­to­1.05­and­0.9­per­cent,­respectively,­and­simultaneously­the­upper­bound­of­the­interest­rate­corridor­from­27­April­and­25­May­was­ 1.3­ per­ cent­ and­ 1.15­ per­ cent,­ respectively,­while­the­ lower­bound­of­the­ interest­rate­corridor­remained­-0.05­per­cent.­At­its­meetings­held­on­25­October­2016­and­22­November­2016,­the­Monetary­Council­reduced­the­upper­bound­of­the­interest­rate­corridor­from­1.15­to­1.05­per­cent­and­to­0.90­per­cent,­respectively.­Thus,­by­the­end­of­2016­the­lower­bound­of­the­interest­rate­corridor­became­-0.05­per­cent­and­the­upper­bound­thereof­0.90­per­cent.

The­Monetary­ Council’s­ decisions­ passed­ on­ 12­ July­and­ 20­ September­ 2016,­ restricted­ banks’­ access­ to­the­ 3-month­ central­ bank­ deposit­ instrument.­ From­August­2016,­the­tender­for­the­3-month­central­bank­deposit­ instrument­was­organised­once­ a­month,­ on­the­Wednesday­that­followed­the­monthly­rate-setting­meeting,­instead­of­the­previous­weekly­tenders,­and­it­was­laid­down­that­the­total­3-month­deposit­portfolio­of­the­banks­that­may­be­placed­in­the­last­quarter­of­2016­must­not­exceed­HUF­900­billion.­Limiting­the­3-months­deposit­ gives­ room­ for­monetary­easing­ through­ the­excess­ liquidity­remaining­ in­the­banking­system.­The­liquidity­squeezed­out­from­the­3-month­deposit­reduces­the­yields­ in­ the­ relevant­markets,­particularly­ in­ the­interbank­market,­and­may­facilitate­additional­lending,­thereby­supporting­economic­growth.

On­ 20­ September­ 2016,­ the­ MNB­ also­ decided­to­ develop­ fine-tuning­ instruments­ to­ offset­ the­

Central bank interest rate swap tenders in 2016

At­the­14­self-financing­IRS­tenders­held­until­the­phase-out­on­7­July­2016,­the­MNB­placed­HUF­263­billion,­HUF­184­billion­and­HUF­50­billion­IRS­with­its­counterparties­at­ 3-year,­ 5-year­ and­ 10-year­ maturities,­ respectively.­Within­the­framework­of­MLS,­in­the­first­quarter­of­2016­the­ MNB­ announced­ five­ LIRS­ tenders­ in­ total.­ The­tenders­were­attended­by­17­credit­ institutions­ in­ total,­and­the­MNB­concluded­LIRS­transactions­in­the­amount­of­HUF­780­billion.­In­accordance­with­the­conditions­the­programme,­ the­banks­undertook­ to­ increase­ their­SME­loan­ portfolio­ by­ one-quarter­ of­ their­ concluded­ LIRS­transactions,­ i.e.­ by­ almost­ HUF­ 200­ billion,­ which­may­achieve­ the­ 5­ to­ 10­ per­ cent­ annual­ growth­ in­ the­outstanding­borrowing­by­SMEs,­set­by­the­MNB.­With­a­view­to­supporting­the­banks’­liquidity­management,­the­MNB­also­provided­the­credit­institutions­participating­in­the­ MLS­ with­ the­ opportunity­ to­ rely­ on­ overnight,­preferential­central­bank­deposit,­earning­interest­at­the­base­rate,­up­to­half­of­their­concluded­LIRS­portfolio.

MAGYAR NEMZETI BANK

ANNUAL REPORT • 2016 26

potentially­lasting­and­material­liquidity­shocks;­in­the­case­of­positive­liquidity­shocks­it­may­intervene­with­1-week­deposits,­while­in­the­case­of­negative­shocks­with­forint­providing­FX­swap,­to­offset­the­change­in­the­liquidity­path.­In­the­fourth­quarter­of­2016,­the­MNB­held­altogether­five­1-month­fine-tuning­swap­tenders:­on­17­and­24­October,­14­and­21­November,­and­on­19­December.­ The­MNB­provided­HUF­150­billion­to­the­banking­system­at­the­tender­held­on­21­November,­while­at­each­of­the­other­ones­HUF­200­billion.­In­addition,­on­23­December­2016­the­MNB­also­held­a­1-week­swap­tender,­where­ it­allocated­HUF­201­billion­to­the­participating­banks.­No­fine-tuning­deposit­tender­was­held­in­2016.

In­order­to­ensure­quantity­adjustment­to­the­limiting­of­the­3-month­deposit­and­harmonisation­with­the­practice­of­the­European­Central­Bank,­at­its­meeting­held­ on­ 25­ October­ 2016,­ the­ Monetary­ Council­reduced­ the­ reserve­ requirement­ from­ 2­ per­ cent­to­1­per­cent­with­effect­from­1­December­2016.­On­27­October­2016,­the­MNB­suspended­the­3-month­central­bank­ loan­ tender­ facility­with­effect­ from­7­November­2016.

Forint liquidity management of the banking system

Items­affecting­the­liabilities­side­forint­liquidity­of­the­central­bank’s­balance­sheet­(3-month­deposit,­2-week­deposit,­balance­on­payment­accounts,­overnight­and­preferential­deposits)­declined­by­a­total­of­HUF­2,400­billion­during­the­year.­While­at­31­December­2015­the­balance­was­HUF­4,628­billion,­the­aggregate­level­at­ the­end­of­ the­ following­year­amounted­ to­HUF­2,228­billion.­The­forint­liquidity­of­the­banking­system­was­reduced­by­HUF­1,475­billion­by­the­change­ in­the­ Single­ Treasury­ Account­ (STA)­ allocable­ to­ the­banking­ system,­ including­ the­ refinancing­ of­ the­foreign­currency­bonds­by­forint­bonds­issued­by­the­Government­Debt­Management­Agency.­The­growth­in­the­cash­in­circulation­and­the­MNB­instruments­also­ reduced­ liquidity­ (by­HUF­276­billion­and­HUF­745­billion,­respectively).­Of­the­latter,­ it­ is­ justified­to­ highlight­ the­ central­ bank­ swaps­ related­ to­ the­conversion­of­the­households’­foreign­currency­loan­into­forints,­of­which­assets­in­the­total­amount­of­EUR­4.76­billion­expired­(EUR­914­million­of­conditional­assets­and­EUR­3.852­billion­of­unconditional­assets),­reducing­ the­ liquidity­of­ the­credit­ institutions­due­to­ the­ forint­ leg­payable.­Meanwhile,­ liquidity­was­expanded­in­the­last­quarter­by­the­fine-tuning­swap­tenders,­ within­ the­ framework­ of­ which­ the­MNB­

provided­the­banking­system,­at­several­tenders,­with­liquidity­of­variable­amounts,­in­the­amount­of­HUF­150-201­ billion.­ From­December­ 2016­ the­ reserve­adequacy­ requirement­ changed,­ and­ the­ required­reserve­ratio­was­reduced­from­2­per­cent­to­1­per­cent.

The­overnight­ (O/N)­deposit­portfolio­fluctuated­ in­the­range­of­HUF­50-100­billion,­apart­from­the­values­recorded­in­the­first­half­of­January­and­between­mid-November­and­the­year-end.­After­the­amendment­of­the­interest­rate­corridor­in­March,­new­deposits­practically­ceased­due­to­the­negative­deposit­rate,­and­then­during­June­it­returned­to­the­levels­recorded­in­ the­ first­ quarter.­ The­ average­ deposit­ balance­during­the­year­was­HUF­55­billion,­but­its­temporal­distribution­was­uneven,­with­major­increase­in­the­last­quarter.­The­surge­ in­O/N­deposits­at­year-end­was­ attributable­ to­ the­ limitation­ of­ the­ 3-month­deposits,­as­the­banks­placed­their­surplus­liquidity­in­ other­MNB­ instruments,­ amongst­ others,­ in­ the­O/N­deposits­available­ to­banks­without­ limitation.­Until­the­beginning­of­June,­and­during­September-October­the­monthly­average­of­preferential­deposits­was­around­HUF­30-80­billion,­while­in­the­summer­months­it­reached­a­HUF­100-160­billion­volume­on­average.­ By­ the­ last­ two­months­ of­ the­ year,­with­the­ restriction­ of­ the­ 3-month­ deposit­ facility,­ the­preferential­deposit­ facility­appreciated­strongly,­ in­parallel­with­which­banks’­ average­holding­ rose­ to­HUF­250-310­billion.

At­the­fifteen­tenders­of­the­2-week­deposit­facility,­after­ the­ restriction­ thereof,­ from­ early­ 2016­ until­its­ phase-out­ at­ the­ end­ of­ April,­ overbidding­was­registered­on­six­occasions,­three­of­which­occurred­in­the­first­half­of­January.­The­average­accepted­interest­rates­at­the­tenders­were­close­to­the­base­rate­all­the­time.­This­implies­that­the­gradual­decrease­in­2-week­deposits­did­not­pose­ liquidity­problems­for­banks.­The­more­active­use­of­the­central­bank­loan­tenders­and­ the­ preferential­ deposit­ facility­ available­ from­February­also­contributed­to­this.

At­the­last­3-month­deposit­tender­on­27­July­2016,­before­ making­ the­ 3-month­ deposit­ tenders­ less­frequent,­ banks’­ demand­ amounted­ to­ HUF­ 222­billion,­in­parallel­with­which­a­portfolio­of­HUF­506­billion­in­total­expired­until­the­tender­held­in­August.­This­shows­that­the­banks­typically­did­not­roll­forward­the­maturities­of­the­interim­tenders,­i.e.­they­did­not­borrow­larger­volumes­of­funds­to­bridge­the­interim­periods.­Thus­the­banking­system­initially­placed­the­

REvIEW­OF­THE­MNB’S­PERFORMANCE­IN­2016

ANNUAL REPORT • 2016 27

3-month­deposits­expiring­before­the­August­tender­on­giro­and­preferential­deposit­accounts,­and­later­the­O/N­deposits­also­increased.­At­the­August­and­September­ 3-month­ deposit­ tenders,­ still­ available­without­ volume­ limits,­ the­ banks­ typically­ also­renewed­part­of­the­3-month­portfolios­due­to­expire­from­ borrowed­ funds.­ Thus,­ the­ 3-month­ deposit­portfolio­temporarily­increased:­rising­from­HUF­1,276­billion­on­23­August­to­HUF­1,837­billion­and­from­HUF­1,629­billion­on­21­September­to­HUF­1,976­billion.­The­ increase­ in­ August­ represented­ new­ deposits­placed­by­the­banks­in­the­amount­of­HUF­637­billion­and­HUF­437­billion­in­September.­By­the­end­of­the­fourth­quarter­of­2016,­the­Monetary­Council­set­the­value­of­ the­3-month­deposit­portfolio­ to­HUF­900­billion.­At­the­tender­held­on­26­October,­the­MNB­accepted­new­3-month­deposits­in­the­amount­of­HUF­100­billion­under­an­aggregate­bid­of­HUF­314­billion­and­expiring­deposits­of­HUF­222­billion.­The­banks’­total­demand­for­3-month­deposits­in­November­and­December­was­HUF­696­billion­and­HUF­521­billion,­respectively,­ compared­ to­ the­allocated­amount­of­HUF­400-400­billion.

As­regards­to­overnight­loans,­345­loan­transactions­were­registered­in­2016,­with­average­holdings­of­HUF­20­billion.­The­largest­utilisation­took­place­in­the­last­third­of­September­2016­(90­transactions­between­21­and­30­September,­with­average­transaction­size­of­HUF­39­billion).

In­2016,­11­banks­ took­1-week­collateralised­ loans­from­the­MNB,­with­an­average­transaction­size­of­HUF­90­billion.­Utilisation­of­the­1-week­collateralised­loans­was­the­highest­at­about­the­end­of­March­and­end­of­September­2016.­The­average­outstanding­borrowing­between­16­March­and­12­April­was­HUF­435­billion­with­15­loan­applications­from­8­credit­ institutions,­while­ between­ 21­ September­ and­ 4­ October­ the­MNB­registered­an­average­stock­of­HUF­530­billion,­comprising­10­loan­applications­from­6­banks.

The­ portfolio­ of­ 3-month­ collateralised­ loans­ was­relatively­stable.­From­January­until­early­November,­the­MNB­ financed­ an­ average­ portfolio­ of­ HUF­ 51­billion,­ with­ the­ largest­ drawdown­ being­ HUF­ 110­billion.­After­8­November­2016­no­new­drawdowns­occurred,­ and­ from­ 7­ December­ 2016­ the­ MNB­suspended­further­disbursement­of­the­3-month­loans.

In­ the­ last­ quarter,­ the­ MNB­ held­ forint­ liquidity­providing­ euro­ swap­ tenders­ on­ six­ occasions.­ Of­these,­at­five­one-month­tenders­it­provided­liquidity­

to­the­counterparties­in­varying­amounts,­around­HUF­150-201­billion­(EUR­485-652­million),­of­which­the­balance­outstanding­at­year-end­was­HUF­199­billion­(EUR­639­million).­The­MNB­also­held­a­1-week­tender­bridging­the­year-end,­where­the­allocated­amount­was­HUF­201­billion­(EUR­648­million).

The­HUFONIA,­reflecting­O/N­interest­rates,­fluctuated­around­the­base­rate­from­mid-March­to­early­June,­whereas­ in­ early­ January,­ in­ February­ and­ in­ June­it­was­close­to­the­lower­bound­of­the­interest­rate­corridor.­In­the­summer­months,­it­fluctuated­around­40-50­basis­points,­while­on­ the­day­of­ the­August­3-month­tender­it­rose­to­79­basis­points,­leaving­the­low­range­of­10-25­basis­points­that­prevailed­from­the­beginning­of­the­month.­After­this,­until­the­3-month­tender­held­on­21­September­2016,­the­HUFONIA­was­around­68-93­basis­points.­On­21­September,­which­was­the­last­tender­without­volume­limit,­ it­rose­to­1.34­ per­ cent,­ exceeding­ the­ upper­ bound­ of­ the­interest­rate­corridor­(1.15­per­cent).­From­the­next­day­its­value­declined­and­on­the­last­two­days­of­the­quarter­ it­ fell­ below­ the­ base­ rate.­ Thereafter,­ the­HUFONIA­remained­close­to­the­base­rate­in­October.­As­a­result­of­the­strongly­expanding­interbank­excess­liquidity,­by­the­end­of­November­the­level­of­interest­rates­ fell­ close­ to­ 10­ basis­ points­ and­ fluctuated­around­this­value­in­December­as­well.

The­ 3-month­ benchmark­ rate,­ bearing­ special­significance­ for­ interest­ rate­ transmission,­ moved­closely­together­with­the­base­rate­in­the­first­three­quarters.­The­3-month­government­securities­market­benchmark­rate­started­to­fall­after­the­announcement­that­ the­ frequency­ of­ the­ 3-month­ deposit­ tender­would­ be­ reduced,­ then­ accelerated­ from­ the­ first­limited­ 3-month­ deposit­ tender,­ i.e.­ from­ end­ of­October,­as­a­result­of­which­the­3-month­discounted­Treasury­bill­yield­dropped­to­6­basis­points­by­the­end­of­December.­Until­the­base­rate­cut­of­25­May,­the­BUBOR­moved­strongly­together­with­the­base­rate,­but­after­this,­until­early­August­it­was­above­the­base­rate­by­no­more­than­12­basis­points­and­thereafter­below­ it­by­no­more­ than­6­basis­points.­After­ the­volume­limitation­on­the­3-month­deposit,­the­BUBOR­also­started­to­fall­strongly,­dropping­to­41­basis­points­by­early­December­and­to­34­basis­points­by­the­end­of­the­year.­In­the­first­nine­months­of­2016,­the­spot­yield­derived­from­the­FRAs­was­close­to­the­base­rate­or­below­it­most­of­the­time,­while­from­mid-October­it­broke­away,­together­with­the­discount­Treasury­bill­yield­and­the­BUBOR,­from­the­base­rate­and­by­mid-December­it­fell­close­to­30­basis­points.

MAGYAR NEMZETI BANK

ANNUAL REPORT • 2016 28

In­the­course­of­the­year,­ interest­rates­on­variable­interest­loans­and­deposits­with­short-term­maturities­declined­ both­ in­ the­ corporate­ and­ the­ household­segments­(between­December­2015­and­November­2016).­ In­ the­corporate­sector,­ the­ interest­ rate­on­sight­ deposits­ fell­ by­ 10­ basis­ points,­ while­ those­on­ term­deposits­with­ a­maturity­ of­ less­ than­one­year­dropped­by­53­basis­points.­ In­the­case­of­the­household­deposits,­the­fall­with­respect­to­the­same­items­ was­ 4­ and­ 51­ basis­ points,­ respectively.­ As­regards­corporate­loans,­overdraft­facilities­registered­a­fall­of­61­basis­points,­while­interest­rates­on­short-term­fixed­rate­loans­and­variable­rate­loans­dropped­by­161­basis­points.­In­the­sector­these­values­showed­a­decline­of­170­and­327­basis­points,­respectively.

Instruments providing foreign exchange liquidity

On­2­March­and­31­March­2016,­EUR­200­million­and­EUR­714­million,­respectively,­of­the­settlement­and­forint­conversion­conditional­euro­swaps­was­closed,­as­ a­ result­ of­ which­ this­ portfolio­ expired.­ Of­ the­unconditional­swap­instruments,­expired­transactions­amounted­ to­EUR­2,082­billion­on­16­March­2016,­EUR­784­million­on­15­June,­EUR­373­million­on­21­September­and­EUR­613­million­on­21­December.­Thus­in­2016,­with­the­expiry­of­EUR­3,852­million,­the­stock­of­unconditional­swaps­dropped­to­EUR­1,082­million.­At­ the­ beginning­ of­ the­ year­ the­ outstanding­ CHF­swaps­concluded­in­relation­to­the­forint­conversion­of­the­consumer­foreign­currency­loans­amounted­to­CHF­12.8­million,­which­expired­in­full­on­13­April­2016.

During­2016,­there­was­no­drawing­against­the­MNB’s­overnight­and­3-month­EUR­swap­facility.­Thus,­after­the­ tender­ held­ on­ 7­ November­ 2016,­ the­ MNB­suspended­the­3-month­EUR­swap­facility.­The­volume­of­the­central­bank­FX­swaps­related­to­the­Pillar­III­of­phase­one­of­the­FGS­fell­to­zero­from­EUR­473­million­recorded­at­the­beginning­of­the­year:­on­31­March­it­dropped­to­EUR­200­million,­on­6­April­to­EUR­150­million,­while­ the­remaining­part­was­repaid­on­29­April.

HUF/EUR­foreign­currency­swap­spreads­developed­similarly­ as­ in­ the­ previous­ period;­ some­ extreme­values,­both­positive­and­negative,­were­observed.­The­annual­average­of­the­spreads­was­around­0­in­all­terms,­taking­a­positive­value­of­5-7­basis­points­at­the­overnight­and­tom­next­periods,­and­slightly­negative­values­of­(-9)-(-20)­basis­points­at­the­longer­periods.­

Compared­to­the­last­quarter­of­2015­the­overnight­spread­was­more­volatile:­in­the­first­five­months­of­the­half-year,­the­mid-quotes­typically­varied­between­-50­and­+125­basis­points,­while­from­mid-May­the­positive­swings­decreased­and,­with­some­exceptions,­fell­below­50­basis­points.­At­the­tom­next­transactions­the­typical­spread­ is­ lower­(within­50­basis­points),­with­larger­swings:­the­spread­at­the­end-March­2016­unconditional­swap­maturity­was­-439­basis­points.­Apart­ from­ this,­not­more­ than­one­or­ two­ swings­per­months­could­be­observed­in­the­entire­period.­Apart­from­the­largest­swings­at­the­start/end­of­the­year,­the­maximum­swings­in­the­overnight­and­tom­next­spreads­varied­on­the­negative­side­around­-200­to­-300­basis­points­and­on­the­positive­side­around­100­to­200­basis­points.­The­remaining­quotes­from­the­end­of­ the­year­and­the­1-week­spreads,­apart­from­the­local­minimum­of­-184­basis­points­around­21­ September,­ did­ not­ exceed­ 63­ basis­ points­ in­absolute­value.­During­the­three­working­days­around­the­end­of­2016­the­overnight­spreads­fell­from­+229­basis­points­to­-1,178­basis­points,­while­the­similar­tom­next­values­dropped­from­+436­basis­points­to­+72­ basis­ points.­ At­ the­ end­ the­ second­ and­ third­quarters­only­a­minor­swap­market­tension­could­be­observed,­in­both­cases­with­overnight­spreads­around­-150­basis­points.­This­implies­that­the­dependence­of­the­Hungarian­banking­system­on­foreign­currency­liquidity­may­have­decreased.

Chart 4Recourse to the central bank’s monetary policy instruments

1 Ja

n 20

16

31 Ja

n 20

16

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ar 2

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ar 2

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ay 2

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l 201

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–1,300

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2,600

3,900

5,200

–1,300

0

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2,600

3,900

5,200 HUF Billion HUF Billion

Net HUF liquidity Net sterilisation volume

3-month deposit

O/N loan

2-week deposit

3-month loan

Reserve holding Preferential depositO/n deposit1-week loan

Note: Net of the loan and swap transactions granted under the Funding for Growth Scheme.Source: MNB.

REvIEW­OF­THE­MNB’S­PERFORMANCE­IN­2016

ANNUAL REPORT • 2016 29

3.2 STABILITY OF THE FINANCIAL INTERMEDIARY SYSTEM

Pursuant­to­the­MNB­Act,­the­primary­objective­of­the­MNB­is­to­achieve­and­maintain­price­stability.­Without­prejudice­to­its­primary­objective,­the­MNB­supports­the­ maintenance­ of­ the­ stability­ of­ the­ financial­intermediary­system,­the­enhancement­of­its­resilience­and­its­sustainable­contribution­to­economic­growth;­furthermore,­the­MNB­supports­the­economic­policy­of­the­government­using­the­instruments­at­its­disposal.­As­ a­member­ of­ the­ European­ System­ of­ Financial­Supervision,­the­MNB­performs­the­tasks­imposed­on­it­arising­out­of­ the­scope­of­ the­European­Banking­Authority,­the­European­Insurance­and­Occupational­Pensions­ Authority,­ the­ European­ Securities­ and­Markets­ Authority­ and­ the­ European­ Systemic­ Risk­Board,­supervises­the­Hungarian­financial­intermediary­system,­and­acts­as­a­resolution­authority.

Key developments in the financial system

The­ Hungarian­ banking­ system’s­ shock-absorbing­capacity­ is­ robust­ both­ in­ terms­ of­ liquidity­ and­capital­stock­(Chart­5).­In­2016,­banks’­lending­activity­intensified,­as­annual­SME­credit­growth­reached­the­level­ of­ 5-10­ per­ cent,­which­ is­ deemed­ necessary­for­ sustainable­ growth.­ The­ previously­ very­ strong­procyclical­operation­of­the­Hungarian­financial­system­eased­substantially,­which­was­greatly­supported­by­the­MNB’s­credit­incentive­schemes­(FGS,­MLS)­and­the­self-financing­programme.­However,­external­risks­rose.­In­addition­to­the­severe­consequences­of­the­crisis,­geopolitical­developments­and­challenges­posed­by­the­persistently­low­interest­rate­environment­represent­the­main­risks­in­the­European­banking­sector.

The­ Financial Stability Reports­ provide­ a­ regular­and­comprehensive­assessment­of­risks­to­financial­stability,­ presenting­ the­ main­ risks­ including­ the­management­ of­ those­ risks.­ Possible­ market­turbulences­evolving­on­the­weak­fundamentals­of­the­European­banking­system­may­affect­the­Hungarian­banking­sector­as­well­ through­various­channels­of­contagion.­ Despite­ the­ lasting­ poor­ performance­of­the­euro­area­economy­seen­in­recent­years,­the­Hungarian­economy­is­still­on­a­growth­path­and­the­systemic­risks­continued­to­decrease,­as­a­result­of­which­Hungary­was­upgraded­by­the­rating­agencies.

As­regards­trends­in­domestic­lending,­in­2016­there­was­a­ turnaround­ in­corporate­ lending­growth­and­particularly­in­SME­lending­growth,­with­the­lending­

incentives­programmes­of­the­central­bank­(FGS,­MLS)­playing­an­important­role­in­this­regard.­As­a­result,­SME­lending­entered­the­expansion­band­of­5­to­10­per­cent,­which­is­necessary­for­sustainable­growth­(Chart­6).­The­growth­rate­of­lending­to­SMEs­including­the­self-employed­was­close­to­12­per­cent.­In­2016,­the­credit­institutions­participating­in­the­third­phase­of­the­Funding­for­Growth­Scheme­lent­HUF­473­billion­

Chart 6Annual growth rate of the outstanding borrowings of the corporate and SME sector

–10 –8 –6 –4 –2 0 2 4 6 8 10 12 14

–5 –4 –3 –2 –1

0 1 2 3 4 5 6 7

Per cent Per cent

2010

Q1

2010

Q2

2010

Q3

2010

Q4

2011

Q1

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Q2

2011

Q3

2011

Q4

2012

Q1

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Q2

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Q3

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Q4

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Q2

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Q3

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Q4

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Q1

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Q2

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Q3

2014

Q4

2015

Q1

2015

Q2

2015

Q3

2015

Q4

2016

Q1

2016

Q2

2016

Q3

2016

Q4

Corporate sector (MFI, Quarter-on-quarter)

SME sector (banking sector, Year-on-year, right-hand scale)SME sector with self-employed (banking sector, Year-on-year, right-hand scale)

Corporate sector (MFI, Year-on-year, right-hand scale)

Note: Based on transactions; the SME sector is estimated on the basis of banking sector data before 2015 Q4.Source: MNB

Chart 5Developments in the Solvency Stress Index

–10

0

10

20

30

40

–400

0

400

800

1,200

1,600 HUF Billion Per cent

Capital need to meet regulatory requirementCapital buffer above the regulatory requirementSolvency Stress Index (right-hand scale)

2008

Q1

2008

Q3

2007

Q1

2007

Q3

2006

Q1

2006

Q3

2005

Q1

2005

Q3

2009

Q1

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Q1

Note: In the case of stress index, the lower the value of the index, the lower the ratio of banks below the regulatory minimum in the event of a stress scenario.Source: MNB.

MAGYAR NEMZETI BANK

ANNUAL REPORT • 2016 30

to­the­SME­sector,­in­roughly­16,600­transactions­to­more­than­11,000­enterprises.­Since­the­launch­of­the­scheme­in­June­2013,­more­than­37,000­enterprises­had­access­to­financing­in­an­amount­of­roughly­HUF­2,600­billion,­of­which­the­outstanding­borrowing­at­the­end­of­2016­was­HUF­1,415­billion.­As­a­result­of­the­scheme,­the­declining­trend­ in­the­outstanding­borrowing­of­SMEs­observed­for­several­years­before­2013­ not­ only­ halted,­ but­ turned­ to­ growth­ on­transaction­basis­from­2015.

Of­the­contracts­concluded­in­the­amount­of­about­HUF­ 473­ billion­ until­ 30­ December­ 2016­ in­ the­third­ phase­ of­ the­ FGS,­ 76.5­ per­ cent­ were­ new­investment­loans­with­an­average­maturity­of­around­9­years,­while­23.5­per­cent­of­them­were­new­lease­transactions­with­an­average­maturity­of­4­to­5­years.­The­average­size­of­the­ loan­and­lease­transactions­concluded­in­the­amount­of­HUF­320­billion­in­Pillar­I­was­HUF­21.3­million­(median­transaction­size:­HUF­6.4­million),­while­the­average­size­of­the­transactions­concluded­in­the­amount­of­HUF­152­billion­in­Pillar­II­was­HUF­96.3­million­(median­transaction­size:­HUF­20.7­million).­As­regards­the­distribution­by­sectors,­in­Pillar­I­agriculture,­trade­&­repair­and­manufacturing­industries­had­outstanding­share,­with­more­than­60­per­cent­of­the­loans­flowing­to­these­three­sectors,­while­Pillar­ II­ is­dominated­by­real­estate­activities,­manufacturing­ and­ transport­&­ storage,­with­ their­aggregate­ratio­being­around­64­per­cent.

The­ segmented­ recovery­ of­ the­ property­ market­continued­ in­ 2016.­ Housing­ market­ represents­ a­key­ area­ at­ the­ level­ of­ the­ individual­ economic­agents­ (households,­ financial­ institutions),­ as­ well­as­at­the­level­of­national­economy.­Housing­market­developments­ are­ closely­ related­ not­ only­ to­ the­financial­stability­dilemmas,­but­also­fundamentally­determine­ the­ short-term­and­ long-term­prospects­of­economic­activity.­Housing­market­developments­and­ in­ particular­ the­ volatility­ of­ housing­ prices­influence­ the­ sector’s­ savings­ and­ consumption­decisions­ through­ the­ households’­ wealth,­ while­they­influence­the­portfolio,­profitability­and­lending­activity­of­financial­institutions­through­the­mortgage­loan­ collateral.­ In­ order­ to­ monitor­ the­ property­price­ developments­ and­ the­ impacts­ of­ those­ on­financial­stability,­the­MNB­developed­its­own­housing­price­index,­which­is­able­to­capture­the­changes­in­domestic­housing­prices­more­accurately,­particularly­the­heterogeneity­ in­prices­and­ their­development­compared­ to­ the­ fundamentally­ justified­ level.­ In­

view­of­the­key­role­of­the­property­market,­in­May­2016­the­MNB­published­the­first­issue­of­the­Housing Market Report,­ to­be­followed­by­semi-annual­new­publications.­The­reports­published­so­ far­highlight­the­ fact­ that­ even­ though­ there­ was­ substantial­appreciation­in­housing­prices­in­Budapest,­housing­prices­ still­ cannot­be­deemed­exaggerated.­On­ the­other­ hand,­ price­ increase­ is­ not­ so­ typical­ in­ less­frequented­areas­or­smaller­settlements.

In­parallel­with­the­housing­market­developments,­a­turnaround­took­place­in­household­lending­as­well.­For­the­first­time­since­2008,­disbursements­exceeded­repayments­ from­ June­ 2016,­ which­ is­ primarily­attributable­ to­ the­ almost­ 50­ per­ cent­ increase­ in­housing­loans.­So­far,­the­central­bank’s­debt­cap­rules­have­kept­new­ lending­at­a­sound­ level,­but­a­shift­to­fixed­rate­loans­would­be­desirable,­particularly­at­longer­maturities,­in­the­case­of­customers­with­higher­payment-to-income­(PTI)­ratios.­However,­this­requires­stronger­price­competition­between­the­banks,­as­the­spread­on­domestic­fixed-rate­loans­is­extremely­high­by­international­standards.

For­many­years,­ the­high­ ratio­and­volume­of­non-performing­household­mortgage­ loans­have­been­a­major­problem­of­the­financial­intermediary­system,­which­needs­to­be­resolved.­In­addition­to­financial­stability­risks,­the­political­and­social­aspects­of­the­problem­ justified­ the­ government­measures­ taken­in­the­past­six­to­seven­years­to­foster­the­equitable­settlement­ of­ the­ situation.­ 2016­ represented­ a­turnaround­ in­ several­ respects,­ as­ the­ foreclosure­and­ eviction­moratorium­ended­on­ 1­March;­ thus,­it­once­again­became­possible­for­lenders­to­enforce­collateral.­It­was­foreseeable­at­the­start­of­the­year­that­the­number­of­properties­offered­to­the­National­Asset­Management­Agency­(NAMA)­would­reach­the­permitted­limit­and­that­the­property­market­boom­and­ the­ low­ yield­ environment­ together­make­ the­sales­of­the­receivables­attractive­for­the­lenders.

Recognising­the­new­situation,­in­March­2016­the­MNB­published­a­recommendation­with­regard­to­the­lasting­recovery­ of­ the­ solvency­ of­ household­ mortgage­loan­debtors­with­ payments­ in­ arrears.­ The­MNB’s­objective­with­the­recommendation­was­to­encourage­the­consensual­settlement­of­debt­servicing,­ in­ line­with­ the­ new­market­ and­ regulatory­ environment,­simultaneously­minimising­the­stability­and­societal­risks.­Within­the­framework­of­the­recommendation,­until­the­end­of­November­2016,­lenders­attempted­to­

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liaise­with­the­debtor­of­almost­68,000­transactions,­with­success­in­a­large­part­of­the­cases.­In­almost­one­quarter­of­the­respective­transactions­the­debtor­was­demonstrably­uncooperative,­and­hence­in­the­case­of­these­clients­the­lender­may­apply­other­solutions­as­well,­not­stipulated­in­the­recommendation.­By­the­end­of­November­almost­3,500­compromises­were­concluded­in­total:­in­the­vast­majority­–­almost­three­quarters­ –­ of­ the­ accepted­ solutions­ the­ property­remained­ in­ the­possession­of­ the­debtor,­while­ in­about­one­fifth­of­ the­ cases­ it­was­ included­ in­ the­programme­of­NAMA­and­in­8­per­cent­of­the­cases­the­property­was­sold­jointly.­Based­on­the­procedural­deadline­of­the­MNB­recommendation,­the­number­of­ compromises­ may­ increase­ in­ the­ first­ half­ of­ 2017.

Compared­ to­ previous­ years,­ the­ banking­ sector­realised­an­outstanding­profit­in­2016.­Partly­due­to­one-off­effects,­such­as­the­release­of­impairments,­the­return­on­equity­ rose­ to­above­10­per­cent.­At­the­same­time,­ in­the­persistently­ low­interest­rate­environment,­ banks’­ structural­ profitability­ will­be­under­pressure­ in­ the­medium­term­due­ to­ the­narrowing­interest­margins.­Despite­the­streamlining­efforts­ of­ past­ years,­ there­ was­ no­ substantial­improvement­ in­ the­ sector’s­ cost­ effectiveness­and­ management­ of­ the­ non-performing­ portfolio­continues­to­tie­down­significant­capacities.

Improved­ cost­ efficiency­ is­ key­ to­ managing­ the­challenges­ posed­ by­ the­ persistently­ low­ interest­environment­and­technological­progress.­This­could­be­fostered­by­the­consolidation­of­the­banking­sector,­the­ exploitation­ of­ the­ opportunities­ inherent­ in­digitalisation­and­the­reduction­of­the­non-performing­loan­ portfolio.­ The­ improvement­ in­ cost­ efficiency­could­be­boosted­by­competition­within­the­banking­sector,­particularly­the­price­competition­in­ lending­to­households,­which­would­force­banks­to­take­the­necessary­measures.

The­ MNB­ conducted­ a­ Market Intelligence Survey in­2016­as­well,­ in­ the­ context­of­which­MNB­staff­members­visited­10­credit­institutions­to­discuss­with­representatives­of­the­institutions­the­strategy­of­the­specific­institution­and­the­condition­of­the­Hungarian­banking­sector,­expected­trends­in­lending,­and­the­factors­ determining­ the­ future­ of­ the­ sector.­ The­results­of­the­survey­were­presented­in­the­May­issue­of­the­Financial Stability Report.

Macroprudential regulatory activity of the MNB

In­2016,­the­MNB’s­macroprudential­activity­focused­on­monitoring­the­adjustment­of­market­participants­and­ the­ trends­ in­ lending,­ and­ on­ fine­ tuning­ the­previously­ elaborated­ set­ of­ macroprudential­instruments.­ In­ line­ with­ its­ macroprudential­mandate,­ in­ 2016­ the­ central­ bank­ published­ its­macroprudential­ strategy,­ enhanced­ its­ system­for­ identifying­ and­ monitoring­ systemic­ risks­ and­developed­its­macroprudential­instruments­necessary­for­efficient­ risk­management.­During­ the­year,­ the­central­bank­monitored­market­developments­closely­and­consulted­with­market­participants­in­the­interests­of­assessing­the­impact­of­the­regulations­introduced­and­duly­calibrating­such.

The­ principles­ pertaining­ to­ the­ use­ of­ the­macroprudential­ instruments­ are­ summarised­ and­presented­to­the­public­in­the­MNB’s­strategy­entitled­“Stability­ today­ –­ Stability­ tomorrow”,­ elaborated­in­ accordance­ with­ the­ recommendations­ of­ the­European­Systemic­Risk­Board­(ESRB)1­and­published­in­January­2016.­In­line­with­the­MNB’s­Statute,­the­strategic­material­designates­the­basic­principles­of­the­ central­ bank’s­ operation­ as­ a­macroprudential­authority:­ the­ targets­ of­ macroprudential­ risk­assessment,­intervention­and­follow-up,­the­method­of­applying­macroprudential­instruments­and­the­main­principles­fostering­transparent­operations.

Having­consulted­with­market­participants,­the­MNB­revised­ the­debt­ cap­ rules­ in­ force­ since­1­ January­2015,­based­on­the­experiences­of­the­past­period.­As­a­result,­it­made­a­number­of­amendments­which­serve­to­reduce­borrowers’­administrative­burdens­and­ease­borrowing,­while­at­the­same­time­continuing­to­ensure­ responsible­ lending.­ Amongst­ other­ things,­the­amendments­may­help­ to­mitigate­ the­ interest­rate­ risks­ borne­ by­ consumers,­ by­ the­ preferential­management­of­instalments­on­mortgage­loans­with­longer­ interest­fixation­periods.­ In­parallel­with­the­amendments,­ the­ answers­ given­ to­ the­ questions­aimed­at­ interpreting­ the­ regulations­and­ fostering­standard­ market­ practices­ were­ published­ on­ the­MNB’s­ website­ in­ the­ form­ of­ “Frequently­ Asked­Questions­–­FAQ”.

As­ a­ result­ of­ the­ review­of­ the­mortgage­ funding­adequacy­ ratio­ (MFAR)­ regulation,­ which­ will­ be­

1­­ESRB/2013/1:­http://www.esrb.europa.eu/pub/pdf/recommendations/2013/ESRB_2013_1.en.pdf.

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ANNUAL REPORT • 2016 32

introduced­ in­ 2017,­ the­ new­ guidelines­ for­ the­requirement­ prescribing­ stable­ forint­ financing­were­also­designated.­As­a­result­of­the­regulation,­two­ new­ mortgage­ banks­ were­ established­ by­the­end­of­2016,­and­ the­first­new­mortgage­bond­issues­ also­ occurred.­ Due­ to­ the­ expected­ change­in­ the­ regulation­ pertaining­ to­mortgages­ and­ the­legislative­environment­for­mortgage­financing,­the­MNB’s­Financial­Stability­Council­modified­the­date­of­introducing­the­MFAR­regulation­from­1­October­2016­to­1­April­2017.­As­a­result­of­the­upturn­in­housing­loans­and­after­establishing­the­mortgage­bank­and­refinancing­ infrastructure,­ it­ became­ necessary­ to­tighten­the­MFAR­regulation.­Defining­the­direction­of­tightening­was­preceded­by­a­detailed­survey­by­the­ MNB,­ which­ assessed­ the­ preparation­ of­ the­mortgage­banks.­Pursuant­to­the­decision­of­the­FSB,­the­minimum­expected­ level­ of­ the­MFAR­and­ the­expected­maturity­of­the­funding­will­increase­from­1­ October­ 2018.­With­ a­ view­ to­ encouraging­ real,­external­ financing,­ the­mortgage­ bonds­ purchased­by­banks­will­be­partially­“netted”­against­the­eligible­funds­ as­ determined­ by­ the­ decree.­ Finally,­ the­mortgage­bonds­subscribed­by­building­societies­can­be­taken­into­account­as­real,­stable­financing­from­1­October­2018.­As­a­result­of­the­amendments,­the­systemic­ maturity­ mismatch­ will­ decrease­ further­and­–­due­to­the­expected­mortgage­bond­issuances­–­the­mortgage­bond­market­may­continue­to­deepen.­In­ relation­ to­ the­ changing­ regulation,­ the­ MNB­consulted­with­a­wide­range­of­stakeholders,­including­market­ participants­ and­ the­ European­ Central­ Bank.

The­ MNB’s­ experts­ surveyed­ the­ concerned­institutions’­ portfolio­ cleaning­ practices­ related­ to­problem­ project­ loans­ and­ reviewed­ the­ status­ of­preparations­for­introducing­the­Systemic­Risk­Buffer­(SRB).­ Based­ on­ the­ experiences,­ with­ a­ view­ to­ensuring­the­standard­interpretation­of­the­regulation­and­developing­a­uniform­market­practice,­the­MNB­also­published­a­summary­on­its­website­(Frequently­Asked­Questions­–­FAQ).­On­20­September­2016,­the­Financial­ Stability­Council­decided­ to­postpone­ the­introduction­of­the­systemic­risk­buffer­by­six­months.­Accordingly,­the­capital­buffer­must­be­accumulated­from­1­July­2017,­based­on­the­portfolio­outstanding­at­ the­ end­ of­ the­ first­ quarter­ of­ 2017.­ Since­ the­announcement­of­the­capital­buffer,­the­banks­have­performed­substantial­cleaning­in­their­balance­sheet:­the­problem­portfolio­fell­from­roughly­HUF­820­billion­in­2014­Q3­to­HUF­247­billion­by­the­end­of­2016­Q3.­In­the­adjustment­period,­which­was­extended­by­the­

MNB’s­decision,­the­banks­can­reduce­their­problem­exposures­ and­ hence­ may­ be­ exempted­ from­ the­accumulation­of­the­systemic­risk­buffer.

Based­on­the­methodology­approved­by­the­Financial­Stability­ Council,­ in­ 2016­ the­MNB­ performed­ the­annual­ review­ of­ other­ systemically­ important­institutions­ (O-SII).­ Considering­ the­ consolidated­balance­ sheet­ data­ of­ 31­ December­ 2015,­ eight­domestic­ banks­ were­ identified­ as­ systemically­important.­ Based­ on­ their­ position­ in­ the­ financial­system,­ these­ institutions­ are­ considered­ to­ be­ of­outstanding­importance;­hence­in­order­to­increase­their­shock-absorbing­capacity,­the­MNB­prescribed­for­them­to­accumulate­additional­capital­buffer­from­1­January­2017.­The­identified­institutions­must­satisfy­the­ capital­ requirements­of­0.5­ to­2­per­ cent,­ as­ a­proportion­of­the­exposure,­in­four­years­at­a­gradually­increasing­level.­The­adjustment­period­lasting­until­2020­supports­the­continued­upturn­in­lending,­while­simultaneously­strengthening­financial­stability,­and­is­also­in­line­with­international­regulatory­practice.

In­accordance­with­its­statutory­obligation,­the­MNB­quarterly­revises­the­countercyclical­capital­buffer­rate­(CCB),­which­may­be­applied­for­the­mitigation­of­the­risks­of­ excessive­ lending.­At­present,­no­excessive­lending­can­be­observed­in­the­banking­system,­and­hence­ the­ Financial­ Stability­ Council­ left­ the­ CCB­rate,­which­is­applicable­to­domestic­exposures,­at­0­per­cent­throughout­the­year­in­order­to­encourage­lending.­The­methodology­of­determining­the­CCB­rate­was­also­enhanced,­supplementing­the­methodology­for­ determining­ the­ build-up­ of­ the­ CCB­ with­ the­conditions­ applicable­ to­ the­ release­ of­ the­ capital­requirement.

As­ part­ of­ the­ follow-up­ of­ the­ macroprudential­instruments,­ in­ October­ 2016­ the­ MNB­ issued­ its­Macroprudential Report­for­the­first­time,­which­may­be­regarded­as­a­novel­initiative­even­by­international­standards.­The­purpose­of­the­report,­which­will­be­published­annually­in­the­future,­is­to­present­to­the­public­the­measures­applied­by­the­MNB­to­prevent­and­address­the­systemic­risks­which­it­identifies­and­communicates,­as­well­as­the­effects­of­such­risks­and­the­adjustment­of­market­participants.

The­ central­ bank’s­ experts­ continued­ to­ monitor­international­ regulatory­ developments­ affecting­the­ financial­ intermediary­ system­ in­ 2016,­ and­participated­ in­ the­macroprudential­policy­working­groups­of­various­European­institutions.

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ANNUAL REPORT • 2016 33

3.3 SUPERVISION AND CONSUMER PROTECTION

Based­on­the­data­from­31­December­2016,­the­MNB­is­responsible­for­the­prudential­supervision­of­1,608­institutions;­the­distribution­of­the­institutions­by­type­is­shown­in­Chart­7.­The­(≈7.8­per­cent)­decrease­in­the­number­of­supervised­ institutions­compared­to­the­previous­year­is­attributable­to­the­concentration­processes­ taking­place­ in­ the­market,­of­which­ the­integration­of­cooperative­credit­institutions­should­be­highlighted­both­in­terms­of­its­topicality­and­weight.­In­2016,­ the­MNB­ launched­126­prudential­and­36­market­surveillance­inspections,­and­completed­129­prudential­and­50­market­surveillance­inspections.­In­the­review­period,­the­MNB­issued­a­total­of­1,736­prudential­legal­enforcement­and­licensing­resolutions,­while­in­the­market­surveillance­and­issuer­oversight­areas­86­legal­enforcement­resolution­were­passed­in­total.­The­measures­taken­included­the­imposition­of­prudential­institutional­fines­amounting­to­HUF­1,168­million,­prudential­personal­fines­amounting­to­HUF­221­million­and­market­surveillance­and­supervisory­fines­of­HUF­3,889­million.

The­MNB­ continued­ the­ practical­ application­ of­ the­enhanced­methods­also­in­the­area­of­IT­supervision;­in­the­spirit­of­which­it­completed­the­survey­of­data­flows,­the­audit­of­the­adequacy­of­the­confidentiality­controls­ and­ the­ assessment­ of­ the­ fraud­ risks­ at­several­institutions.­In­order­to­ensure­higher­certainty­–­instead­of­the­traditional­sampling-based­audit­–­the­

supervisory­authority­introduced­an­audit­methodology­based­ data­ analysis­ covering­ the­ entire­ dataset­ and­independent­ recalculation.­ In­ relation­ to­ the­ quick­spread­ of­ cloud­ services,­ regarded­ as­ one­ the­most­significant­information­technology­innovations­in­the­last­twenty­years,­the­MNB­elaborated­its­recommendation­regarding­the­use­of­social­and­public­cloud­services.

Supervision of credit institutions

The­ MNB’s­ functional­ area­ responsible­ for­the­ supervision­ of­ credit­ institutions­ initiated­42­ inspections­ in­ total­ in­ 2016,­ and­ closed­ 28­comprehensive,­ 11­ targeted,­ 1­ thematic­ and­ 8­follow-up­ inspections.­ As­ regards­ the­ institutions’­capital­adequacy,­11­ICAAP­inspections­(aimed­at­the­internal­capital­adequacy­assessment­process)­were­completed.­As­a­ result­of­ the­procedures­closed­ in­respect­of­the­credit­institutions,­in­2016­prudential­institutional­penalties­in­the­total­amount­of­HUF­709­million­were­imposed,­underlining­that­the­MNB­takes­firm­measures­against­infringing­forms­of­conduct­and­institutions­failing­to­comply­with­the­provisions­of­its­earlier­resolutions.

In­ accordance­ with­ international­ trends­ and­ the­recommendation­of­the­European­Banking­Authority­(EBA),­the­business­model-based­approach­is­gaining­increasing­ importance­ in­ domestic­ supervisory­activities­ as­ well.­ The­ central­ bank­ pays­ special­attention­to­making­the­supervised­institutions­aware­of­the­business­model­analyses­performed­on­the­basis­of­the­continuously­developing­framework­and­of­the­identified­risks­and­this­dialogue­efficiently­supports­the­banks’­strategy­development,­planning­and­risk­management­processes.

The­ supervisory­ review­ and­ internal­ evaluation­process­ of­ the­ large­ banks’­ capital­ adequacy­assessment­process­(ICAAP-SREP)­and­the­validation­of­the­internal­models­necessary­for­calculating­the­capital­ requirement,­ bear­ the­ utmost­ importance­for­the­stability­of­the­financial­intermediary­system.­During­ the­year,­ the­MNB­conducted­ the­ review­ in­respect­of­all­ complex­banks­and­at­ the­same­time­launched­validation­processes,­at­the­banks’­request,­in­ the­ case­ of­ several­ risk­models.­With­ a­ view­ to­supplementing­ the­MLS,­which­ supports­ economic­growth,­ and­ making­ it­ more­ efficient,­ the­ central­bank­ –­ in­ its­ capacity­ as­ supervisory­ authority­ –­provided­the­credit­institutions­with­an­allowance­in­the­capital­requirement­in­proportion­to­the­growth­commitments­they­made.

Chart 7Number of supervised entities by type on 31 December 2016

Insurance companiesIntermediaries (non-financial institutions)Credit institutionsFinancial enterprisesPension, health and mutual aid fundsOther non-financial institutionsCapital market institutions

45

1,05593

253

698 85

Source: MNB.

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ANNUAL REPORT • 2016 34

In­ April­ 2016,­ a­ prudential­ thematic­ inspection­assessing­the­efficiency­of­the­large­banks’­household­mortgage­loan­collection­process­was­launched,­which­covered­both­the­operative­structure­of­the­collection­area­and­the­adequacy­of­risk­management­methods­related­to­the­categorisation­of­overdue­transactions.­The­ procedure­ analysing­ the­ efficiency­ of­ the­ NPL­reduction­ strategy­may­ also­ serve­ as­ an­ additional­incentive­to­foster­portfolio­cleaning,­and­it­helped­the­banks,­having­reviewed­their­own­processes,­pay­more­attention­to­expanding­the­restructuring­facilities.­The­MNB­actively­applied­ its­operative­procedures­with­a­ short­ lead-in­ time­ and­ typically­ launched­ these­without­advance­notice­to­the­credit­ institutions­as­well,­in­the­course­of­which­it­formulated­findings­in­respect­of­the­data­supply­and­the­calculation­of­the­MFAR.

During­ the­ reporting­ period,­ the­ MNB­ actively­participated­ in­ the­ risk­assessment­of­ international­banking­ groups­ both­ as­ home­ and­ host­ authority.­As­part­ of­ the­ college­work,­within­ the­ framework­of­ joint­ decisions,­ the­ central­ bank­ promoted­ the­formulation­of­requirements­applying­to­institutions­also­active­in­the­Hungarian­market,­ensuring­that­the­operation­of­domestic­actors­was­risk­conscious­and­efficient­in­microprudential­terms­as­well.­As­a­result­of­the­intensive­cooperation,­the­recovery­plans­were­accepted,­based­on­which­–­in­a­crisis­situation­–­an­institution­would­able­to­continue­its­operation­and­restore­the­normal­course­of­business­without­public­assistance­as­well.

The­ largest­ change­ in­ the­ regulatory­ environment­of­ the­financial­ sector­was­due­ to­ the­modification­of­ the­Act­on­ the­ integration­of­ cooperative­ credit­institutions­and­the­MNB­Act2­in­2016,­as­a­result­of­

which­ it­ became­ necessary­ to­ revise­ the­ oversight­strategy­ and­ the­ instruments­ related­ to­ the­Integration.­ The­ amendments­ extended­ the­MNB’s­oversight­competence­to­the­Integration­Organisation­as­ well,­ and­ established­ the­ opportunity­ for­ risk-based­ oversight.­ The­ purpose­ of­ the­ increasingly­centralised­ Integration­ is­ to­ ensure­ that­ with­centralised­ institutions­ (Integration­ of­ Cooperative­Credit­Institutions­–­ICCI­and­Takarékbank)­it­operates­in­a­framework­similar­to­that­of­large­banks­and­the­member­ cooperative­ credit­ institutions­ practically­function­ as­ branches.­ When­ reaching­ the­ level­ of­operation­of­ large­banks,­ the­MNB­wishes­to­apply­the­oversight­principles­and­ instruments­applied­to­large­banks;­however,­the­basic­requirement­of­this­is­ to­ have­ a­ homogenous­ group­ operating­ on­ the­basis­ of­ uniform­ regulations,­ efficiently­ managed­and­ controlled­ by­ the­ central­ institution.­ In­ order­to­ensure­stability,­the­MNB­does­not­yet­supervise­the­Integration­using­the­large­bank­approach­in­full,­and­ thus­ a­ transitional­ period­ was­ introduced,­ in­the­course­of­which­for­the­institutions­with­highest­weight­and/or­risk,­it­applies­custom­treatment,­and­for­cooperative­credit­ institutions­ it­applies­ joint­or­intensive­ joint­ treatment,­ depending­ on­ their­ risk­profile.

With­the­completion­of­the­processes­commenced­in­past­years,­the­focus­of­financial­institution­licensing­activity­was­on­the­acquisition­of­controlling­interests,­the­mergers­ of­ cooperative­ credit­ institutions,­ the­transfer­ of­ payment­ service­ general­ agreement­portfolios,­as­well­as­the­transfer­of­loan,­credit,­lease­and­ receivable­ portfolios.­ In­ 2016,­ two­ specialised­credit­ institutions­–­ERSTE­Mortgage­Bank­Ltd.­and­K&H­Mortgage­Bank­Ltd.­–­obtained­activity­licences­and­entered­the­market.­Additionally,­the­MNB­also­

Table 2Number of inspections conducted at credit institutions, financial enterprises and payment institutions

Type of entity Type of inspectionClosed in 2016

Started in 2016 In progress on 31 Dec 2016Started in 2015 Started in 2016

Credit­institutions­(and­branches)

Comprehensive 11 14 20 6

Targeted 7 4 13 9

Thematic 1 0 1 1

Follow-up 3 5 6 1

validation­and­SREP 4 7 11 4

Financial­enterprises Targeted 4 2 3 1

Payment­service­providers Comprehensive 2 1 2 1

2­­Act­CXXCv­of­2013­and­Act­CXXXIX­of­2013.

REvIEW­OF­THE­MNB’S­PERFORMANCE­IN­2016

ANNUAL REPORT • 2016 35

authorised­the­establishment­of­another­specialised­credit­institution,­MKB­Mortgage­Bank­Ltd.­AXA­Bank­Europe­ SA­ Hungarian­ Branch­ Office­ terminated­ its­operation­in­Hungary­at­the­end­of­the­year,­while­the­Banif­Plus­Bank­Ltd.­merged­with­the­credit­institution­Cofidis­SA­as­a­result­of­a­cross-border­merger.­The­portfolio­ of­ AXA­was­ taken­ over­ by­ OTP­ Bank­ Plc,­while­the­portfolio­Banif­Plus­was­transferred­to­the­Hungarian­Branch­Office­of­Cofidis.­Of­the­acquisition­of­interests­in­credit­institutions,­the­market­sale­of­MKB­Bank­Ltd.­should­be­highlighted.

Supervision of insurance companies, funds and intermediaries

In the insurance sector,­9­new­inspections­started­and­11­ongoing­inspections­were­concluded­in­2016.­The­prudential­fines­imposed­in­respect­of­the­insurance­market­amounted­to­a­total­of­HUF­247­million.

One­of­the­most­ important­events­ in­the­ insurance­sector­ was­ the­ changeover­ to­ Solvency­ II,­ which­was­ successfully­ completed­ in­ 2016.­ In­ the­ past,­the­ MNB­ had­ supported­ this­ process­ by­ issuing­recommendations­and­conducting­ impact­analyses,­along­ with­ active­ communication­ and­ test­ data­reporting.­The­preparation­can­be­deemed­successful­by­European­standards,­as­the­central­bank­forwarded­the­data­of­ the­domestic­ insurers­ to­ the­European­authority­ in­a­much­higher­quality­than­average.­ In­addition,­ the­ smooth­ changeover­ is­ also­ reflected­by­ the­ stable­ capital­ adequacy­ at­ the­ sector­ level­(over­200­per­cent),­and­moreover,­it­reached­the­EU­average­compared­to­the­former­situation.­The­central­bank’s­recommendation,­in­which­it­requires­holding­capital­ buffer­ to­ eliminate­ volatility­ impacts,­made­a­major­ contribution­ to­ the­ stability­ of­ the­ capital­position.

In­ the­ low­ market­ yield­ environment,­ it­ is­ a­ key­requirement­for­the­insurers­that­they­offer­a­variety­of­ marketable­ and­ cost­ efficient­ products­ which­comply­with­the­decreased­yields,­but­nevertheless­provide­positive­return­for­the­customers.­The­MNB­elaborated­the­ethical­life­insurance­concept­along­the­“fair”­approach­in­its­strategy,­the­primary­objective­of­which­is­to­increase­public­trust­and­willingness­of­self-provision.­In­order­to­attain­the­targets­set,­the­central­bank,­in­cooperation­with­the­legislator­and­the­market,­initiated­the­amendment­of­the­law,­issued­two­MNB­decrees­and­a­recommendation­consisting­

of­ 120­ points,­ which­ determine­ the­ expectations­toward­the­ insurers.­As­a­result­of­the­measures,­a­new­generation­of­life­insurance­products­with­savings­may­appear­from­2017.

In­2016,­ the­MNB­conducted­pilot­business­model-based­ inspections­ at­ four­ insurers.­ Although­ the­central­bank­identified­minor­shortcomings­in­these­proceedings,­ on­ the­whole­ it­ can­ be­ said­ that­ the­inspected­ insurers­have­strategies­which­are­ in­ line­with­the­external­environment,­realistically­ feasible­with­the­available­resources,­consider­the­potential­risks­and­guarantee­sustainable­profitability­ for­the­insurer,­and­their­business­plans­are­harmonised­with­the­strategy,­the­fulfilment­of­which­is­continuously­backtested.

In­the­course­the­comprehensive­inspections,­the­MNB­inspected­the­proper­application­of­the­new­Insurance­Act3­issued­in­relation­to­Solvency­II,­introduced­on­1­January­2016­and­of­the­EU­rules.­In­the­spirit­of­this,­along­the­Prudent­Person­Principle­related­to­insurers’­investment­ activity­ within­ the­ Solvency­ II­ rules,­ it­inspected­ the­adequacy­of­ the­ investment­strategy­and­regulation­with­special­care­and­it­assessed­the­investment­activity,­also­focusing­on­the­profitability­and­ liquidity­ aspects.­ The­ supervisory­ authority­treated­as­a­priority­the­inspection­of­the­composition­and­quality­of­the­assets­constituting­the­regulatory­capital­ and­ the­ cover­ for­ the­ insurance­ technical­reserves,­as­well­as­the­maturity­match­of­the­reserves­and­underlying­ liabilities,­ and­ the­ adequacy­of­ the­procedures­that­are­to­ensure­this.­The­ inspections­revealed­ shortcomings­ in­ the­ area­ of­ investment­policies,­ the­evaluation­of­corporate­decisions,­and­continuous­monitoring­of­the­portfolio.

In­ the­ reporting­ period,­ the­ underlying­ factors­ of­the­ sector-specific­ findings­ included­ infringements­related­to­the­contractual­terms­of­the­sold­products­and­ customer­ information­ documents,­ as­ well­as­ to­ the­ customer­ information­ and­ complaint­management.­ In­ addition,­ irregularities­ related­ to­outsourcing­contracts,­product­designs,­provisioning­and­accounting­policies,­portfolio­management­and­registration­systems,­were­also­identified.

The­ forward-looking­ approach­ of­ the­ supervisory­authority­is­evidenced­by­the­fact­that­it­implemented­a­ number­ of­ early­ interventions­ in­ the­ insurance­sector,­which­helped­prevent­jeopardising­customer­

3­­Act­LXXXvIII­of­2014.

MAGYAR NEMZETI BANK

ANNUAL REPORT • 2016 36

funds­as­a­result­of­the­inadequate­operation­of­the­institution­or­the­erroneous­business­model.­ In­the­case­of­the­Romanian­insurer­Astra,­the­MNB­played­a­special­–­a­kind­of­intermediary­–­role­between­the­Hungarian­and­Romanian­guarantee­funds,­to­ensure­that­the­aggrieved­customers­of­the­branch­office­have­proper­access­to­the­damages.­At­the­same­time,­it­provided­continuous­information­to­the­public­on­the­progress­of­the­Romanian­procedure­and­the­related­deadlines.

In the funds sector,­16­new­inspections­started­and­17­ongoing­inspections­were­concluded,­in­the­context­of­which­a­total­of­HUF­11.4­million­was­imposed­in­fines,­and­the­activity­licences­of­two­voluntary­funds­were­withdrawn.

In­ several­ cases,­ the­ inspections­ identified­shortcomings­ in­ the­ internal­ control­ systems­ and­processes,­ irregularities­ related­ to­ the­organisation­and­ documentation­ of­ delegate­ election­ meeting,­the­absence­of­regulation­updates­and­the­violation­of­ accounting­ rules.­ During­ the­ comprehensive­inspections,­ the­ focus­ areas­ continued­ to­ be­ the­proper­ execution­ of­ payments­ related­ to­ services­provided­ to­ members­ and­ to­ the­ termination­ of­membership,­and­the­correct­crediting­of­membership­fees­ to­ individual­ accounts­ in­ accordance­with­ the­appropriate­ distribution­ ratio.­ The­ supervisory­authority­concentrated­on­the­inspection­of­indirect­costs­related­to­ investments,­as­a­result­of­which­a­number­of­asset­managers­reimbursed­the­funds­for­unjustified­excess­costs,­and­thus­those­were­credited­to­members’­individual­accounts.

In­ December­ 2016,­ the­ MNB­ issued­ a­ revised­recommendation­on­ the­ selectable­portfolio­ system,­which­may­be­operated­by­the­voluntary­pension­funds­and­puts­more­emphasis­than­before­on­encouraging­

the­ funds­ that­ they­ should­ adjust­ the­ portfolios­ to­the­members’­life­cycles­and­risk-taking­capacity,­and­clarifies­ the­ regulation­ of­ the­ investment­ policy­ of­those.­At­ the­ end­of­ the­ year,­ the­ central­ bank­ also­published­the­notice­presenting­the­premium­charged­by­the­voluntary­pension­funds­between­2000­and­2015,­which­ compares­ the­membership­ fee­ deduction­ for­operational­and­liquidity­purposes,­and­the­level­of­asset­management­costs­to­the­members’­assets.­According­to­the­notice,­the­value­of­the­sector-level­indicators­is­still­below­1­per­cent,­i.e.­the­degree­of­the­deductions­charged­to­the­members­can­be­deemed­low.

Within­the­framework­of­the­cooperation­agreement­concluded­with­the­National­Association­of­voluntary­Funds,­the­MNB­conducted­several­negotiations­on­the­market­and­regulatory­processes,­as­well­as­on­the­proposals­aimed­at­fostering­the­development­of­the­voluntary­funds­system­and­strengthening­the­self-provision­approach.

The­ fact­ that­ –­ due­ to­ the­ amendment­ of­ the­ Act­on­ voluntary­ funds­and­of­ the­ related­government­decrees­ –­ all­ voluntary­ pension­ funds­ operating­selectable­portfolio­systems­modified­their­regulations­related­ to­ the­operation­of­ the­selectable­portfolio­system­ increased­ the­number­of­ cases­managed­ in­the­area­of­fund­licensing.

In­ the­ intermediary area,­ the­ supervisory­ authority­enhanced­its­audit­methodology,­extending­the­focus­thereof­to­the­ inspection­of­the­content­of­mediated­contracts­ in­ terms­ of­ the­ insurance­ trade­ and­ the­existence­ of­ proper­ professional­ care­ in­ particular­as­ regards­ the­ new­ contracts­ recommended­ for­corresponding­ needs.­ All­ inspections­ conducted­ in­respect­of­the­intermediaries­identified­shortcomings­in­respect­of­the­registration­in­the­supervisory­authority’s­register.

Table 3Number of inspections conducted at insurance companies, funds and intermediaries

Type of entity Type of inspectionClosed in 2016

Started in 2016 In progress on 31 Dec 2016Started in 2015 Started in 2016

Insurance­companiesComprehensive 5 2 7 5

Targeted 3 1 2 1

Pension,­health­and­mutual­aid­funds

Comprehensive 9 6 14 8

Targeted 2 0 2 2

IntermediariesTargeted 4 0 3 3

Follow-up 0 1 1 0

REvIEW­OF­THE­MNB’S­PERFORMANCE­IN­2016

ANNUAL REPORT • 2016 37

During­ the­ licensing­ procedures,­ new­ tasks­ were­generated­by­the­management­of­the­“fit­&­proper”­requirements­towards­the­newly­employed­insurance­intermediary­activity­controllers,­as­prescribed­by­the­provisions­of­the­new­Insurance­Act.

Supervision of capital market institutions

In­2016,­the­MNB­launched­39­new­inspections­and­closed­31­inspections­at­capital­market­ institutions,­in­the­context­of­which­it­imposed­institutional­and­personal­fines­ in­ the­amount­of­HUF­377.5­million.­During­the­year,­several­enterprises­terminated­their­investment­ services­ activities­ and­according­ to­ the­developments­ being­ seen,­market­ consolidation­ is­expected­to­continue­in­2017­as­well.

A­basic­element­of­the­inspection­of­investment­firms­was­ the­ audit­ of­ the­ transactions­ and­ positions­ in­institutions’­ record-keeping­ systems­ based­ on­ the­data­ of­ the­ databases­ obtained­ during­ the­ on-site­inspections.­The­tools­of­continuous­oversight­were­expanded­with­the­database­ logics­enquiries­based­on­ the­ regular­ data­ reporting­ by­ the­ supervised­institutions.­ Since­ February­ 2016,­ customers­ of­investment­ service­ providers­ may­ enquire­ on­ the­month-end­balances­of­ the­securities­account­held­with­the­service­provider­on­the­MNB’s­website.

The­central­bank­treats­ the­protection­of­customer­receivables­ and­ compliance­ with­ the­ related­statutory­ provisions­ as­ key­ priorities.­ As­widely­ as­possible,­the­MNB­applies­operative-type­inspection­methods­at­capital­market­actors,­where­during­the­

on-site­ inspections­ conducted­without­prior­ notice­it­ acquires­ the­ data­ directly­ from­ the­ inspected­institution,­thereby­preventing­the­potential­mala fide amendment­of­such­data.­During­the­reporting­year,­such­inspections­were­carried­out­on­10­occasions,­in­the­course­of­which­–­apart­from­identifying­potential­sectoral­ infringement­ and­ the­ related­proportional­measures­–­no­systemic­fraud­or­conduct­jeopardising­customers’­assets­was­revealed.

In­the­course­of­inspecting­investment­fund­managers,­in­ addition­ to­ the­ control­ of­ data­ supplies,­ the­supervisory­ authority­ focused­ on­ the­ inspection­of­ the­ institutions’­ business­ processes,­ particularly­on­ risk­ management,­ liquidity­ management,­investment­decisions,­order­management­and­their­capital­position.­The­targeted­audited­closed­in­2016­resulted­ in­ the­ withdrawal­ of­ the­ activity­ licence­on­one­occasion­and­the­suspension­thereof­in­one­ case.

In­ relation­ to­ the­MiFID­ II­ regulation­ (the­directive­specifying­ the­ requirements­ related­ to­ investment­firms­ and­ regulated­ markets)­ to­ be­ applied­ from­January­ 2018­ due­ to­ the­ amendment­ of­ the­ EU­Directive­ 2004/39/EC­ on­ markets­ in­ financial­instruments,­ the­ supervisory­ authority­ conducted­consultations­with­the­market­institutions.

After­ 1­ July­ 2016,­ the­ registered­ status­ of­intermediaries­ registered­ without­ a­ principal­ceased­by­operation­of­law,­as­a­result­of­which­the­MNB­ cancelled­ the­ data­ of­ almost­ two­ thousand­intermediaries­from­its­records.

Table 4Number of inspections conducted at capital market institutions

Type of entity Type of inspectionClosed in 2016

Started in 2016 In progress on 31 Dec 2016Started in 2015 Started in 2016

Investment­fund­managers­(exc.­venture­capital­fund­managers)

Comprehensive 1 5 15 10

Targeted 1 0 1 1

venture­capital­fund­managers Comprehensive 2 0 3 3

Central­counterparty Comprehensive 0 1 1 0

Central­depository Comprehensive 0 0 1 1

Investment­firms

Comprehensive 3 3 10 7

Follow-up 0 2 3 1

Thematic 0 1 1 0

Targeted 10 2 4 2

MAGYAR NEMZETI BANK

ANNUAL REPORT • 2016 38

Market surveillance and oversight of issuers

In­2016,­the­MNB­completed­50­market­surveillance­inspections,­as­a­result­of­which­ it­ imposed­market­surveillance­ penalty­ amounting­ to­ almost­ HUF­ 3.9­billion.

The­MNB­pays­special­attention­to­the­liquidation­of­unauthorised­activities­distorting­the­market­and­to­the­immediate­suppression­of­the­initiatives­without­economic­foundation,­promising­unreasonably­high­yields­and­aimed­at­damaging­investors.­In­the­spirit­of­fighting­the­spread­of­unauthorised­actors­in­the­low­ interest­ and­ yield­ environment,­ in­ 2016­ the­supervisory­ authority­ considerably­ increased­ the­number­ of­ the­ temporary­ measures­ taken­ in­ the­early­phase­of­its­market­surveillance­procedures,­the­criminal­charges­filed­during­the­procedures­and­press­releases­ informing­ the­ public­ about­ unauthorised­service­providers.

In­2016,­the­series­of­market­surveillance­procedures­related­ to­ the­ unlicensed­ purchase­ of­ receivables­in­ Hungary­ was­ closed.­ As­ a­ result­ of­ the­ public­authority’s­ actions,­ the­ central­ bank­ also­ initiated­criminal­ proceedings,­ in­ addition­ to­ the­ market­surveillance­ penalties­ of­ several­ hundred­ million­forints­which­were­imposed­in­certain­cases­of­special­importance.

In­ 2016,­ the­MNB­ placed­ the­ control­ of­ the­ stock­exchange­ issuers’­ notification­ obligation­ on­ new­foundations,­ in­ the­ spirit­ of­ which­ it­ encourages­the­ issuers­of­publicly­traded­securities­to­fulfil­the­notification­ obligation­ voluntarily.­ The­ supervisory­authority­issued­resolutions­–­in­addition­to­imposing­supervisory­penalty­in­the­amount­of­some­HUF­50­million­–­ in­about­40­cases­against­ the­ issuers­ that­breached­the­notification­obligation,­and­in­13­cases­the­trading­of­the­respective­securities­at­the­stock­exchange­was­also­suspended.

As­ part­ of­ the­ new­ stock­ exchange­ strategy,­ new­issuers­ appeared­ on­ the­ Budapest­ Stock­ Exchange­after­two­years.

Consumer protection

The­MNB’s­consumer­protection­activity­in­2016­was­strongly­ determined­ by­ the­ fulfilment­ and­ closure­of­the­extraordinary­tasks­related­to­the­settlement.­During­ the­ review­ of­ the­ settlement­ more­ than­

18,000­documents­were­generated­and­as­part­of­the­inspection­the­central­bank­received­electronic­data­reporting­in­more­than­16,000­cases.­As­part­of­the­settlement­thematic­audit,­in­relation­to­infringements­which­were­ identified­the­MNB­ imposed­consumer­protection­ fines­ in­ the­ total­ amount­ of­ HUF­ 155­million,­ penalties­ of­ HUF­ 6.1­million­ for­ failure­ to­comply­with­the­prescribed­extraordinary­reporting­and­ procedural­ penalties­ of­ HUF­ 2.3­ million­ for­hindering­the­inspection.­On­the­whole,­the­series­of­inspections­ carried­out­at­322­financial­ institutions­did­not­reveal­systemic­errors;­most­of­the­affected­parties­ remedied­ the­ shortcomings­ already­ during­the­ inspection­ and­ the­ fulfilment­of­ the­ additional­obligations­prescribed­by­the­MNB­is­also­on­schedule.

With­a­view­to­assessing­and­managing­the­consumer­protection­risks,­in­2016­the­MNB­launched­thematic­inspections­related­to­fair­lending­and­to­companies­pursuing­ pawnbroking­ activity,­ impacting­ 18­supervised­institutions­in­total.

The­ investigation­ of­ suspected­ infringements­was­ performed­ within­ the­ framework­ of­ targeted­inspections­ aimed­ at­ complaint­ management,­ the­calculation­and­communication­of­annual­percentage­rate­ of­ charge,­ and­ at­ the­ identification­ of­ unfair­commercial­practices­to­the­detriment­of­consumers.

In­ order­ to­ survey­ the­ sales­ techniques,­ conducts,­provision­ of­ information­ and­ the­ real­ market­circumstances,­the­MNB­concluded­trial­transactions­in­26­cases­in­2016.

The­ consumers’­ petitions­ initiating­ consumer­protection­inspections­also­bore­important­information­for­the­central­bank,­which­were­investigated­–­upon­the­existence­of­the­statutory­conditions­of­launching­the­procedure­–­in­222­cases.

Due­ to­ the­ infringements­ identified­ during­ the­inspections,­the­MNB­imposed­consumer­protection­fines­ in­ the­ total­ amount­ of­ HUF­ 258.4­ million­ in­2016.­ The­MNB­monitored­ the­actual­ conduct­and­communication­of­the­supervised­institutions­in­the­form­of­continuous­consumer­protection­supervision,­and­ in­ the­ course­ of­ this­ it­ issued­ a­ total­ of­ 42­consumer­protection­warnings,­due­to­the­detection­of­undesirable­practices.

The­ supervisory­ authority­ considers­ it­ particularly­important­ to­ ensure­ that­ the­ general­ terms­ and­conditions­should­comply­with­requirements­of­good­

REvIEW­OF­THE­MNB’S­PERFORMANCE­IN­2016

ANNUAL REPORT • 2016 39

faith­and­fairness,­as­prescribed­by­civil­law,­and­thus­in­2016­it­reviewed­in­detail­the­relevant­regulations­of­ nine­ financial­ institutions­ that­ concluded­ new­consumer­car­loans­or­lease­contracts­in­autumn­2015.­The­respective­institutions­modified­their­contractual­conditions­ by­ eliminating­ the­ concerns­ formulated­by­the­supervisory­authority,­and­thus­the­MNB­did­not­ bring­ actio popularis­ claims­ against­ them.­ At­the­ request­ of­ the­MNB,­ the­ institutions­ updated­their­entire­outstanding­contract­portfolio­with­ the­changes,­and­thus­conditions­that­were­unjustified­or­represented­an­unfair­disadvantage­for­the­consumers,­or­ that­were­unclear,­were­ removed­ from­150,000­contracts.

In­relation­to­the­national­home­creation­communities­established­ based­ on­ the­ provisions­ of­ Act­ Xv­ of­2016,­ the­ MNB­ fulfilled­ its­ obligations­ related­ to­the­regulation,­and­also­prepared­and­published­the­informative­guidelines­both­for­the­consumers­and­the­future­organisers.

Financial Consumer Protection Centre

Customers­can­reach­the­customer­service­operating­in­the­MNB’s­Financial­Consumer­Protection­Centre­through­four­channels,­i.e.­in­person,­over­the­phone,­by­ e-mail­ and­ by­ petitions­ submitted­ on­ paper.­ In­2016,­the­customer­service­received­37,543­enquiries­and­3,698­petitions.­Half­of­the­customer­petitions­and­enquiries­related­to­the­financial­market­and­almost­one­quarter­related­to­the­ insurance­sector.­Within­the­financial­market,­a­large­part­(36­per­cent)­of­the­enquiries­ and­ complaints­ related­ to­ lending,­while­almost­one­ third­of­ the­ insurance­cases­concerned­compulsory­motor­third-party­liability­insurance.­The­causes­ of­ problems­ primarily­ included­ settlements­related­to­contracts,­insufficient­information,­various­administrative­ errors,­ the­ amount­ of­ commissions,­

costs­ and­ fees,­ the­ degree­ of­ indemnification­ and­lengthy­ claim­ settlements.­ In­ 2016,­ the­ enquiries­and­petitions­received­in­connection­with­the­claims­related­to­the­termination­of­the­services­of­ASTRA­Insurer­accounted­for­almost­4­per­cent­of­all­enquiries­received­by­the­customer­service.

During­the­central­bank’s­consumer­protection­activity,­financial­ consumer­ protection­ communication­ is­becoming­ increasingly­ important.­ The­ purpose­ of­this­is­to­reduce­the­damages­arising­from­consumers’­erroneous­ decisions,­ increase­ consumers’­ financial­awareness­and­enhance­domestic­financial­ literacy.­As­ part­ of­ this,­ in­ December­ 2016­ the­ consumer­protection­ webpage­ (micro­ site)­ available­ through­the­MNB’s­website­was­revamped,­rendering­it­even­more­ user-friendly­ with­ its­ new­ structure.­ On­ the­consumer­protection­micro­site,­which­attracts­roughly­ten­thousand­visitors­per­month,­visitors­can­search­for­thematic­content­in­almost­350­articles,­covering­almost­the­whole­range­of­financial­services.

Within­ the­ framework­ of­ the­ Financial­ Navigator­information­paper­series,­which­is­already­regarded­as­a­classic­publication,­4­new­Financial­Navigator­papers­and­ 2­ new­ Financial­ Navigator­ EXTRA­ notification­were­published.­The­printed­booklets­were­published­in­more­than­4.8­million­copies­to­foster­financially-aware­decision-making­by­the­general­public.

The­MNB­also­assists­the­provision­of­comprehensive­information­to­consumers­with­short­videos,­dealing­with­the­most­important­financial­topics.­These­are­also­available­online;­in­this­spirit,­by­the­end­of­the­year­19­short­films­had­been­published.­The­central­bank­also­ tries­ to­access­ the­widest­possible­ range­of­ consumers­ via­ social­media,­ and­ thus­ it­ shared­almost­400­contents­enhancing­financial­awareness­on­its­Facebook­site.­As­one­element­of­the­Financial­

Table 5The MNB’s consumer protection administrative activity, and data related to the settlement thematic audit(HUF Millions)

Type of entity Procedural penaltiesConsumer protection fines

regarding extraordinary data supply

Consumer protection fines regarding infringements revealed

in the course of thematic inspection

Credit­institutions 0.25 0 126.0

Cooperative­credit­institutions 0.85 1.1 12.9

Financial­enterprises­equivalent­to­credit­institutions 1.2 5 14.3

Debt­management­institutions 0 0 1.9

Total: 2.3 6.1 155

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Navigator­ information­ system,­ the­ MNB’s­ product­selection­ applications­ help­ collect­ the­ information­necessary­ for­ consumers’­decisions­more­easily.­Of­these,­the­enhancement­of­the­bank­account,­deposit­and­ loan/lease­selector,­and­ the­household­budget­and­loan­calculator­commenced­during­the­year,­while­the­national­branch­and­ATM­search­application­helps­orientation­from­June­as­a­new­service.

In­2016,­the­Financial­Advisory­Network­–­operating­with­ the­ support­ of­ the­ MNB­ –­ was­ renewed:­ it­provides­financial­information­and­advice­at­9­county­seats­in­almost­4,600­matters.­As­a­new­service,­twice­a­month,­the­offices­also­offer­external­advisory­services­in­smaller­settlements­around­the­county­seats,­and­thus­the­service­is­available­at­18­sites­monthly.­NGOs­participating­ in­ the­ financial­ consumer­ protection­Civil­ Network­ organised­ 91­ events,­ particularly­ for­the­population­ living­ in­the­countryside,­to­provide­assistance­ in­ consumers’­ legal­ enforcement­ efforts­and­to­provide­information.­The­Financial­Consumer­Protection­Centre­organised­2­ forums­and­2­online­examinations­for­the­NGOs­during­the­year.

The­MNB­ places­ strong­ emphasis­ on­ representing­the­interests­of­social­groups­with­special­needs,­and­thus­with­a­view­to­providing­equal­opportunities­to­customers­with­impaired­hearing,­a­video­interpreter­service­ was­ introduced­ at­ the­ personal­ customer­service­from­1­December­2016.­From­the­same­day,­the­customer­service­receives­telephone­enquires­at­toll-free­telephone­numbers.

3.4 RESOLUTION

In­2016,­one­of­the­greatest­achievement­of­the­MNB­was­the­successful­completion­of­resolution­procedure­for­MKB­Bank.

The­ resolution­ of­ MKB­ Bank­ was­ one­ of­ the­ first­resolution­ procedures­ in­ the­ European­ Union­conducted­ on­ the­ basis­ of­ the­ new­ European­resolution­ framework­ introduced­ in­ 2014.­ During­the­ 18-month­ procedure,­ which­ commenced­ in­December­2014,­MKB­Bank­disposed­of­its­toxic­asset­portfolio­by­applying­the­sale­of­business­and­the­asset­separation­resolution­tools,­which­together­with­the­reorganisation­measures­taken­in­parallel,­contributed­to­the­recovery­of­the­institution’s­long-term­viability.­The­ bank,­ which­ was­ thus­ set­ on­ a­ sustainable­path,­ was­ sold­ by­ the­MNB,­ acting­ in­ its­ scope­ as­resolution­authority,­in­an­open,­transparent­and­non-

discriminatory­sales­process­to­market­participants­in­the­first­half­of­2016.­Meanwhile,­the­funds­qualifying­as­State­aid­were­used­to­the­smallest­possible­degree­and­were­refunded­by­the­market­sale.­The­creditors­of­the­bank­suffered­no­loss­in­relation­to­the­resolution­proceeding,­and­the­funds­and­assets­of­the­bank’s­clients­and­business­partners­continuously­enjoyed­maximum­protection.­In­view­of­the­fact­that­the­MNB­fulfilled­the­measures­specified­in­the­resolution­action­plan,­as­a­ result­of­which­ the­ resolution­objectives­were­ met­ in­ full,­ the­ resolution­ procedure­ was­closed­on­30­June­2016.­One­of­the­most­important­fundamental­principles­of­the­resolution­framework­is­that­no­owner­or­creditor­should­incur­greater­losses­as­a­ result­of­ the­ resolution­procedure­ than­would­have­been­incurred­if­the­institution­had­been­wound­up­under­normal­insolvency­proceedings­(No­Creditors­Worse­Off­principle);­if­this­is­not­the­case,­the­owners­and­the­creditors­are­entitled­to­compensation­from­the­Resolution­Fund.­In­making­that­assessment,­after­completion­of­the­resolution­proceeding,­in­summer­2016­ the­ MNB­ appointed­ an­ independent­ valuer,­complying­with­the­relevant­professional­and­conflict­of­ interest­ criteria,­ to­prepare­ the­valuation­of­ the­difference­between­the­relevant­assumed­liquidation­procedure­and­the­completed­resolution­procedure.­In­view­of­the­complexity­of­the­task,­the­valuation­extended­on­into­2017.

The­MNB­ exercises­ the­ ownership­ rights­ over­ the­Hungarian­ Resolution­ Asset­ Management­ vehicle­(Magyar­Szanálási­vagyonkezelő­Zrt.­–­MSZvK­Zrt.).­The­subsidiaries­of­MSZvK­manage­the­mostly­toxic­asset­portfolio,­separated­from­MKB­Bank­during­the­resolution­and­their­duty­is­to­sell­those­at­the­highest­possible­price.

In­ 2016,­ the­ MNB­ participated­ in­ the­ work­ of­the­ resolution­ colleges­ set­ up­ for­ given­ groups­ of­institutions­–­led­by­the­Single­Resolution­Board,­as­the­resolution­authority­of­the­Banking­Union­–­as­the­host­resolution­authority­of­the­Hungarian­subsidiary­banks­of­several­parent­banks­with­registered­office­in­the­European­Union.­In­respect­of­the­banking­group,­belonging­to­its­competence­as­group-level­resolution­authority,­the­most­important­objective­in­2016­was­to­identify­the­critical­functions­of­the­group­and­to­elaborate­the­resolution­strategy,­which­ensures­the­maintenance­of­ these­ functions,­and­ to­have­ them­accepted­by­the­resolution­college.­The­joint­decision,­representing­the­acceptance­of­the­resolution­plan,­may­be­passed­in­the­first­quarter­of­2017.

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In­addition­to­the­work­performed­in­the­resolution­colleges,­ cooperating­ closely­ with­ EU­ resolution­authorities,­ the­ MNB­ also­ participates­ in­ the­enhancement­of­the­regulatory­environment­related­to­resolution,­primarily­in­the­various­working­groups­of­ the­European­Banking­Authority­ (EBA).­ The­EBA­guidelines­issued­during­the­year­were­duly­adopted­in­ the­ MNB’s­ internal­ regulations.­ The­ Resolution­Handbook­was­ also­ revised­ in­ line­with­ regulatory­changes,­which­was­justified­by­the­incorporation­of­the­useful­experiences­gained­during­the­resolution­of­MKB­ Bank­ in­ the­ internal­ regulations,­ and­ also­by­ the­ need­ to­ ensure­ harmony­ with­ the­ directly­applicable­EU­regulations,­which­entered­ into­force­in­2016.­ In­addition,­ together­with­ respective­peer­authorities,­the­MNB­participates­in­the­development­of­ the­ resolution­ framework­ applicable­ to­ central­counterparties­and­insurers,­which­is­expected­to­be­codified­in­the­near­future.

With­ a­ view­ to­ developing­ cooperation­ with­ the­resolution­ authorities­ of­ countries­ outside­ the­European­Union,­ in­2016­ the­MNB­ liaised­with­ the­resolution­authorities­of­46­non-EU­countries­in­seven­phases,­with­the­purpose­of­deepening­professional­cooperation­ and­ later­ concluding­ cooperation­agreements­ with­ the­ authorities­ of­ particular­importance­in­terms­of­cross-border­cooperation.

The­collective­funds­(National­Deposit­Insurance­Fund,­Resolution­Fund,­Investor­Protection­Fund,­Settlement­Fund)­ are­ important­ parts­ of­ the­ financial­ stability­safety­net.­In­2016,­the­MNB­granted­3-month­liquidity­loans­subject­to­full­compliance­with­the­prohibitions­of­monetary­financing,­to­the­Settlement­Fund­and­to­the­Investor­Protection­Fund­in­order­to­ensure­the­orderly­compensation­of­the­affected­investors,­which­were­repaid­in­full­by­the­due­date.­It­is­a­recurring­task­for­the­MNB­every­year­to­determine­the­rate­of­the­risk-based­premium­payment­to­the­fund­for­the­member­ institutions­of­ the­Resolution­Fund,­at­ the­market­level­and­for­individual­institutions.

The­ experts­ of­ the­ MNB­ made­ presentations­ on­resolution­both­at­domestic­and­foreign­conferences­and­ also­ published­ a­ number­ of­ academic­ and­professional­papers.

3.5 PAYMENT AND SECURITIES SETTLEMENT SYSTEMS

Security of domestic payments

Findings of payment inspections

In­ 2016,­ the­ MNB­ verified­ compliance­ with­ the­provisions­of­Act­LXXXv­of­2009­on­the­Pursuit­of­the­Business­of­Payment­Services­(hereinafter:­Payment­Services­Act),­MNB­Decree­No.­18/2009­(vIII.­6.)­on­executing­payments­(hereinafter:­MNB­Decree),­and­the­Regulation­of­the­European­Parliament­and­the­Council­on­interchange­fees­for­card-based­payment­transactions­(hereinafter:­MIF­regulation),­published­as­a­new­law­to­be­controlled)­at­15­credit­institutions­(2­ banks,­ and­ 13­ cooperative­ credit­ institutions).­On­the­basis­of­the­Act­on­Certain­Payment­Service­Providers­ (hereinafter:­ Payment­ Service­ Providers­Act),­it­also­inspected­the­4­voucher­issuers­operating­–­ in­ practice­ as­ well­ –­ in­ Hungary.­ In­ addition­ to­scheduled­inspections,­at­the­beginning­of­2016­the­MNB­concluded­5­inspections­carried­over­from­2015.­In­ addition­ to­prescribing­ corrective­measures,­ the­MNB­imposed­fines­amounting­to­a­total­of­HUF­51.5­million­ in­ the­case­of­3­ inspections.­ In­ three­cases,­the­measures­ prescribed­based­on­ the­ inspections­carried­out­in­2015­were­implemented­inadequately;­the­MNB­therefore­prescribed­additional­measures­and­ repeatedly­ imposed­ fines­ amounting­ to­ HUF­6.4­million­in­these­cases.­During­the­19­inspections­conducted­ in­ 2016,­ the­ infringement­ of­ statutory­provisions­ was­ identified­ in­ 94­ cases.­ 16­ of­ these­inspections­ were­ concluded­ by­ the­ application­ of­measures­(the­MNB­instructed­the­institutions­to­meet­their­obligations­by­the­deadline),­of­which­a­penalty­in­the­total­amount­of­HUF­3.2­was­imposed­on­1­credit­institution­due­to­the­severity­of­the­infringements.­Thus,­the­fines­imposed­in­2016­amounted­to­a­total­of­HUF­61.1­million,­including­fines­brought­forward­from­the­previous­year­and­follow-up­audits.­In­addition,­2­administrative­procedures­were­still­in­progress­on­31­December­2016.

The­inspections­revealed­that­credit­institutions­failed­to­comply­with­certain­rules­related­to­the­provision­of­advance­and­subsequent­information,­the­formal­and­

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substantive­requirements­of­the­master­agreement,­the­ amendment­ and­ termination­ of­ the­ master­agreement,­ the­ opening­ of­ the­ payment­ account,­the­correction­of­payment­transactions,­liability­and­the­ bearing­ of­ damages­ and­ queuing.4­ Moreover,­the­MNB­also­ identified­shortcomings­ in­respect­of­certain­ rules­ pertaining­ to­ the­ receipt­ of­ payment­orders,­the­rejection­of­payment­orders­issued­by­the­other­payment­service­providers­or­by­the­client,­the­queuing­or­partial­execution­of­payment­orders,­the­administrative­ payment­ order­ and­ court­ payment­order,­the­execution­of­payment­transactions­between­payment­ service­ providers­ to­ the­ credit­ of­ the­payment­account,­the­value­date,­making­the­amount­of­the­payment­transaction­available­to­the­beneficiary­and­the­execution­of­direct­debits.5­The­most­frequent­infringements­involved­violations­of­the­requirements­of­the­Payment­Services­Act­in­respect­of­the­supply­of­advance­and­subsequent­information,­and­of­the­MNB­Decree­in­respect­of­making­the­amount­of­the­payment­transaction­available­to­the­beneficiary.

During­the­inspection­of­institutions­engaged­in­the­issuance­ of­ negotiable­ vouchers,­ the­ infringement­of­ the­ rules­ pertaining­ to­ the­management­ of­ the­consideration­for­the­negotiable­vouchers,­complaint­management­ and­ the­ registration­ of­ the­ contact­person­ in­ charge­ of­ consumer­ protection­matters6 and­a­statutory­shortcoming­related­to­data­reporting­regulation7­were­identified.

By­ reinforcing­ the­ compliance­of­ credit­ institutions­and­other­payment­service­providers­with­regulations,­payment­ inspections­contribute­ to­ the­ reliable­and­compliant­ operation­ of­ the­ financial­ intermediary­system,­the­predictability­of­payment­processes­for­customers,­and­hence,­the­efficient­delivery­of­services­to­customers.

Statements on payments

In­ 2016,­ the­ central­ bank­ issued­ 29­ resolutions­and­ professional­ opinions­ on­ payments­ based­ on­administrative­and­customer­enquiries.­In­two­cases,­the­MNB­provided­an­opinion­focusing­on­payment­issues­in­relation­to­European­Union­legislation,­and­in­

27­cases­it­issued­statements­or­professional­opinions­based­on­household,­institutional,­administrative­or­other­requests.

Payment and settlement systems

Introduction of the instant payment service in Hungary

In­the­first­half­of­2016,­the­MNB­launched­a­project­to­implement­the­introduction­of­the­instant­payment­services­in­Hungary,­as­a­first­step­of­which­it­started­comprehensive­consultations­with­the­affected­market­participants.­ The­ stakeholders­ of­ the­project­ could­express­their­professional­opinion­on­the­concept­put­up­for­professional­debate­at­industry­forums,­bilateral­discussions­and­in­the­form­of­written­proposals.­As­the­first­step­of­ the­consultation­process,­ the­MNB­organised­professional­ forums­ in­May­2016­ for­ the­banking­ sector,­ the­ technical­ service­ sector,­ the­public­actors,­and­for­organisations­representing­the­interests­of­enterprises­and­consumers.­The­forums­were­ followed­ by­ bilateral­ meetings­ in­ June­ with­a­narrower­ circle­of­market­participants,­while­ the­option­to­submit­written­comments­was­open­to­all­organisations­in­the­sector.­After­the­processing­of­the­professional­opinions­received,­the­MNB­elaborated­the­final­development­concept.

The­Financial­Stability­Council­of­the­MNB­approved­the­ rules­ applicable­ to­ instant­ payments­ on­ 13­December­ 2016.­ The­ rules­ contain­ fundamental­requirements,­ the­ fulfilment­ of­ which­ is­ the­precondition­for­rendering­instant­payment­services­in­ Hungary,­ and­ they­ define­ the­ transactions­ that­must­ be­ executed­ in­ all­ cases­ in­ accordance­ with­the­rules­of­instant­execution­after­the­launch­of­the­system.­ The­ development­ of­ the­ instant­ payment­system­ permits­ the­ application­ of­ modern­ IT­ and­communication­ solutions­ in­ payments,­ thereby­supporting­ innovation­ and­ fostering­ competition­between­actors­in­the­payments­market.­In­the­new­system,­it­will­be­possible­to­initiate­payments­up­to­the­amount­HUF­10­million,­ 24­hours­on­each­day­of­ the­ year,­ even­ by­merely­ specifying­ the­mobile­number­of­the­beneficiary,­and­the­funds­will­reach­the­

4­­Sections­3­(2),­4­(1)­and­(2),­8­(1)­and­(2),­10­(1),­13,­14­(1),­15­(1),­17.(4)­and­(6),­18­(1)­and­(3),­2­(1)­and­(2),­26(1)­and­(2),­43-46,­49,­50­(3),­61­(1)­and­(2)­of­the­Payment­Services­Act.

5­­Sections­5­(1),­(2),­(5)­and­(6),­7­(3),­(4)­and­(7),­8­(2),­9­(3),­17,­20,­21,­21/B,­31(3a),­37/A­(8)­of­the­MNB­Decree.6­­Sections­52(4)­a),­(5)­and­(6)­a),­70­(9),­70­(15)­of­the­Payment­Service­Provider­Act.7­­MNB­Decree­48/2014­(XI.­27)­on­the­Data­supply­obligations­to­be­fulfilled­for­enabling­the­Magyar­Nemzeti­Bank­to­perform­its­basic­duties,­rules­related­to­the­data­reporting­entitled­“Report­on­the­ issued­negotiable­vouchers”­(MNB­identification­code:­P54)­ (filling­ instructions­ in­Section­II­of­Annex­2).

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ANNUAL REPORT • 2016 43

8­­Regulation­260/2012/EU­establishing­technical­and­business­requirements­for­credit­transfers­and­direct­debits­in­euro­and­amending­Regulation­924/2009/EC.

9­­Regulatory­Technical­Standard­on­Strong­Customer­Authentication­and­Common­and­Secure­Communication.

addressee­in­a­matter­of­seconds.­Building­on­the­new­system,­ it­will­be­possible­ to­create­supplementary­services,­such­as­e.g.­mobile­payment­solutions.­As­a­result­of­this,­new­types­of­service­providers­may­also­enter­ the­payments­market­and­compete­with­traditional­ participants,­ providing­ customers­ with­a­much­wider­ range­of­ convenient,­ fast­ and­ cheap­electronic­ payment­ services­ than­ at­ present.­ The­MNB­will­publish­the­details­related­to­the­operation­and­ development­ of­ the­ infrastructure­ early­ 2017.­Thereafter,­ a­ national­ infrastructure­modernisation­project­will­commence­with­the­ lead­of­the­central­bank­to­ensure­that­both­the­central­infrastructure­and­the­systems­of­the­payment­service­providers­become­capable­of­processing­the­transactions­in­accordance­with­the­rules­from­the­second­half­of­2019.

The­ MNB­ regards­ the­ introduction­ of­ the­ instant­payment­ service­ as­ a­ development­ project­ that­serves­the­long-term­competitiveness­of­the­payment­industry.­ The­ success­ of­ this­ project­ will­ provide­customers­ with­ services­ of­ higher­ quality­ than­ at­present.­The­project,­which­commenced­in­the­first­half­of­2016,­will­generate­changes­across­the­sector­in­the­coming­years,­which­will­increase­the­efficiency­of­the­sector.

Intensive preparation for the changes accompanying the SEPA regulation’s entry into force

In­ 2016,­ domestic­ payment­ service­ providers­continued­ to­ be­prepared­ for­ compliance­with­ the­requirements­ defined­ in­ the­ EU­ regulation8­ (final­date­regulation)­applicable­to­EUR­credit­transfers­and­direct­debits.­In­the­European­Union,­the­SEPA­credit­transfer­ (SCT)­and­ the­SEPA­direct­debit­ (SDD)­was­introduced­in­2008­and­2009,­respectively.­Pursuant­to­the­regulation,­the­changeover­to­the­single­payment­scheme­had­to­be­completed­by­August­2014­in­the­euro­area­countries,­while­the­deadline­for­countries­outside­the­euro­area­was­October­2016.

In­order­to­monitor­the­preparation­process,­the­MNB­and­ the­ Hungarian­ Banking­ Association­ conducted­a­ questionnaire-based­ survey­ on­ the­ changeover­to­the­single­payment­scheme­among­the­payment­service­providers­in­the­first­half­of­2016.­As­a­result­of­ the­ survey,­ it­was­ established­ that­ the­majority­

of­ the­ service­ providers­ transacting­ high­ payment­turnover­ had­ already­ started­ preparations­ for­ the­single­payment­scheme­earlier,­while­the­rest­of­the­payment­ service­ providers­ started­ this­ in­ the­ first­or­second­quarter­of­2016.­A­rule­of­the­regulation­representing­one­of­the­greatest­challenges­is­that­the­payment­service­provider­must­ensure­in­the­case­of­the­customers,­not­qualifying­as­consumers­or­micro­enterprises­(companies,­public­authorities),­initiating­or­receiving­EUR­credit­transfer­(direct­debit)­orders­in­batches­that­after­the­deadline­they­use­only­the­messages­ specified­ in­ SEPA­ format.­ In­ the­ case­ of­Hungary,­the­changeover­was­duly­implemented­by­the­deadline­of­31­October­2016.

Elaboration of the security requirements related to electronic payments

The­experts­of­the­MNB’s­functional­area­performing­the­ oversight­ of­ the­ payment­ systems­participated­in­the­twentieth­plenary­meeting­of­the­SecuRe­Pay­forum,­dealing­with­the­security­of­retail­payments,­jointly­controlled­by­the­European­Central­Bank­and­the­European­Banking­Authority­(EBA),­the­topic­of­which­–­pursuant­to­the­payment­services­directive­revised­ in­ 2015­ (PSD2)­ –­was­ the­ agreement­ on­ a­draft­standard9­ensuring­the­development­of­strong­client­authentication­and­communication­related­to­electronic­payments.­The­MNB’s­colleagues­engaged­in­ oversight­ –­ in­ cooperation­ with­ the­ Banking­Association­–­made­a­professional­ presentation­on­the­ draft­ published­ by­ EBA­ on­ 12­ August­ 2016­ to­the­representatives­of­the­commercial­banks,­where­they­described­the­requirements­of­the­regulation­in­relation­to­the­authorisation­provided­by­the­relevant­PSD2.

Experiences in 2016 with regard to the forint’s accession to the CLS system

Since­16­November­2015,­the­Hungarian­forint­is­also­a­ settlement­ currency­ in­ the­ international­ foreign­currency­settlement­infrastructure­operated­by­CLS.­Through­the­accession,­the­MNB­acquired­membership­in­ the­CLS­ International­Oversight­Committee,­ as­a­result­of­which­the­central­bank’s­duties­performed­within­ the­ framework­ of­ international­ cooperative­oversight­expanded.­As­part­of­this,­at­the­meetings­of­the­committee­held­in­2016­the­MNB’s­representatives­

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reported,­among­others,­on­the­experiences­of­ the­forint’s­accession­to­date.

In­2016,­the­system­operated­smoothly.­Since­the­start­of­the­service­the­forint­turnover­settled­in­CLS­has­been­continuously­increasing;­in­2016­the­volume­of­the­related­netted­RTGS­turnover­multiplied­compared­to­the­initial­value.­The­growth­was­also­attributable­to­ the­ fact­ that­ in­ the­period­after­accession­ there­was­ a­major­ increase­ in­ the­ number­ of­ direct­ CLS­members­settling­their­foreign­exchange­transaction­against­forint­ in­this­system,­and­several­Hungarian­credit­institutions­also­became­indirect­members­in­the­ system.­ In­ accordance­ with­ the­ central­ bank’s­objectives,­an­increasing­volume­of­domestic­banks’­foreign­currency­turnover­is­transferred­to­CLS,­which­greatly­increases­the­stability­of­the­domestic­financial­system­by­eliminating­the­settlement­risk.­Based­on­the­experiences­gained­so­far­ it­may­be­stated­that­the­ infrastructure­ cooperation­ developed­ between­the­respective­parties­fully­complies­with­the­security­and­operation­requirements,­and­it­ is­ready­for­the­integration­of­additional­institutions.­Accordingly,­the­central­bank­maintains­its­expectation­that­as­many­as­possible­domestic­market­participants­should­develop­direct­ or­ indirect­ connection­ to­ the­ system,­ and­ it­supports­the­initiatives­related­to­this­in­all­cases.

New transactions in the intraday clearing system of the Interbank Clearing System

Following­the­introduction­of­intraday­clearing­in­2012,­paper-based­credit­transfer­transactions,­collection-type­ operations­ and­ the­ credit­ transfers­ of­ the­Hungarian­State­Treasury­remained­in­the­overnight­settlement­ cycle.­ As­ a­ result­ of­ the­ development­performed­ last­year,­ from­1­ January­2016­all­ forint­credit­ transfers­ requiring­ interbank­ clearing,­which­are­submitted­to­the­credit­institutions­on­paper,­are­processed­ in­the­ intraday­settlement­system­of­the­Interbank­Clearing­System.­As­a­result­of­this,­apart­from­Treasury­ credit­ transfers,­ only­ collection-type­transactions­ are­ settled­ in­ the­ overnight­ system.­However,­in­order­to­support­the­efficiency­of­public­payments,­ the­ MNB­ initiated­ that­ the­ Treasury’s­individual­and­direct­credits­should­be­also­settled­in­the­fast­and­modern­intraday­clearing­system,­similarly­to­the­credit­transfers­executed­in­the­credit­institution­sector.­The­diversion­of­the­Treasury’s­direct­credits­to­the­intraday­clearing­requires­substantial­preparation,­as­due­to­the­mass­payments,­transactions­with­an­

extremely­ high­ number­ of­ items­ must­ be­ settled­within­a­short­time­on­the­given­days.­The­MNB,­GIRO­and­the­credit­institutions­have­already­prepared­for­the­changeover;­the­go-live­planned­for­the­first­half­of­2017­depends­on­the­preparedness­of­the­Treasury.

Annual review of the EMIR licence of KELER CCP completed

KELER­ CCP,­ as­ an­ institution­ performing­ central­counterparty­activity­within­the­European­Union,­had­to­go­through­a­re-licensing­process­in­2014­to­ensure­compliance­with­EMIR,10­which­was­performed­by­a­licensing­college­comprised­of­international­members.­Based­on­ the­EMIR­ requirements,­KELER­CCP­must­continuously­comply­with­the­requirements,­and­this­compliance­is­reviewed­by­the­licensing­college­at­least­once­a­year­in­person;­additionally,­it­must­regularly­notify­the­college­on­all­major­operational­changes­that­affect­the­licensed­activity.­The­2016­review­was­performed­ in­ September,­ as­ a­ result­ of­ which­ the­college­established­that­the­operation­of­KELER­CCP­continues­ to­ comply­ with­ the­ EMIR­ requirements.­In­addition­to­the­MNB­and­the­European­Securities­Market­ Authority­ (ESMA),­ the­ authorities­ of­ those­countries­also­participate­in­the­college­of­KELER­CCP,­which­have­delegates­ at­ KELER­CCP,­ thus­ the­ Irish,­Belgian­and­British­financial­supervisory­authorities­were­also­represented­in­the­college.

Other information

Survey of the frauds related to direct debit and credit transfers

At­ the­ initiative­ of­ the­ European­ Central­ Bank,­ in­September­2016­a­ consultation­was­ launched­with­the­MNB’s­ cooperation­ to­ survey­ the­ features­ and­underlying­ motives­ of­ the­ fraud­ cases­ related­ to­direct­debits­and­credit­transfers.­The­information­was­collected­in­anonymous­form­on­questionnaires,­which­were­processed­by­ECB.

Range of data published in the payment table set expanded further

Taking­ account­ of­ users’­ requirements,­ from­ early­2016­the­payment­table­set­was­expanded­to­include­data­ presenting­payment­ card­ turnover.­ As­ part­ of­this,­the­value­of­payment­card­turnover­is­published­in­a­breakdown­by­card­ types.­ In­addition,­data­on­

10­­European­Union­regulation­on­the­OTC­derivative­transactions,­central­counterparties­and­trading­data­warehouses.

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debit­ and­ credit­ card­ turnover­ are­ also­ available­retrospectively­to­the­first­half­of­2010.

Publications related to payments and payment systems

In­ June­ 2016,­ the­ MNB’s­ publication­ related­ to­payment­systems,­entitled­Payment Systems Report 2016­was­published­for­the­fifth­time.­In­this­regular­publication,­ the­ MNB­ prepared­ a­ comprehensive­expert­ analysis­ on­ the­ trends­ observed­ in­ 2015­ in­the­ domestic­ payments­ and­ the­ operation­ of­ the­supervised­ payment­ and­ securities­ settlement­systems,­ and­ a­ forward-looking­ analysis­ of­ current­events­ in­ 2016.­ The­ report­ is­ available­ at:­ https://www.mnb.hu/en/publications/reports/payment-systems-report/payment-systems-report-2016.

In­the­June­issue­of­the­Financial­and­Economic­Review,­a­ paper­ by­ Tamás­ Ilyés­ and­ Lóránt­ varga­ entitled­Macroeconomic effects of the increase of electronic retail payments – A general equilibrium approach using Hungarian data­was­published.­In­the­paper­they­focus­on­the­potential­effects­on­the­performance­of­the­Hungarian­economy­if­components­of­various­sizes­of­the­retail­and­other­household­cash­payments­were­substituted­with­payment­by­debit­card.­The­paper­is­available­at­http://english.hitelintezetiszemle.hu/.

On­ 29­ August,­ the­ MNB­ published­ the­ volume­summarising­the­experiences­gained­during­the­two­years­ since­ the­ introduction­ of­ the­ Self-financing­Programme.­ The­ analysis­ describes­ in­ detail­ the­ways­ in­which­ participants­ of­ the­ payment­ system­adjusted­to­the­specific­measures­of­the­Self-Financing­Programme­and­illustrates­the­impact­of­the­series­of­measures­on­selected­liquidity­indicators.

In­ the­MNB­Occasional­Papers­ series,­ the­paper­of­Gergely­Balla­and­Tamás­Ilyés­entitled Liquidity needs and liquidity costs of an instant payment systems­was­published­on­30­November­2016,­which­provides­a­background­analysis­ for­ the­ introduction­of­ instant­payment­services­in­Hungary.­In­the­paper,­the­authors­presented­and­quantified­ three­ cost­ elements­ that­may­occur­in­the­Hungarian­instant­payment­system­in­relation­to­liquidity­management.­In­the­analysis­of­the­cost­types,­it­was­revealed­that­the­liquidity­needs­of­the­instant­payment­system­and­the­cost­of­providing­this­liquidity­is­manageable­at­the­level­of­the­entire­payment­system,­i.e.­it­does­not­represent­an­obstacle­that­would­substantially­hinder­the­introduction­of­the­instant­payment­services.­The­authors­also­presented­

the­analysis­at­the­international­conference­entitled­Economics of Payments VIII,­organised­by­Deutsche­Bundesbank­ on­ 9­ November­ 2016.­ The­ analysis­ is­available­ at­ https://www.mnb.hu/en/publications/studies-publications-statistics/occasional-papers.

3.6 FOREIGN EXCHANGE RESERVES MANAGEMENT

Purposes of holding reserves

Similarly­to­other­central­banks,­one­of­the­key­tasks­of­the­MNB­–­as­specified­in­the­Act­on­MNB­–­is­to­manage­the­foreign­exchange­reserves­of­the­country.­The­MNB­ holds­ foreign­ exchange­ reserves­ for­ the­purpose­of­fulfilling­several­functions:

–­­to­ensure­the­level­of­reserves­expected­by­market­participants­(‘international­collateral’),

–­­to­support­the­monetary­and­exchange­rate­policy­(providing­intervention­capacity),

–­­to­provide­foreign­currency­liquidity­for­the­banking­system,

–­­to­ satisfy­ the­ state’s­ transaction-related­ foreign­currency­requirement.

Market­participants­continue­to­pay­special­attention­to­developments­ in­ foreign­exchange­reserves.­The­MNB­ also­ regularly­ reviews­ the­ desirable­ level­ of­reserves­and,­if­necessary,­initiates­measures­–­within­the­permitted­ limits­–­ to­reach­the­adequate­ level.­In­2016,­the­foreign­exchange­reserves­exceeded­the­secure­ level,­ expected­ by­ the­ investors­ and­ other­market­participants,­throughout­the­year.

In­ terms­ of­ transaction­ goals,­ servicing­ the­management­ of­ government­ debt­ continued­ to­be­ the­ most­ important­ objective­ last­ year,­ which­was­ greatly­ influenced­by­ the­MNB’s­ Self-financing­Programme.­The­debt­management­agency­supported­the­policy­of­rolling­over­the­expiring­foreign­currency­liability­essentially­using­ the­ forint­by­higher­ share­of­ forint­ denominated­ issuance,­which­was­mostly­facilitated­ by­ the­ banks’­ excess­ demand­ and­ the­government­ securities­ purchases­ of­ households.­Through­the­negative­net­foreign­currency­issuance,­the­Government­Debt­Management­Agency­ repaid­the­ expiring­ foreign­ currency­ debt­ by­ the­ foreign­currency­ purchased­ from­ the­ central­ bank­ to­ the­debit­of­its­increased­forint­deposit.­In­addition,­the­

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continuous­provision­of­budgetary­ institutions­with­foreign­ currency­ should­ be­ mentioned­ here.­ The­transfers­ received­ from­ the­ European­ Union­ also­flow­through­the­MNB;­these­have­been­and­will­be­substantial­sources­of­foreign­exchange­reserves.­The­aforementioned­ transaction­goals­were­once­ again­satisfied­smoothly­in­2016.

The­MNB­still­does­not­hold­foreign­exchange­reserves­purely­for­asset­accumulation­purposes.­On­the­other­hand,­in­the­course­of­managing­the­required­volume­of­foreign­reserves­it­makes­efforts­to­enforce­yield­considerations­at­all­times,­i.e.­as­a­responsible­asset­manager­to­retain­and,­if­possible,­even­increase­the­value­thereof.

Reserve size

The­ level­ of­ Hungary’s­ foreign­ exchange­ reserves­declined­by­EUR­5.94­billion­ in­2016,­amounting­to­EUR­24.4­billion­at­the­end­of­the­year.

The­Government­Debt­Management­Agency’s­items­serving­the­repayment­of­debt,­particularly­the­net­foreign­currency­financing­of­the­government­and­the­net­foreign­currency­interest­expenditures,­as­well­as­the­foreign­currency­expenses­of­the­Hungarian­State­Treasury,­ reduced­ the­ foreign­ exchange­ reserves­by­roughly­EUR­6.6­billion­ in­total.­The­change­was­primarily­ the­ combined­ result­ of­ bond­ maturities­in­ the­nominal­values­of­GBP­500­million,­CHF­200­million­and­EUR­1­billion,­the­repayment­of­the­last­instalment­of­ the­ foreign­currency­ loan­ taken­ from­the­European­Commission,­cash­movements­related­to­the­retail­foreign­currency­bond­(P€MÁK)­and­other­items.­The­cash­movements­related­to­the­conversion­of­the­households’­foreign­currency­loans­into­HUF,­

to­ the­ foreign­ currency­pillar­of­ the­ third­phase­of­the­FGS,­and­to­the­foreign­exchange­swaps­expiring­under­Pillar­3­of­the­first­phase­of­the­FGS,­reduced­the­reserves­by­almost­EUR­4.5­billion.­The­inflow­of­EU­transfers,­in­the­amount­of­roughly­EUR­3.4­billion­in­2016,­were­the­primary­items­that­pointed­toward­the­increase­in­foreign­exchange­reserves­against­the­reserve-reducing­items;­however,­this­has­offset­the­fall­ in­ the­ reserve­ holdings­ only­ partially.­ In­ April,­Hungary­ –­ as­ the­ first­ among­ the­ countries­ in­ the­region­–­issued­a­foreign­currency­bond­denominated­in­ renminbi­ in­ the­ Chinese­ offshore­market­with­ a­value­of­CNy­1­billion.­The­maturity­of­1-week­liquidity­providing­swap­transaction­at­ the­end­of­2015­had­a­reserve-increasing­effect­of­approximately­EUR­0.5­billion,­while­foreign­currency­swap­tenders­providing­forint­ liquidity,­announced­in­September­and­called­for­as­of­mid-October,­had­a­reserve-increasing­effect­amounting­to­some­EUR­1.3­billion.­The­profit­realised­on­the­reserves­in­the­reporting­period­amounted­to­EUR­28­million.

Financial performance and risks of foreign exchange reserves

In­fulfilling­its­core­tasks­as­stipulated­in­the­Act,­i.e.­managing­ the­ country’s­ foreign­exchange­ reserves,­the­MNB­ inevitably­ faces­ financial­ risks.­ The­ basic­principles­are­that­the­degree­of­the­assumed­risks­should­ be­ aligned­ with­ the­ objectives­ of­ the­ core­activity,­ the­size­of­ the­ risks­should­be­known,­and­risk­ assumption­ should­ be­ conscious­ and­ limited,­in­ accordance­ with­ the­ institution’s­ risk-taking­capacity.­In­the­course­of­foreign­exchange­reserves­management,­ the­ threefold­ objective­ of­ liquidity,­security­ and­ yield­must­ be­ satisfied,­meaning­ that­the­MNB­tries­to­achieve­the­highest­yield­level­while­continuously­keeping­the­risks­at­the­pre-defined­low­level.

Similarly­to­other­central­bank­duties,­the­Monetary­Council­is­also­the­supreme­decision-making­body­in­respect­of­ foreign­exchange­reserves­management:­it­ defines­ the­ objectives­ and­ requirements­ related­to­ the­ foreign­exchange­reserves,­ such­as­ the­ level­and­liquidity­of­the­reserves,­decides­on­the­currency­used­ for­ optimisation,­ the­ risk­ strategy­ and­ the­most­ important­ numerical­ strategic­ parameters­ of­reserve­ investment.­ The­operative­decision-making­powers­ are­ exercised­ and­ the­ foreign­ exchange­reserve­management­strategy­is­implemented­by­the­Executive­Board,­within­the­framework­stipulated­by­the­Monetary­Council.­The­Executive­Board­approves­

Chart 8Developments in the size of foreign exchange reserves

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the­limit­system­serving­as­a­framework­for­risk­taking:­the­ permitted­ maximum­ deviation­ of­ the­ reserve­portfolios­ from­ the­ benchmarks,­ the­ counterparty­limits­ and­ the­ range­ of­ investment­ instruments­permitted­in­the­field­of­reserve­management.

The­ two­ main­ pillars­ of­ the­ reserve­ management­are­ the­ benchmark­ system­ and­ the­ limit­ system.­Independent­ performance­ measurement­ is­ an­important­element­of­ the­ risk-taking­policy.­With­a­view­ to­ ensuring­ the­measurement­ of­ the­ success­of­portfolio­management,­the­performance­of­each­reserve­portfolio­is­compared­with­the­performance­of­ a­ reference­ (benchmark)­ portfolio.­ Benchmark­portfolios­show­what­yield­would­have­been­produced­by­ a­ passively­ managed­ portfolio­ that­ represents­a­ wide­ market­ segment­ if­ investment­ parameters­had­ been­ the­ same.­ The­ performance­ of­ foreign­exchange­reserves­management­activity­is­presented­in­ comparison­ to­ these­ benchmark­ portfolios.­ The­benchmarks­reflecting­the­risk-return­preference­of­the­MNB­and­serving­the­performance­measurement­of­the­portfolios­are­maintained­by­the­risk­management­unit,­independently­of­the­business­area.

The­most­important­risk­categories­related­to­foreign­exchange­ reserves­ management­ include­ market­risk,­ liquidity­ risk,­ credit­ risk,­ settlement­ risk­ and­counterparty­ risk.­ The­ MNB­ controls­ the­ possible­degree­of­financial­risks­related­to­foreign­exchange­reserves­ management­ using­ limits.­ In­ accordance­with­the­conservative­reserve­portfolio­management­characteristic­ of­ central­ banks,­ the­MNB­ applies­ a­strict­limit­system,­which­considers­market­and­other­indicators,­ in­addition­to­the­expected­high­level­of­credit­ratings.

In­ the­ course­ of­ foreign­ exchange­ reserves­management,­ the­ MNB­ applies­ a­ variety­ of­ risk-minimising­ techniques­ to­ensure­ that­ the­assumed­risks­comply­with­the­MNB’s­risk­tolerance.­In­the­case­of­derivative­instruments,­the­MNB­concluded­ISDA­(International­Swaps­and­Derivatives­Association)­and­related­CSA­(Credit­Support­Annex)­agreements­with­its­counterparties,­which­keep­the­credit­risk­exposure­potentially­arising­in­respect­of­the­counterparty­at­a­ low­ level­ through­ the­ margin­ arrangement.­ In­the­ case­of­ the­ repo­ transactions­ regulated­by­ the­GMRAs­ (Global­ Master­ Repurchase­ Agreement),­the­prescribed­margins­also­helps­ limit­risks.­ In­the­case­ of­ foreign­ exchange­market­ transactions,­ the­MNB­ settles­ its­ transactions,­ in­ accordance­ with­the­ international­best­practices,­ in­ the­CLS­ system,­

thereby­minimising­its­settlement­risks.­In­the­course­of­reserve­management,­the­MNB­also­considers­the­foreign­currency­liquidity­requirement­of­the­monetary­policy­instruments.

In­2016,­the­MNB­managed­euro,­US­dollar,­Japanese­yen,­British­pound­and­Chinese­renminbi­portfolios.­The­MNB­assumes­ exchange­ rate­ exposure­ only­ in­euro:­ it­ hedges­ the­other­ currency/euro­ cross­ rate­risks­by­derivative­instruments.­The­holding­of­other­exchange­rate-hedged­foreign­currency­instruments­is­justified­by­the­higher­diversification­and,­in­the­case­of­the­US­dollar,­the­available­higher­liquidity.­Altogether,­the­MNB­actively­manages­seven­portfolios,­in­euro,­US­dollar,­British­pound­and­renminbi.­Based­on­the­MNB’s­ former­ decision,­ it­ allocates­ a­ small­ part­ of­the­ foreign­ exchange­ reserve­portfolios­ to­ Chinese­government­securities­investments,­the­first­step­of­which­was­carried­out­indirectly,­in­cooperation­with­BIS­ (Bank­ for­ International­ Settlements,­ Basel).­ By­mid-2016,­ the­ building­ of­ the­ internally­managed,­Chinese­renminbi­exposure­was­also­completed.­The­MNB­manages­the­Japanese­yen­portfolio,­containing­government­ securities­ only,­ as­ an­ index-linked­portfolio­strictly­following­the­benchmark.­From­the­end­of­2012­–­in­the­form­of­a­mandate­given­to­an­external­asset­manager­and­custodian­–­US­agency­mortgage­backed­securities­ (MBS)­also­ form­a­part­of­the­MNB’s­investment­strategy.­In­2016,­a­second­MBS­portfolio­was­also­built,­relying­on­external­asset­management.­The­strategic­average­duration­(target­duration)­of­the­reserve­portfolios­was­around­1­year.­The­MNB’s­gold­reserves­amount­to­98,857­ounces,­worth­EUR­108­million­at­ the­end­of­ the­ reporting­period.

The­EUR­risk-free­portfolio­represents­the­backbone­of­ the­ foreign­ exchange­ reserves­ and­ may­ only­include­ highly-rated­ government­ securities,­ state-guaranteed­securities­and­the­issues­of­(supranational)­international­institutions.­Its­benchmark­includes­100­per­ cent­ euro­ area­ government­ securities­ of­ AAA-AA­rating.­In­addition­to­the­foregoing,­highly-rated­corporate­and­bank­issues,­and­covered­securities­may­be­purchased­for­the­EUR­investment­portfolio;­this­portfolio­typically­includes­government­securities­only­for­the­purpose­of­adjusting­the­maturity­structure.

The­benchmark­of­both­the­euro­and­the­US­dollar­investment­portfolio­contains­government­securities,­corporate­ and­ bank­ bonds,­ as­ well­ as­ money­ and­capital­market­instruments­of­high­credit­rating­with­a­maximum­residual­maturity­of­7­years.­The­structure­

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of­ the­ benchmark­ portfolios,­ the­ credit­ rating­ and­residual­maturity­of­the­assets­reflect­a­conservative­willingness­to­take­risks,­typically­characterising­central­banks.

In­the­decreasing­yield­environment­resulting­from­the­global­crisis­that­commenced­in­2008,­most­central­banks­ realised­ a­ profit­ on­ their­ foreign­ exchange­reserves­as­a­ result­of­ the­ typically­ rising­prices­of­the­bonds­managed­in­the­central­banks’­portfolios.­With­the­government­and­other­bonds­of­mostly­high­credit­rating,­managed­in­its­portfolios,­the­MNB­also­benefited­from­this­process­through­the­revaluation­of­ the­positions­as­ a­ result­ of­ the­decreasing­ yield­environment.­ In­ view­ of­ the­ substantially­ negative­yield­ environment­ that­ sank­ close­ to­ zero­ in­ the­euro­area,­the­possibility­of­further­price­increase­is­limited,­which­explains­the­more­modest­performance­compared­to­previous­years.

Similarly­ to­ the­ previous­ year,­ the­ ECB’s­ and­ Fed’s­opposite­ monetary­ policy­ measures­ continued­ to­be­ determinant­ factors.­ In­ the­ USA,­ an­ interest­rate­ increasing­ cycle­ commenced­ after­ the­ end­of­ quantitative­ easing­ and­ the­ asset­ purchase­programme.­ It­was­ anticipated­ that­ the­ Fed­would­continue­ its­ tightening­ cycle­ started­ in­ December­2015,­however,­as­a­result­of­the­referendum­held­in­Great-Britain­on­leaving­the­European­Union­(Brexit),­the­deceleration­in­global­growth,­and­other­domestic­macroeconomic­data,­the­tightening­did­not­continue­until­December­2016,­when­Fed­raised­the­ interest­by­25­basis­points.­By­contrast,­in­Europe­easing­the­monetary­stance­remained­in­focus­in­2016.­During­the­ year,­ the­ ECB­modified­ its­ securities­ purchase­programme­announced­earlier­on­several­occasions.­In­addition­to­the­extension­of­the­programme,­it­also­decided­to­reduce­all­three­elements­of­the­interest­rate­corridor.­At­the­end­of­the­year,­the­Governing­Council­of­the­ECB­announced­the­extension­of­the­asset­purchase­programme­until­the­end­of­2017.­In­the­period­under­review,­Brexit­was­one­of­the­most­important­economic­events,­which­also­contributed­to­the­global­postponement­of­the­interest­rate­increase­expectations­and­the­high­level­of­demands­for­safe­instruments.­As­regards­the­performance­of­reserves,­the­reporting­period­was­determined­by­continuously­declining­EUR­yields,­which­were­in­the­negative­range­in­ a­major­ part­ of­ the­ yield­ curve.­USD­ yields­ also­

fell­in­the­first­half­of­2016,­followed­by­a­rise­in­the­second­half-year,­and­thus­by­the­end­of­the­year­they­exceeded­the­level­recorded­a­year­ago­by­10-25­basis­points­in­total.

Despite­the­low­yield­environment,­in­2016­the­MNB­achieved­close­to­zero,­but­positive­performance­on­the­foreign­exchange­reserves­both­in­absolute­terms­and­ compared­ to­ the­ respective­ benchmarks.­ The­liquidity­allocated­for­the­attainment­of­the­monetary­policy­objectives­was­ continuously­available­during­the­year­and­no­credit­risk­event­occurred­that­would­have­had­an­adverse­effect­on­the­MNB’s­reputation.­The­annualised­yield­realised­on­the­gold­and­foreign­exchange­reserves­–­weighted­by­the­market­value­and­adjusted­for­the­financing­cost­–­was­0.01­per­cent,­outperforming­the­benchmark­by­9­basis­points.

In­ respect­ of­ the­ future­ performance­ of­ foreign­exchange­reserves,­ it­still­represents­a­risk­that­the­performance­of­the­reserve­portfolios­may­become­negative­if­the­yields­of­the­highly-rated­assets­move­from­ an­ extremely­ low­ level­ as­ result­ of­ a­ yield­increase,­which­deteriorates­reserve­performance­as­a­result­of­the­revaluation­loss­arising­from­depreciation­of­the­existing­bonds­over­the­short­run.­On­the­other­hand,­due­to­the­short­duration­of­the­reserves,­the­medium-term­impact­of­this­is­already­positive.

In­view­of­the­substantially­changed­financial­market­environment­ and­ the­ negative­ expected­ return­realisable­on­the­foreign­exchange­reserves,­the­MNB­responded­ by­ the­ diversification­ of­ its­ exposures,­and­in­order­to­maintain­the­capital­–­in­line­with­the­conservative­central­bank­mandate­–­by­the­amendment­of­the­portfolio­structure­and­the­parallel­strengthening­of­ risk­ controls.­ At­ the­ end­ of­ December­ 2016,­ the­degree­of­the­MNB’s­interest­rate­risk,­according­to­the­vaR­terminology­with­a­95­per­cent­confidence­level­and­1-month­horizon,­was­EUR­20­million,­with­an­Expected­Shortfall­(ES)­of­EUR­25­million.­This­means­that­under­the­portfolio­ composition­and­market­ circumstances­at­ the­ end­ of­ December,­ the­ chance­ of­ the­ MNB’s­suffering­a­loss­higher­than­EUR­20­million­compared­to­the­expected­return­within­one­month­is­5­per­cent,­while­the­expected­value­of­the­losses­exceeding­the­vaR­value­is­EUR­25­million.­The­ES­value­of­EUR­25­million­corresponds­to­1­thousandth­of­the­reserve­portfolio­value.

REvIEW­OF­THE­MNB’S­PERFORMANCE­IN­2016

ANNUAL REPORT • 2016 49

3.7 CASH LOGISTICS ACTIVITY

Currency in circulation

On­31­December­2016,­ the­ total­ value­of­ currency­in­ circulation­ amounted­ to­ HUF­ 4,580­ billion,­representing­ a­ 6­ per­ cent­ year-on-year­ increase­of­HUF­275.7­billion.

Cash­holdings­increased­strongly­in­2016­as­well,­but­the­extremely­intensive,­double-digit­expansion­seen­since­2012­decelerated.­As­a­result­of­the­growth,­the­GDP-proportionate­value­of­cash­holdings­at­the­end­of­2016­reached­13­per­cent,­ representing­a­minor­increase­ compared­ to­ the­ value­ of­ 12.6­ per­ cent­registered­at­the­end­of­2015.

The­ decline­ in­ the­ growth­ of­ cash­ holdings­ is­presumably­attributable­to­the­fact­that­ last­year­–­compared­to­the­period­of­2012-2015­–­there­was­no­

such­major­change­in­the­interest­rate­environment­that­would­have­materially­reduced­the­opportunity­cost­of­holding­currency,­thereby­representing­a­strong­incentive­ for­ the­use­of­ cash­ for­ savings­purposes.­In­2015,­a­number­of­one-off­effects­increased­cash­holdings­(settlement­of­foreign­currency­ loan,­NDIF­payments),­which­was­less­typical­in­2016.­Inflation,­which­once­again­started­to­rise­recently,­also­pointed­to­the­deceleration­of­the­growth­in­cash­holdings.­By­contrast,­household­consumption­growth­supported­the­ continuation­ of­ the­ major­ increase­ in­ cash­holdings.­On­the­whole,­the­deceleration­of­the­growth­in­cash­holdings­was­in­line­with­the­expectations.

The­change­in­the­volume­of­banknotes­in­circulation­varies­ by­ denomination.­ In­ the­ case­ of­ the­20,000-forint,­10,000-forint,­5,000-forint,­1,000-forint­and­500-forint­denominations,­the­stock­rose­by­5,­9,­5,­8­and­5­per­cent,­respectively,­while­in­the­case­of­the­2,000­forint­denomination­the­stock­decreased­by­2­per­cent­last­year.

The­ two­ largest­ banknote­ denominations­ still­ play­a­dominant­role­in­the­cash­turnover:­at­the­end­of­last­year­they­jointly­accounted­for­65­per­cent­of­the­volume­of­banknotes­in­circulation.­This­is­due­to­the­fact­that­in­addition­to­their­payment­role­in­the­cash­turnover,­they­also­fulfil­a­capital­formation­function.

Compared­to­the­end­of­previous­year,­the­volume­of­the­forint­coins­in­circulation­increased­by­7­per­cent­on­average.

The­MNB’s­expenditures­related­to­cash­production­amounted­to­a­gross­sum­of­HUF­13.7­billion­in­2016.­The­increase­compared­to­previous­years­is­primarily­attributable­to­the­higher­manufacturing­needs­related­to­the­new,­enhanced­banknotes.

Chart 10Distribution of banknotes in circulation by quantity at end-2016

5009% 20,000

29%

10,00036%

5,0006%

2,0005%

1,00015%

Chart 11Banknote and circulation coin manufacturing (gross expenditure)

4.7 4.8 5.0 5.9 2.7 2.8 2.9 3.7

7.9 11.7 4.0

1.7 2.5 1.8

1.4 0.9 1.0 1.2

3.0

2.0

0 2 4 6 8

10 12 14

0 2 4 6 8 10 12 14

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

HUF Billion HUF Billion

Cost of banknote productionCost of circulation coin production

Chart 9Cash/GDP and cash/consumption expenditure of households

0 2 4 6 8

10 12 14 16 18 20 22 24 26 28

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*

Per cent Per cent

Cash/GDPCash/Household consumption expenditure

* The 2016 GDP figure and the consumption expenditure of households are MNB estimates.

MAGYAR NEMZETI BANK

ANNUAL REPORT • 2016 50

Table 6Banknotes and coins11 in circulation (data from 31 December 2016 and 31 December 2015)

2016 2015

BanknotesVolume Value Ratio (%) Volume Value Ratio (%)

Million pieces Billion HUF Volume Value Million pieces Billion HUF Volume Value

20,000­forint­ 130.7 2,613.8 28.9 58.0 124.5 2,491.0 29.3 58.8

10,000­forint­ 162.3 1,622.8 35.9 36.0 148.6 1,486.2 35.0 35.1

5,000­forint­ 27.5 137.8 6.1 3.1 26.2 130.8 6.2 3.1

2,000­forint­ 23.4 46.8 5.1 1.0 23.8 47.6 5.6 1.1

1,000­forint­ 67.9 67.9 15.0 1.5 63.2 63.2 14.8 1.5

500­forint­ 40.5 20.3 9.0 0.4 38.7 19.3 9.1 0.4

Total 452.3 4,509.4 100.0 100.0 425.0 4,238.1 100.0 100.0

CoinsVolume Value Ratio (%) Volume Value Ratio (%)

Million pieces Billion HUF Volume Value Million pieces Billion HUF Volume Value

200­forint­ 130.1 26.0 8.0 41.5 121.4 24.3 8.0 41.3

100­forint­ 170.9 17.1 10.5 27.3 161.9 16.2 10.6 27.6

50­forint­ 153.0 7.6 9.4 12.2 142.6 7.1 9.3 12.1

20­forint­ 289.6 5.8 17.9 9.3 272.4 5.4 17.9 9.2

10­forint­ 336.6 3.4 20.7 5.4 317.5 3.2 20.8 5.4

5­forint­ 544.4 2.7 33.5 4.3 509.6 2.6 33.4 4.4

Total 1,624.6 62.6 100.0 100.0 1,525.4 58.8 100.0 100.0

11­­The­table­does­not­include­holdings­of­commemorative­coins­and­commemorative­banknotes­issued­by­the­central­bank,­which­although­–­as­legal­tender­–­form­part­of­the­means­of­payment­in­circulation,­in­accordance­with­their­role,­do­not­participate­actively­in­the­execution­of­cash­turnover.

Distribution of cash

In­ 2016,­ the­ MNB­ managed­ cash­ turnover­ for­ its­clients,­i.e.­credit­institutions­and­the­Hungarian­Post,­in­a­total­amount­of­HUF­4,130­billion;­within­that­it­distributed­319­million­banknotes­to­its­clients,­while­291­million­banknotes­were­delivered­to­the­central­bank.

In­the­past­year,­the­MNB­scrapped­164­million­end-of-life­banknotes,­and­replaced­them­by­new,­high­quality­means­of­payment.

Prevention and reduction of counterfeiting

In­ accordance­ with­ the­ previous­ years,­ the­counterfeiting­of­forint­banknotes­was­extremely­low­again­ in­2016;­ the­total­number­of­ forint­banknote­counterfeits­ eliminated­ from­ cash­ circulation­ was­1,549.

The­number­of­counterfeit­banknotes­ for­each­one­million­genuine­banknotes­ in­circulation­was­3.4­ in­last­ year,­ which­ is­ extremely­ favourable­ even­ by­international­standards.

The­free­educational­activity­performed­by­the­MNB­in­respect­of­banknotes­also­contributes­significantly­to­maintaining­the­low­counterfeit­indicator.­In­addition­to­the­printed­educational­materials­provided­by­the­central­bank­and­also­published­on­the­ internet,­ in­2016­ the­MNB’s­ experts­ trained­ more­ than­ 2,000­retail­cashiers­on­the­features­of­banknotes­and­the­possibilities­of­verifying­the­genuineness­of­banknotes,­thereby­also­ensuring­ the­efficient­ identification­of­counterfeit­banknotes.

In­ 2016,­ counterfeiting­ of­ higher­ denominations­(mainly­the­10,000-forint­and­20,000-forint­banknotes)­remained­most­typical,­accounting­for­87­per­cent­of­counterfeit­forint­banknotes.

Table 7Denomination breakdown of discovered forint banknote counterfeits in 2016

Denominations 500 1,000 2,000 5,000 10,000 20,000

Breakdown­(%) 2.5 0.6 2.6 7.7 33.8 52.8

The­ counterfeiting­ methods,­ which­ are­ still­characterised­ by­ the­ use­ of­ office­ reproduction­

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ANNUAL REPORT • 2016 51

equipment­(colour­copy­machines,­printers),­also­did­not­change­considerably.

Persons­ familiar­ with­ the­ features­ of­ authentic­banknotes­can­detect­the­counterfeits­using­simple­checks­(touching,­holding­up­to­light­or­moving)­or­in­a­cash­office­environment­using­combined­checks,­i.e.­with­the­use­of­Uv-A­and­Uv-C­light.

The­ occurrence­ of­ counterfeit­ foreign­ currency­ is­still­negligible.­The­central­bank’s­experts­examined­1,576­various­foreign­currency­counterfeits­in­2016.­Of­these,­the­number­of­counterfeit­euro­banknotes­was­1,233.

Cash distribution administrative inspections

In­ 2016,­ the­ MNB­ inspected­ compliance­ with­ the­provisions­of­the­MNB­Act­on­cash­issuance,­of­the­Banknote­Decree12­and­of­the­MNB­Decrees13­on­the­central­bank­data­supply­at­12­credit­institutions,­three­cash­processing­providers­and­one­payment­institution.­The­purpose­of­the­cash­distribution­administrative­inspections­was­to­ensure­the­proper­quality­of­the­forint­ banknotes­ in­ circulation,­ the­ mitigation­ of­operational­risks­for­the­smooth­cash­circulation­and­the­provision­of­fair­services­by­the­credit­institution­to­the­households.­The­MNB­launched­16­administrative­inspection­ procedures­ in­ 2016,­ one­ of­ which­ was­closed­ in­ January­ 2017.­Of­ these,­ in­ six­ cases­ in­ a­letter­of­warning­the­MNB­called­upon­the­inspected­institutions­to­eliminate­the­shortcomings­identified,­while­it­found­no­infringement­in­10­procedures.­In­addition,­ within­ the­ framework­ of­ the­ continuous­verification­ of­ the­ data­ included­ in­ reporting,­ a­warning­was­issued­in­two­cases­due­to­missing­the­deadline.­Of­the­ inspections­ launched­in­2015,­two­administrative­ procedures­were­ closed­ early­ 2016,­without­ identifying­ any­ infringement.­ During­ the­administrative­ inspections,­ the­MNB­ identified­ the­violation­of­certain­rules14­applicable­to­the­recycling­of­ banknotes,­ the­ operation­ of­ banknote­ handling­machines,­ the­ action­ plan­ for­ the­management­ of­extraordinary­situations­occurring­in­the­distribution­of­cash,­the­management­of­incomplete­or­damaged­banknotes,­ the­content­of­ the­ institutions’­ internal­regulations,­the­management­of­suspected­counterfeit­banknotes­and­to­the­fulfilment­of­the­central­bank­reporting­obligations.

Hungarian banknotes being redesigned

In­the­period­of­2014–2018,­the­MNB­is­renewing­the­banknote­series­currently­ in­circulation­and­ issuing­redesigned,­ enhanced­and­modern­banknotes­ that­will­also­satisfy­the­cash­distribution­requirements­of­the­cash­processing­machines­and­automated­teller­machines,­while­at­the­same­time­providing­state-of-the-art­protection­against­counterfeiting.

Of­ the­ series­ comprising­ six­ denominations,­ the­first­ banknote­ redesigned­ by­ the­ MNB­ was­ the­

Chart 13Trends in the counterfeits for each one million genuine banknotes and the value of the resulting damage

0

25

50

75

100

0

25

50

75

100

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

HUF MillionPieces

Number of counterfeits per one million genuine banknotes in circulationAmount of the losses caused

Chart 12Annual trends in the number of counterfeit forint banknotes identified in turnover

0

2,000

4,000

6,000

8,000

10,000

12,000

0

2,000

4,000

6,000

8,000

10,000

12,000Pieces Pieces

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

12­­MNB­Decree­11/2011­(IX.6.)­on­the­processing­and­distribution­of­banknotes­and­on­technical­ tasks­relating­to­the­protection­of­banknotes­against­counterfeiting.

13­­­­MNB­Decrees­50/2015­(XII.9)­and­48/2014­(XI.27.)­on­the­data­reporting­obligations­to­the­central­bank’s­information­system­primarily­to­enable­the­Magyar­Nemzeti­Bank­to­carry­out­its­basic­duties.

14­­Article­23­(8)­of­the­MNB­Act,­Sections­4(2),­5­(1)-(3),­14,­19­and­23­of­the­Banknote­Decree,­Subsection­2.1.1­of­Annex­2­and­Annex­4,­Annex­II­of­the­MNB­Decrees­on­central­bank­data­reporting.

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ANNUAL REPORT • 2016 52

10,000-forint­bill­in­2014,­followed­by­the­20,000-forint­banknote­in­2015.­The­next­two­denominations­were­the­2,000-forint­and­5,000-forint­banknotes,­which­became­legal­tender­from­15­November­2016;­they­appeared­in­the­circulation­gradually,­from­1­March­2017,­after­the­proper­preparation­of­the­participants­of­the­cash­supply­chain.

On­ 1­ December­ 2016,­ the­ central­ bank­ prolonged­the­exchange­of­the­20,000-forint­banknotes­issued­before­2015­by­one­year,­thus­they­can­be­used­in­cash­circulation­until­31­December­2017.­After­the­day­of­the­withdrawal­the­cash-desks­of­the­credit­institution­and­the­Hungarian­Post­will­exchange­the­withdrawn­forint­banknotes­to­legal­tender­for­further­three­years­and­the­MNB­for­20­years,­free­of­charge.

Issue of commemorative coins and the commemorative version of circulation coins

Pursuant­ to­ the­MNB­ Act,­ the­MNB­ has­ exclusive­right­ to­ issue­ banknotes­ and­ coins,­ also­ including­commemorative­ banknotes­ and­ commemorative­coins,­which­are­also­legal­tender­in­Hungary.­The­MNB­–­in­line­with­the­practice­of­foreign­central­banks­–­issues­commemorative­coins­with­the­aim­of­creating­a­worthy­memorial­of­Hungary’s­major­historic,­cultural­and­ scientific­ anniversaries,­ events­ and­ persons­in­ a­ lasting­ form­ for­ succeeding­ generations. The­commemorative­coins­are­not­meant­for­circulation.

Since­ 2014,­ the­ MNB­ has­ also­ issued­ all­commemorative­ coins­ made­ of­ precious­ metal­ in­a­ cheaper,­ non-ferrous­metal­ version,­ with­ a­ view­to­ enforcing­ the­ coins’­ value-conveying,­ attention-raising­ and­educational­ roles­ in­ a­wider­ circle.­ The­MNB’s­ decision­ with­ regard­ to­ the­ distribution­ of­silver­commemorative­coins­(for­3­month­after­issue)­and­non-ferrous­metal­commemorative­coins­at­face­value­also­serves­the­purpose­of­expanding­the­range­of­conveying­value.

Based­on­the­statutory­powers­and­in­the­spirit­of­the­sales­policy­in­place­since­2014,­in­2016­the­central­bank­issued­19­commemorative­coins­in­nine­topics.­Three­of­these­were­gold­coins,­seven­were­silver­coins­and­nine­(of­two­independent­designs­of­coin)­were­non-ferrous­metal­collector­coins.

The­technological­innovation­introduced­in­the­2016­commemorative­ coin­ programme­ is­ the­ security­feature­appearing­in­the­mint­mark:­‘B’­and­‘P’­letters­

in­microlettering­on­the­mint­mark­are­indiscernible,­they­are­visible­only­if­magnified­minimum­ten­times­and­serve­as­protection­against­the­counterfeiting­of­the­commemorative­coins.­The­new­security­features­appeared­on­all­commemorative­coins­issued­in­2016,­except­for­the­mini­gold­coins­with­diameter­of­11­mm.

The­ MNB’s­ 2016­ commemorative­ coin­ issuing­programme­commenced­on­25­April­2016­with­the­silver­coin­in­a­denomination­of­HUF­10,000,­entitled­Fundamental­ Law­of­Hungary,­ and­ the­non-ferrous­metal­version­thereof­in­a­denomination­of­HUF­2,000.­The­commemorative­coins­recalled­the­5th­anniversary­of­ the­enactment­of­ the­Fundamental­Law­and­the­significance­thereof.­The­5-year­old­Fundamental­Law­is­the­foundation­of­the­legal­system­of­Hungary­and­the­first­written­constitution­in­the­country’s­history­which­ was­ adopted­ by­ a­ democratically­ elected­legislature.

On­27­April­2016,­the­MNB­issued­a­mini­gold­collector­coin­with­a­face­value­of­HUF­5,000,­a­silver­coin­with­a­face­value­of­HUF­10,000­and­the­non-ferrous­metal­coin­version­of­the­latter­one,­with­a­face­value­of­HUF­2,000­in­honour­of­the­Games­of­the­XXXI­Olympiad.­The­ MNB­ issues­ collector­ coins­ to­ commemorate­the­ world’s­ most-viewed­ sports­ event­ since­ 1984;­however,­it­is­the­first­time­that­a­non-ferrous­coins­is­also­issued­with­the­Olympics­as­its­theme.

On­ 9­ July­ 2016,­ the­ central­ bank­ issued­ a­ silver­collector­coin­with­a­face­value­of­HUF­10,000­and­a­non-ferrous­metal­coin­with­a­face­value­of­HUF­2,000­to­commemorate­the­1700th­anniversary­of­the­birth­of­Saint­Martin,­who­was­born­in­Savaria­(present-day­Szombathely)­ and­ is­ venerated­as­one­of­ the­most­popular­saints­of­Europe.­Exceptionally,­the­silver­and­non-ferrous­metal­ coins­were­ issued­with­different­coin­design.

On­14­July­2016,­the­MNB­issued­a­gold­collector­coin­‘Gold­florin­of­Sigismund’­with­a­ face­value­of­HUF­50,000­in­normal­and­piedfort­size,­which­is­four­times­the­weight­of­the­standard­coin.­The­non-ferrous­metal­version­of­the­commemorative­coin,­with­a­face­value­of­HUF­2,000­was­also­issued.­All­three­coins­are­part­of­ the­“Mediaeval­Hungarian­gold­florins”­collector­series,­launched­in­2012.

On­1­August­2016,­i.e.­on­the­70th­anniversary­of­the­introduction­of­the­forint,­the­MNB­wished­to­remind­the­ population­ about­ the­ notable­ anniversary­ by­issuing­silver­collector­coins­with­a­face­value­of­HUF­

REvIEW­OF­THE­MNB’S­PERFORMANCE­IN­2016

ANNUAL REPORT • 2016 53

10,000,­non-ferrous­metal­coins­with­a­face­value­of­HUF­2,000­ and­ the­ commemorative­ version­of­ the­HUF­50­circulation­coin.­The­commemorative­version­of­the­circulation­coin­was­released­to­circulation­in­2­million­copies.

The­MNB­issued­special,­vertical­rectangular­silver­and­brass­commemorative­coins­with­face­value­of­HUF­10,000­and­HUF­2,000,­respectively,­on­9­August­2016,­to­mark­the­150th­anniversary­of­the­Budapest­Zoo­and­Botanical­Garden.

One­of­the­most­special­issues­in­2016­was­the­silver­collector­coin­with­a­ face­value­of­HUF­20,000­and­its­nonferrous­metal­version­with­a­face­value­of­HUF­2,000­to­celebrate­the­225th­anniversary­of­the­birth­of­ István­Széchenyi.­ The­ face­ value­and­ size­of­ the­silver­commemorative­coin­issued­on­21­September­2016­ is­ exceptional,­ thereby­ acknowledging­ the­characterisation­of­Széchenyi­by­Kossuth:­the­biggest­silver­commemorative­coin­(with­a­diameter­of­52.5­mm)­for­“the­greatest­among­Hungarians”.­The­reeded­edge­of­the­commemorative­coins­is­uniquely­divided;­the­grouping­of­ the­ reeds­ refers­ to­ the­year­ István­Széchenyi­was­born.

The­2016­commemorative­coin­programme­was­closed­by­the­issue­of­a­non-ferrous­metal­commemorative­coin­for­the­60th­anniversary­of­the­1956­Hungarian­Revolution­and­Fight­for­Independence­on­3­November­2016.­ The­ commemorative­ coin­with­ face­ value­ of­HUF­2,000­was­issued­as­part­of­the­series­launched­in­2014,­presenting­the­Hungarian­national­memorial­sites.

3.8 STATISTICAL SERVICES

For­the­purpose­of­fulfilling­its­duties­as­specified­in­the­MNB­Act,­the­MNB­collects­statistical­information­for­the­analysis­of­financial­developments,­preparation­of­ monetary­ policy­ decisions,­ oversight­ of­ the­operation­payment­and­settlement­systems­to­ensure­the­ smooth­ execution­ of­ payments,­ supporting­the­ stability­ of­ the­ financial­ system,­ as­well­ as­ for­the­ fulfilment­ of­ the­ micro­ and­ macroprudential­supervisory­ activity,­ and­ publishes­ the­ statistics­compiled­from­those.

The­MNB­publishes­statistical­ information,­analyses­and­ time­ series­ on­ its­ website­ for­ the­ public,­ in­accordance­with­the­release­calendar­for­statistics.­In­relation­to­the­individual­statistical­areas­the­MNB­also­issues­methodological­publications.

In­2016,­ the­MNB­ issued­6­decrees­ related­ to­data­reporting­ in­ 2017;­ these­ were­ primarily­ decrees­containing­data­reporting­ordered­for­the­fulfilment­of­ the­MNB’s­ basic­ tasks,15­ supplemented­ by­ four­decrees­ ordering­ the­ data­ reporting­ necessary­primarily­for­the­fulfilment­of­the­supervisory­tasks.16 In­addition,­the­MNB­also­issued,­in­a­separate­form­related­ to­ one­ year­ –­ to­ ensure­ promulgation­ as­soon­as­possible­–­the­MNB­Decree­prescribing­data­reporting­with­regard­to­certain­financial­instruments,­general­financial­information­and­capital­adequacy­of­the­credit­institutions.17­In­respect­of­the­fulfilment­of­the­reporting­requirements­ in­2016­several­mid-year­changes­were­ implemented.­ In­relation­to­the­conversion­of­certain­foreign­currency-denominated­receivables­originating­from­consumer­loan­contracts,­the­MNB­also­issued­an­MNB­Decree18­prescribing­a­one-off­data­reporting­in­2016.­In­2016,­the­effective­MNB­Decrees­ related­ to­ the­data­ supplies­of­ 2016­were­modified­on­ seven­occasions­ due­ to­ changes­in­the­domestic­legislative­environment,­with­a­view­to­effecting­publication­changes,­and­to­ensure­the­receipt­of­data­necessary­for­the­research,­analysis­and­decision­support­activity­required­for­the­fulfilment­of­the­MNB’s­fundamental­duties.19

Results of the data collection integration projects

Of­the­two­harmonisation­projects­–­ Integration of data collection for statistical and supervisory purposes and­ Integration of the statistical and supervisory IT systems­ –launched­ after­ the­ integration­ of­ the­HFSA­and­ the­MNB,­ the­data­ collection­ integration­project­ was­ successfully­ completed­ in­ 2016.­ The­main­goal­of­the­data­collection­ integration­project­was­ to­ rationalise­ and­ consolidate­ statistical­ and­supervisory­data­collections­after­the­integration,­to­eliminate­overlaps,­and­to­develop­a­new,­integrated,­international­quality­data­collection­system­that­is­also­suitable­for­satisfying­all­supervisory­and­central­bank­

15­­MNB­Decree­50/2016­(XII.12).16­­MNB­Decrees­48/2016.(XII.­12),­49/2016­(XII.­12),­51/2016­(XII.­12)­and­52/2016­(XII.­12).17­­MNB­Decree­20/2016­(vI.­6).18­­MNB­Decree­1/2016­(I.13).19 ­­The­changes­affected­the­MNB­Decrees­ordered­for­the­fulfilment­of­the­MNB’s­fundamental­and­supervisory­tasks,­as­well­as­MNB­Decree­20/2016­(vI.­6.)­[MNB­Decrees­3/2016­(II.­8.),­5/2016­(III.­1.),­17/2016.­(v.­11.),­21/2016­(vI.­29.),­33/2016­(vIII.­8.),­38/2016­(IX.­29.),­46/2016­(XI.­25.)].

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statistical­requirements.­Changing­the­data­collection­model­will­take­place­over­a­period­of­several­years,­and­ in­parallel,­ the­project­ entitled­ “Integration of statistical and supervisory IT systems”­addresses­the­required­information­technology­support­system.

As­ the­ closure­ of­ the­ successful­ work­ performed­ by­the­project­entitled­ Integration of data collection for statistical and supervisory purposes,­ the­ MNB­ data­reporting­decree,­containing­the­credit­institutions’­more­detailed­data­supplies­in­the­new­structure,­valid­from­2017,­was­promulgated­in­the­first­half­of­2016­[20/2016­(vI.­6.)].­From­2017,­credit­institutions­may­change­over­from­the­application­of­the­Hungarian­accounting­system­to­international­accounting­rules,­i.e.­IFRS.­Within­the­framework­of­the­project,­the­MNB­elaborated­a­new,­detailed­ data­ collection­ from­ the­ credit­ institutions,­which­ replaces­ several­ former­ data­ collections­ and­ensures­uniform­data­supply­by­the­credit­institutions­applying­Hungarian­accounting­standards­and­IFRS.­The­decree­published­in­early­June­2016­applies­to­certain­financial­instruments­and­general­financial­information­of­credit­institutions,­and­thus­it­contains­the­statistical­balance­sheet­and­profit­and­loss­account,­the­detailed­data­related­to­deposits­and­financial­derivatives,­as­well­as­individual­FINREP­package,­i.e.­the­data­reporting­of­credit­institutions­changing­over­to­IFRS­from­1­January­2017,­based­on­the­international­accounting­standards.­The­ individual­ FINREP­ package­ was­ elaborated­ on­the­basis­of­and­in­ line­with­the­consolidated­FINREP­package,­standardised­at­EU­level.

There­has­been­an­increasing­demand­for­individual-level­credit­data,­both­at­ international­and­national­level,­in­the­area­of­statistical­data­collection,­central­bank­analyses­and­ fulfilment­of­ supervisory­duties.­The­ MNB­ places­ increasing­ emphasis­ on­ verifying­the­quality­of­the­loan­register­data,­available­from­two­ sources­ –­ the­ CCIS­ data­ taken­ over­ from­BISZ­Zrt.­ and­ the­data­ from­ the­data­ collection­ordered­directly­for­the­credit­institutions,­expanded­in­2016­and­supplementing­the­loan­register­–­and­performing­the­necessary­corrections.­A­high­quality­loan­register­better­fulfils­its­function­related­to­responsible­lending,­provides­comprehensive­analytical­opportunities­for­the­monitoring­ of­ lending­ processes,­ and­over­ the­longer­run­it­also­allows­the­potential­replacement­of­aggregate­statistics­by­individual­data.

Publication changes in the MNB statistics

As­a­supplement­to­the­monthly­securities­statistics­data­ dissemination,­ from­2016­ the­MNB­publishes­

press­releases­on­the­changes­in­the­securities­holdings­issued­by­residents­and­the­breakdown­of­the­holders.­The­ publication­ of­ the­ press­ release­ was­ justified­by­ the­ fact­ that­ the­ role­ of­ securities,­ particularly­of­ debt­ securities­ and­ within­ that­ of­ government­securities,­substantially­increased­in­the­investments­of­ the­economic­ sectors;­ in­addition,­ there­was­an­increasing­ demand­ from­ market­ participants­ to­present­the­ownership­breakdown­of­securities.­The­purpose­of­the­securities­press­release­is­to­provide­the­users­with­more­comprehensive­information­on­the­major­events­that­occurred­ in­the­given­period­and­on­the­ownership­structure­of­the­securities­ in­circulation.­ Another­ important­ function­ of­ it­ is­ to­provide­ those­ interested­ with­ easy-to-understand­summary­ information­on­the­data­appearing­ in­the­monthly­securities­statistical­publication.

In­line­with­international­statistical­recommendations,­the­MNB­publishes­the­country­breakdown­of­stock,­flow­ and­ income­ data­ of­ direct­ investments­ in­ a­breakdown­by­ immediate­ investor­and­ investment.­However,­ among­ domestic­ and­ international­ users­there­ is­ also­ mounting­ demand­ for­ a­ breakdown­of­ the­ inward­ foreign­ direct­ investment­ position­by­ the­ ultimate­ investor.­ Starting­ from­ September­2016,­the­MNB­compiles­and­publishes­the­position­of­ foreign­ direct­ investments­ in­ Hungary­ broken­down­by­the­country­of­the­ultimate­investor.­These­supplementary­ annual­ statistics­ are­ also­ published­simultaneously­with­the­September­data­release,­but­with­a­time­ lag­of­21­months,­and­can­be­deemed­final,­in­line­with­the­normal­revision­practice,­in­the­33th­month­after­the­reference­period.­The­first­year­of­which­this­breakdown­is­available­is­2014.­The­new­country­breakdown­of­inward­FDI­positions­is­made­available­by­the­MNB­on­its­website­broken­down­by­instruments,­separately­for­equity­and­debt,­for­data­excluding­special­purpose­entities­(SPEs).

Supervisory statistics

In­2016,­the­supervisory­data­collection­ introduced­in­2014­for­credit­ institutions­with­uniform­content­and­format­across­the­European­Union­(hereinafter:­EU­ reporting­ standard)­ was­ supplemented­ with­additional­ new­ elements,­ primarily­ in­ the­ area­ of­liquidity­monitoring.­ The­ standardised­ receipt­ and­processing­ of­ these­ reports,­ ensuring­ data­ quality,­and­tracking­the­frequent­amendments­and­taxonomy­version­ changes­ take­ place­ in­ a­ regulated­manner­in­ accordance­with­ detailed­ procedures.­ The­MNB­also­ submits­ the­ supervisory­ reports­of­ the­ largest­

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Hungarian­banking­groups­to­the­European­Banking­Authority­ and­ started­ to­make­ preparation­ for­ the­planned­ submission­ of­ the­ supervisory­ reports­ of­all­credit­ institutions­operating­in­Hungary­over­the­medium­run.­The­MNB­developed­the­consolidated­risk­monitoring­system­for­banking­groups­using­both­the­new­uniform­data­ standard­ and­ the­ additional­data­content­ regulated­by­ the­MNB­Decree,­within­the­framework­of­which­a­quarterly­risk­assessment­of­the­activities­of­all­banking­groups­is­prepared.­The­statistics­based­on­supervisory­reporting,­aggregated­at­sector­level,­are­published­on­the­MNB’s­website­in­ the­ form­of­time­series­and­the­publications­are­expanded­ depending­ on­ the­ users’­ needs.­ Among­the­supervisory­data­published­on­credit­institutions,­new­ time­ series­ on­ corporate­ lending­ activity­was­introduced­in­the­second­half­of­2016,­which­places­special­ emphasis­ on­ analysing­ the­ components­ of­changes­in­the­outstanding­loans­towards­micro,­small­and­medium-sized­enterprises.

The­ insurers’­ supervisory­ data­ reporting­ has­ fully­changed­ with­ the­ introduction­ of­ the­ uniform­Solvency­II­(S­II)­European­Union­rules­in­2016.­The­data,­prepared­in­line­with­the­new­technical­standard­applicable­to­the­reporting­of­insurers­based­on­the­single­EU­authorisation­((2450/2015­EU­(2015.­XII.­31)­are­already­submitted­in­XBRL­format.­Simultaneously­with­ this,­ the­ data­ content­ specified­ in­ the­ MNB­decree­ on­ supervisory­ reporting­ applicable­ to­ the­insurers­ falling­ within­ S­ II­ has­ been­ substantially­reduced,­containing­only­supplementary­information­in­order­to­prevent­overlaps.­The­new­data­reporting­requirements­ were­ successfully­ implemented.­ The­MNB­met­the­requirements­prescribed­by­EIOPA­ in­full­and­by­the­deadline,­i.e.­it­uploaded­the­opening­reports­of­the­ insurers­ falling­within­S­ II,­as­well­as­their­2016­Q1-Q3­reports,­in­full­and­by­the­deadline­to­ EIOPA’s­ data­ receiving­ system.­ Simultaneously­with­ this,­ the­ insurers’­ institutional­ monitoring­risk­ assessment­ system­ also­ had­ to­ be­ renewed.­Implementation­was­carried­out­in­two­phases:­The­assessment­of­seven­risk­elements­carried­out­in­phase­one­from­2016­Q1­will­be­expanded­to­ include­the­assessment­of­further­two­risk­elements­from­2017­Q1.­The­introduction­of­the­new­data­reporting­was­accompanied­ by­ the­ major­ transformation­ of­ the­formerly­published­statistical­series,­as­S­II­introduced­fundamental­methodological­changes.­Thus,­most­of­the­ formerly­published­time­series­could­no­ longer­be­continued.

International data supply, international cooperation

As­ follows­ from­ its­ status,­ the­ expectations­ arising­from­international­cooperation­and­its­membership­obligations,­ the­ MNB­ regularly­ supplies­ data­ and­information­ to­ the­ European­ Central­ Bank,­ the­Statistical­ Office­ of­ the­ European­ Communities­(Eurostat),­the­European­supervisory­authorities­(EBA,­EIOPA),­the­Bank­for­International­Settlements­(BIS),­the­ International­Monetary­ Fund­ (IMF),­ the­World­Bank­and­the­Organisation­for­Economic­Co-operation­and­Development­(OECD).

With­ a­ view­ to­ complying­ with­ the­ international­recommendations­and­requirements,­and­monitoring­the­changes­therein,­the­MNB­is­continuously­present­at­international­forums­related­to­the­central­bank’s­statistical­activity­and­plays­an­active­role­in­the­work­of­ the­ international­ working­ groups­ dealing­ with­methodological­developments­and­current­statistical­matters.

CESS 2016­ (Conference of European Statistics Stakeholders)­was­organised­jointly­by­Eurostat,­the­ECB,­the­European­Statistical­Advisory­Committee,­the­Federation­of­European­National­Statistical­Societies,­the­ Hungarian­ Central­ Statistical­ Office­ and­ the­Hungarian­Statistical­Association,­in­Budapest­on­20-21­October­2016.­The­purpose­of­the­conference­was­to­bring­together­European­methodological­experts,­and­producers­and­users­of­statistics,­to­discuss­the­users’­needs,­share­the­best­practices­related­to­the­compilation­and­publication­of­statistics,­and­present­new,­ innovative­ forms­ of­ communicating­ statistics­(applications,­videos).­In­the­presentation­held­at­the­event,­ the­MNB­presented­ the­Hungarian­practices­related­ to­ the­ compilation­ and­ publication­ of­ FDI­statistics­ filtering­ out­ the­ data­ of­ special­ purpose­entities­(SPEs),­the­capital­in­transit­and­transactions­of­asset­portfolio­realignment.

Data quality, administrative inspection

The­MNB­audited­ the­ compliance­ –­ i.e.­ the­timely­submission­ of­ the­ reports­ and­ the­ data­ quality­ –­with­ the­ reporting­ requirements­ specified­ on­ the­basis­ of­ the­MNB­ decrees­ prescribing­ data­ supply­to­ the­central­bank­ information­system­and­by­ the­directly­applicable­EU­legal­acts­(hereinafter­together:­reporting­ regulations)­ in­ the­ form­ of­ continuous­

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inspection­ in­ 2016­ as­ well.­ In­ 2016,­ the­ MNB­launched­ no­ administrative­ inspection­ procedures;­the­administrative­inspection­procedure­launched­in­2015­in­respect­of­one­credit­institution­ended­with­a­warning­and­by­prescribing­measures.

In­2016,­due­to­the­infringements­ identified­on­the­basis­of­the­continuous­inspection­of­the­fulfilment­of­data­supplies,­measures­were­taken­in­430­cases:­in­79­cases­binding­resolutions­or­notices­were­issued,­while­ in­the­rest­of­the­cases­warnings­were­given,­mostly­due­to­ the­omission­or­ late­performance­of­the­reporting­obligations­(erroneous­reporting­justified­measures­ in­2­cases).­Based­on­the­audit­evidence,­the­MNB­obliged­ the­reporting­agents­ to­eliminate­the­ identified­ errors,­ submit­ the­ omitted­ reports­retrospectively­and­fulfil­the­statutory­requirements­in­the­future.­The­measures­affected­certain­statistical­data­supplies­with­regard­to­the­balance­of­payments,­monetary,­securities­and­payments­statistics,­and­the­financial­intermediary­system,­as­well­as­supervisory­reports.

In­2016,­penalties­were­imposed­on­21­occasions­–­on­18­reporting­agents­–­due­to­the­failure­to­comply­with­the­reporting­requirements­or­for­late­fulfilment.

3.9 THE MNB’S ACTIVITY IN THE AREA OF SOCIAL RESPONSIBILITY

In­ the­ implementation­ of­ the­ Pallas­ Athena­ Public­Thinking­ Programme,­ which­ forms­ a­ key­ element­of­ the­ Social­ Responsibility­ Strategy,­ announced­in­ line­ with­ the­ mission,­ vision­ and­ fundamental­values­ laid­down­ in­ its­ Statute,­ the­MNB­considers­the­ enhancement­ of­ financial­ literacy,­ financial­awareness,­ and­ underlying­ economic­ and­ social­knowledge,­as­well­as­the­related­institutional­system­and­ infrastructure­ to­ be­ its­ mission­ and­ strategic­task.­In­the­MNB’s­view,­the­central­bank­can­support­the­realisation­of­economic­policy­objectives­within­the­framework­of­the­Programme­by­renewing­and­enhancing­education­–­primarily­tertiary­education­–­and­the­system­of­economist­and­financial­training­and­by­supporting­scientific­activity­and­financial­literacy.­The­MNB­implements­its­education­programmes­with­this­goal­in­mind.

Under­ the­ auspices­ of­ the­ education­programmes,­the­ MNB­ Excellence­ Scholarship­ programme­ was­announced­ for­ the­ first­ time­ in­ 2016.­ Within­ its­framework­ more­ than­ 400­ students­ of­ 25­ higher­

education­institutions­received­awards­and­benefited­from­scholarship­grants.

In­the­area­of­institutional­partnerships­supporting­the­social­responsibility­strategy,­the­strategic­cooperation­between­ the­ Corvinus­ University­ of­ Budapest­ and­the­ MNB­ commenced­ by­ signing­ the­ cooperation­agreement­ two­ years­ ago.­ The­ purpose­ of­ the­cooperation­is­to­contribute­to­the­realisation­of­the­Pallas­Athena­Public­Thinking­Programme’s­goals­by­organising­joint­professional­education­projects­and­providing­ the­ infrastructure­ conditions­ supporting­these­initiatives.­In­2016,­the­MNB­Department­was­set­up­at­the­Corvinus­School­of­Economics­and­the­areas­ of­ geo-economy,­ geopolitics­ and­ economic­geography­were­ also­ strengthened­ by­ the­ support­of­the­MNB.­The­MNB­Department­offers­nearly­ten­courses­on­a­variety­of­ subjects:­ in­addition­ to­ the­subjects­“Analysis­of­time­series”,­“Analysis­of­financial­markets”,­“Modelling­in­the­central­bank’s­practice”,­“Role­ of­ the­ banking­ system­ in­ the­ economy”,­“Ethical­economy”,­“Modern­trends­in­economy”­and­“Theory­and­practice­of­monetary­policy”,­the­courses­“International­economic­and­financial­institutions”­and­“Economic­governance”­were­also­ introduced.­As­a­result­ of­ the­ cooperation,­ the­ central­ bank­ analyst­specialisation­was­launched­at­the­economic­analyst­masters­course,­and­after­a­break­of­several­years­the­regional­ and­ environmental­ economy­ programme­was­re-launched,­with­a­new­education­profile­and­lecturers.

With­the­cooperation­of­the­Pallas­Athena­Foundations­the­doctoral­(Phd)­programme­entitled­“Geopolitics,­geo-economics­and­political­geography­from­a­Central­European­perspective”­was­launched­at­the­University­of­Pécs­in­the­autumn­of­2015,­starting­the­academic­year­ of­ 2016/2017­with­ two­ classes.­ The­ students­participating­ in­ the­ programme­ can­ learn­ from­prominent­ domestic­ and­ foreign­ experts,­ and­may­attend,­ through­ application,­ international­ scientific­conferences­ and­ foreign­ summer­ universities.­ The­Phd­supporting­scholarship­programme,­announced­by­the­Pallas­Athena­Domus­Scientiae­Foundation,­was­expanded­with­a­new­class­in­September­2016.­The­young­researchers­have­the­opportunity­–­in­addition­to­following­macroeconomics,­financial­and­banking­courses­–­to­master­the­latest­methodological­skills­as­ well.­ The­ academic­ progress­ of­ the­ third­ year,­which­has­already­entered­the­active­research­phase,­is­ guaranteed­ by­ strict­ professional­ requirements,­mentor­support­and­a­schedule.

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The­cooperation­agreement­between­the­MNB­and­the­ Budapest­ Business­ School­ was­ also­ signed­ in­autumn­2016.­As­part­of­this­cooperation,­the­MNB­supports­the­education­of­young­experts­speaking­East­Asian­languages­who­are­familiar­with­the­culture­and­economies­of­the­East­Asian­countries­and­regions,­as­well­as­the­development­of­the­educational,­research,­cultural­and­economic­relations­between­Hungary­and­the­countries­of­East­Asia.

The­ MNB­ extended­ the­ range­ of­ institutional­cooperation­ supporting­ the­ reform­ of­ economic­higher­education­also­to­the­region­of­North­Hungary,­by­ concluding­ a­ cooperation­ agreement­ with­ the­University­ of­ Miskolc.­ As­ part­ of­ this,­ the­ MNB­undertook­to­provide­the­outstanding­students­of­the­Faculty­of­Economy­with­internship­and­scholarship­opportunities,­and­ to­ facilitate­ the­ implementation­of­joint­professional­events.­The­MNB­also­supports­the­introduction­of­a­novel­form­of­education­–­i.e.­dual­education­–­in­cooperation­with­the­Pallas­Athena­University,­where­at­the­Mechanical­Engineering­and­the­ Business­Management­ bachelor­ courses­ more­than­30­dual­students­can­gain­professional­experience­currently.

The­ Tiszaroff­ Scholarship­ Tender­ is­ aimed­ at­ the­convergence­of­disadvantaged­regions.­Thanks­to­this­programme,­more­than­50­students­from­the­micro-region­were­able­to­benefit­from­scholarship­in­2016­again.­ The­ cooperation­ projects­ under­ preparation­include­the­partnership­to­be­formed­with­the­Eötvös­Loránd­ University­ and­ the­ Károli­ Gáspár­ Calvinist­University,­as­well­as­the­support­of­the­Non-profit­Foundation­for­Students’­Scientific­Association­(TDK).­During­the­year,­the­MNB­also­developed­partnership­relations­ with­ a­ number­ of­ prominent­ foreign­universities,­institutions­and­researchers­in­the­area­of­international­educational­relations­in­order­to­keep­track­of­ the­most­ important­trends­ in­ international­higher­education.

Within­the­framework­of­a­series­of­festive­events,­the­temporary­exhibition­entitled­“70­years­of­the­forint”­was­opened­on­1­August­2016­on­the­occasion­of­the­issuance­ of­ Hungary’s­ national­ legal­ tender,­ which­was­extended­into­a­travelling­exhibition,­reaching­six­regions­nationwide,­from­October­2016.­The­MNB­is­carrying­out­the­travelling­exhibition­in­cooperation­with­ local­ higher­ education­ and­ public­ education­partner­ institutions­–­taking­ into­account­the­given­region’s­specific­characteristics­relating­to­the­history­

of­money­and­numismatics–­focusing­on­the­provision­of­comprehensive­information­to­the­public.

In­ creating­ its­ Depository­ Programme­ in­ January­2014,­ the­MNB­ joined­ the­ group­ of­major­ central­banks­ that­ contribute­ to­ the­protection­of­ cultural­heritage­through­artwork­purchases­and­collections.­The­primary­objective­of­the­Depository­Programme­is­to­regain­the­possession­for­Hungary­of­as­high­a­portion­of­art­treasures­that­earlier­passed­into­foreign­ownership­as­possible,­and­at­the­same­time­to­keep­the­treasures­that­can­be­found­in­domestic­estates­in­Hungary­by­purchasing­them.

As­ a­ result­ of­ the­programme,­ invaluable­ artworks­have­been­obtained­by­the­central­bank­and­can­be­viewed­in­public­collections,­such­as­the­painting­by­Tiziano­vecellio­–­virgin­Mary­with­Child­and­St.­Paul,­by­Lajos­Gulácsy­–­The­mulatto­man­and­the­statue-white­ woman,­ by­ János­ vaszary­ –­ Christianity,­ by­Dezső­Orbán­–­Nude­(large­format),­Gábor­Bachman’s­architecture­ and­ design­ collection,­ the­ painting­ by­Mihály­Munkácsy­–­Christ­in­front­of­Pilate,­the­Silver­thalers­minted­in­the­16th-17th­century­in­Transylvania­–­coin­collection,­the­presentation­of­the­Transylvanian­region­of­the­Open­Air­Museum­of­Szentendre,­the­painting­collection­of­István­Kövesi,­the­early­works­of­ László­Moholy-Nagy­ and­ the­documents­ related­to­his­oeuvre,­the­Artpool­document­collection­built­by­Júlia­Klaniczay­and­György­Galántai,­the­painting­by­ Abraham­ van­ Beijeren­ entitled­ Still­ Life­ with­Fruit,­Sea­Food,­and­Precious­Tableware,­the­granite­conference­table­of­Marcell­Breuer,­the­internationally­acknowledged­ architect­ of­ Hungarian­ origin,­ the­silver­covered­tray­produced­in­1791­in­the­workshop­of­Johann­Georg­Hann,­vienna-based­goldsmith­for­Count­ Sámuel­ Teleki­ (1739-1822),­ certain­works­of­art­from­the­estate­of­Rudolf­Bedő,­the­Ferenc­Kiss­collection,­which­includes­the­portrait­of­Sándor­Petőfi­painted­ by­Miklós­ Barabás­ and­ the­ daguerreotype­made­in­Boston­portraying­Lajos­Kossuth.

A­ detailed­ description­of­ the­works­ of­ art­ and­ the­collections­purchased­within­ the­ framework­of­ the­MNB’s­ Depository­ programme­ is­ available­ on­ the­central­bank’s­website.

In­ addition,­ to­ the­ best­ of­ its­ capacity,­ the­ MNB­participates­ in­ value­ creation,­ the­ preservation­ of­national­values,­intellectual­and­cultural­heritage­(e.g.­Museum­of­Fine­Arts,­Palace­of­Arts),­and­supports­the­training­of­professionals­and­scientific­activities­

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ANNUAL REPORT • 2016 58

(e.g.­ Hungarian­ Economic­ Association,­ National­Association­ of­ Doctoral­ Candidates)­ directly­ or­through­its­foundations­under­strategic­agreements­or­via­ad­hoc­grants.­Through­charitable­donations,­it­ has­ contributed­ to­ improving­ the­ quality­ of­ life­and­ equal­ opportunities­ of­ disadvantaged­ groups­and­ to­ alleviating­ the­ difficulties­ arising­ from­extraordinary­ life­ situations­ (e.g.­Magic­Lamp­Wish­Fulfilling­Foundation,­Hungarian­Red­Cross).­Within­the­framework­of­ its­corporate­social­ responsibility­programme­and­aligned­with­its­designated­strategic­objectives,­the­central­bank­is­open­to­expanding­the­group­of­its­cooperating­partners.

3.10 FACTORS SHAPING THE COMMUNICATION OF THE MNB

In­order­to­supply­the­general­public­with­continuous­and­ comprehensive­ information,­ in­ 2016­ the­MNB­issued­ a­ total­ of­ 413­ press­ releases,­ held­ 48­ press­conference­and­published­93­professional­articles­in­the­printed­press­and­online,­as­well­on­its­own­website.

The­ purpose­ of­ the­ central­ bank’s­ statements­and­ press­ conferences­ included,­ among­ others,­presentation­ of­ the­ decisions­ and­ facts­ related­ to­monetary­ policy­ and­ financial­ stability,­ the­MNB’s­most­important­decisions,­publication­of­the­results­of­the­Monetary­Council’s­meeting,­presentation­of­the­results­of­the­supervisory­inspections­and­information­on­the­related­resolutions,­as­well­as­publication­of­important­ statistical­ data­ and­ information­ on­ cash­turnover,­the­banknote­exchange­programme­and­the­issuance­of­commemorative­coins.

The­ presentation­ and­ introduction­ of­ the­ targeted­central­bank­programmes­and­measures­supporting­the­economic­policy­of­the­government­and­Hungarian­economic­ growth,­ along­ with­ the­ demonstration­and­description­of­ important­professional­decisions­was­a­key­objective­again­in­2016.­The­central­bank­continuously­ reported­ on­ the­ MNB’s­ initiatives,­including­ the­ Funding­ for­Growth­ Scheme­ and­ the­latest­results­thereof,­the­current­events­of­the­self-financing­ programme­ and­ the­ MNB’s­ fine-tuning­swap­ tenders.­ The­ professional­ papers­ published­on­the­MNB’s­website­and­other­competent­online­portals­made­a­major­contribution­to­familiarising­and­explaining­the­background­of­professional­decisions­and­processes.

The­MNB­provided­ information­on­the­steps­of­the­banknote­replacement­programme,­which­continued­

in­2016­–­among­others­on­the­new­issuances­and­the­withdrawal­dates­–­not­only­through­the­press,­but­also­directly­ in­retail­ trade,­with­posters­and­flyers,­which­presented­the­appearance­and­security­features­of­the­new­banknotes,­and­informed­consumers­on­the­dates­until­which­the­specific­banknotes­can­be­used­ in­daily­shopping.­All­parts­of­the­educational­series­ launched­with­ a­ view­ to­ increasing­ financial­awareness­ and­ consumers’­ knowledge­were­made­public­on­ the­central­bank’s­website,­video­sharing­channel­and­social­media­sites.

The­MNB­paid­ special­ attention­ to­ provide­ regular­and­ detailed­ information­ on­ its­ value­ creating­initiative,­supplementing­the­traditional­central­bank­activities,­be­it­the­increasing­number­of­educational­programmes­ implemented­ through­ university­cooperation­ or­ the­ activity­ performed­with­ a­ view­to­ augmenting­ the­ domestic­ art­ treasures­ within­the­ framework­ of­ the­ Depository­ programme.­ A­short­film­was­also­produced­on­all­elements­of­the­Depository­ programme,­ from­ which­ anybody­ can­obtain­ information­ on­ the­ importance­ of­ the­ art­treasures­ and­ the­ sites­ where­ they­ are­ exhibited­through­ the­MNB’s­ social­media­and­video­ sharing­ site.

3.11 THE MNB’S INCOME IN 2016

In­2016,­the­Magyar­Nemzeti­Bank­recorded­a­profit­of­ HUF­ 54.3­ billion.­ In­ 2016,­ the­ following­ main­developments­had­an­effect­on­the­balance­sheet­and­profit:

–­­the­ level­ and­ composition­ of­ foreign­ exchange­reserves­defined­by­monetary­policy,­ and­ foreign­currency­purchases­and­sales­affecting­the­level­of­reserves:­operations­performed­by­the­Government­Debt­ Management­ Agency­ in­ relation­ to­ debt­management,­ net­ foreign­ exchange­ inflows­ from­EU­ transfers,­ the­ foreign­ exchange­ conversions­performed­ by­ the­ Hungarian­ State­ Treasury­ for­purposes­not­related­to­debt­financing;

–­­developments­ in­ instruments­ absorbing­ forint­liquidity,­ which­ are­ correlated­ with­ changes­ in­foreign­exchange­reserves­and­the­MNB’s­net­foreign­currency­receivables;

–­­changes­ in­ forint­ interest­ rates­ and­ international­foreign­exchange­interest­rates;­and

–­­changes­in­the­forint­exchange­rate.

REvIEW­OF­THE­MNB’S­PERFORMANCE­IN­2016

ANNUAL REPORT • 2016 59

Net­interest­and­interest-related­losses­amounted­to­HUF­15.6­billion,­which­represents­an­improvement­of­HUF­27.1­billion­compared­ to­ the­previous­year.­The­MNB’s­interest­loss­stems­from­the­fact­that­FX­reserves,­which­account­for­more­than­two­thirds­of­its­balance­sheet,­are­mainly­financed­from­forint­funds,­and­ foreign­exchange­yields­are­below­the­average­forint­interest­rate.­In­2016,­the­improvement­in­net­interest­income­was­primarily­attributable­to­the­fact­that­–­owing­to­the­self-financing­programme­and­the­conversion­of­the­households’­foreign­currency­loans­into­ forint­ –­ foreign­ exchange­ reserves­ decreased­substantially,­and­there­was­a­decline­in­the­balance­of­ liquidity­ absorbing­ instruments.­ The­ difference­between­the­yield­levels­was­also­smaller,­which­had­a­positive­impact­on­net­interest­income.

Net­ forintinterest­ and­ interest-related­ losses­amounted­ to­HUF­28.4­billion,­ i.e.­HUF­64.6­billion­less­than­in­2015.­As­a­result­of­the­contraction­of­the­central­bank­balance­sheet,­the­average­portfolio­of­forint­liabilities­with­interest­rate­tied­to­the­base­rate­(regulatory­reserve,­liquidity­absorbing­instruments)­was­halved­year­on­year.­The­average­central­bank­base­rate­weighted­by­calendar­days­fell­by­60­basis­points­ in­ 2016.­ Both­ processes­ contributed­ to­ the­substantial­improvement­in­net­interest­income.

Foreign­ currency­ net­ interest­ and­ interest-related­income­ showed­a­profit­of­HUF­12.8­billion,­which­fell­ substantially­ short­ of­ the­ result­ from­ last­ year,­

mainly­ due­ to­ the­ decline­ in­ interest­ income­ on­foreign­exchange­ reserves.­ The­ reserves­decreased­by­almost­EUR­6­billion­during­the­year­and­the­fall­in­the­euro­yield­levels­also­continued.­Due­to­these­factors,­interest­income­on­foreign­exchange­reserves­was­realised­at­a­lower­level­than­last­year.

Realised­gains­arising­from­financial­operations­rose­by­HUF­1.9­billion­in­2016.­This­profit/loss­category­primarily­ contains­ gains­ and­ losses­ realised­ from­changes­ in­ the­market­prices­of­ securities­ included­in­the­FX­reserves.­The­increase­in­profit­was­mainly­attributable­to­the­higher­securities­sales,­connected­to­ the­ decrease­ in­ foreign­ exchange­ reserves,­ and­this­was­ strengthened­by­ the­continuing­decline­ in­euro­yields.­The­MNB’s­profit­arising­ from­financial­operations­amounted­to­HUF­16.8­billion­in­2016.

The­two­main­factors­determining­the­income­arising­from­ exchange­ rate­ changes­ are­ the­ difference­between­the­official­and­the­cost­rates­as­well­as­the­volume­of­foreign­exchange­sales.­In­2016,­the­forint­exchange­rate­was­less­volatile­compared­to­previous­years:­the­difference­between­the­official­and­the­cost­rate­became­smaller.­The­volume­of­foreign­currency­sales­also­dropped­and­ they­ typically­ took­place­ in­relation­to­the­debt­management­operations­of­the­Government­ Debt­Management­ Agency.­ Exchange­gains­earned­during­the­year­amounted­to­HUF­95.1­billion,­and­continued­to­be­a­key­component­of­the­central­bank’s­profit.

Table 8Abbreviated income statement and individual balance sheet items of the MNB(HUF Billions)

No. Description(P/L line) 2015 2016 Change

1 Net­interest­and­interest-related­income­(I+II)-(X+XI) –42.7 –15.6 27.1

2 –­net­forint­interest­and­interest-related­income­(I-X) –93.0 –28.4 64.6

3 –­net­foreign­exchange­interest­and­interest-related­income­(II-XI) 50.3 12.8 –37.5

4 Realised­gains/losses­arising­from­financial­operations­(Iv-XIv) 14.9 16.8 1.9

5 Income­arising­from­exchange­rate­changes­(III-XII) 177.7 95.1 –82.6

6 Other­constituents­of­net­income*­(v+vI+vII+vIII)-(XIII+Xv+XvI+XvII+XvIII) –55.3 –42.0 13.3

7 Profit/loss for the year (1+4+5+6) 94.5 54.3 –40.2

Revaluation­reserves­in­the­balance­sheet

8 –­due­to­unrealised­foreign­exchange­gain/loss 312.6 182.5 –130.1

9 –­due­to­changes­in­the­market­value­of­the­foreign­currency­securities** 28.5 17.4 –11.1

* Revenues on supervisory activities, net profit/loss of banking operations, costs of issuing banknotes and coins, net creation and release of provisions, income/expenses from commission and from other items.

MAGYAR NEMZETI BANK

ANNUAL REPORT • 2016 60

Other­components­of­net­income­include­operating­income,­ costs­ and­ expenses,­ the­ costs­ of­ issuing­banknotes­ and­ coins,­ creation­ and­ release­ of­provisions,­ income­ from­ supervisory­ activity­ and­income/expenses­ from­ fees­ and­ commissions­ and­other­ income/expenses.­Net­ expenditures­ deriving­from­these­items­amounted­to­HUF­42­billion­in­2016,­representing­ a­ year-on-year­ decrease­ of­ HUF­ 13.3­billion.

The­MNB’s­equity­amounted­to­HUF­372­billion­at­the­end­of­the­year.­Its­size­was­fundamentally­determined­by­the­level­of­revaluation­reserves,­in­particular,­the­reserves­due­to­forint­exchange­rate­changes.

Revaluation­reserves­due­to­the­forint­exchange­rate­changes­declined­by­HUF­130.1­billion­compared­to­end-2015,­ since­ at­ the­ end­ of­ 2016­ the­ difference­between­the­official­and­the­average­cost­rates­was­smaller­than­a­year­earlier.­Revaluation­reserves­due­to­exchange­rate­changes­stood­at­HUF­182.5­billion­on­31­December­2016.

On­ 31­ December­ 2016,­ the­ MNB’s­ balance­ sheet­showed­unrealised­gains­of­HUF­17.4­billion­on­foreign­

currency-denominated­securities­marked­to­market,­falling­short­of­the­previous­year’s­level,­due­to­the­decline­in­FX­reserves.

3.12 FINANCIAL PERFORMANCE OF THE MNB

The­ internal­operations­of­ the­MNB­are­essentially­aimed­ at­ providing­ the­ resources­ required­ for­ the­efficient­discharge­of­the­duties­stipulated­by­the­MNB­Act.

Operating costs

Actual­ operating­ costs­ in­ 2016­ amounted­ to­ HUF­35,395­ million,­ which­ is­ 13.2­ per­ cent­ below­ the­approved­ budget­ and­ 7.3­ per­ cent­ above­ the­expenditures­incurred­in­2015.

The­shortfall­compared­to­the­2016­budget­in­the­case­of­personnel­costs­is­due­to­the­fact­that­during­the­year­the­headcount­was­lower­than­planned,­and­part­of­the­family-friendly­workplace­programme’s­2016­phase­will­ be­ implemented­differently,­ in­ line­with­the­Executive­Board’s­decision.­The­fulfilment­of­the­2016­general­operating­costs­below­the­budget­was­mostly­attributable­to­the­fact­that­the­new­contract­for­the­communication­service­was­not­concluded­in­2016,­contrary­to­the­plans,­due­to­the­longer-than-anticipated­public­procurement­procedure.

The­ increase­ in­ the­ expenses­ compared­ to­ the­previous­year­occurred­in­the­personnel­costs,­mostly­due­to­the­rise­in­the­average­headcount­by­52­(4.1­per­cent)­primarily­ through­ the­filling­of­vacancies,­and­ also­ for­ the­ performance­ of­ new­ tasks­ (e.g.­resolution­ and­ reorganisation­ activity,­ and­ extra­duties­of­the­Financial­Arbitration­Board,­as­mandatory­enforcement­forum).

General­operating­costs­also­increased,­mostly­due­to­the­rise­in­the­costs­of­armed­security­guarding,­within­the­operating­expenditures.­This­is­attributable­to­the­

Chart 14Changes in the forint exchange rate (inverse scale)

290

295

300

305

310

315

320

325

290

295

300

305

310

315

320

325

Revaluation reserves dueto exchange rate changes

HUF 182.5 billionRevaluation reserves dueto exchange rate changes

HUF 312.6 billion31

.12.

2015

31.1

2.20

16

EUR/HUF EUR/HUF

Average cost rateMNB official exchange rate EUR/HUF

Jan

2015

Fe

b 20

15

Mar

201

5 Ap

r 201

5 M

ay 2

015

June

201

5 Ju

ly 2

015

Aug

2015

Se

p 20

15

Oct

201

5 N

ov 2

015

Dec

2015

Ja

n 20

16

Feb

2016

M

ar 2

016

Apr 2

016

May

201

6 Ju

ne 2

016

July

201

6 Au

g 20

16

Sep

2016

O

ct 2

016

Nov

201

6 De

c 20

16

Table 9Operating costs of the MNB in 2016

Description Actual data for 2015 Budget for 2016 Actual data for 2016 Index (2016 actual /

2016 budgeted)

Index (2016 actual

/ 2015 actual)

HUF millions Per cent

1.­Staff­expenditures 19,712­ 23,334­ 21,146­ 90.6 107.3

2.­General­operating­costs 13,261­ 17,459­ 14,249­ 81.6 107.5

Total 32,973 40,793 35,395 86.8 107.3

REvIEW­OF­THE­MNB’S­PERFORMANCE­IN­2016

ANNUAL REPORT • 2016 61

fact­that­with­the­outsourcing­of­the­security­guarding­activity,­security­requirements­increased,­the­impact­of­which­was­ incurred­ in­ the­ operating­ costs­ from­March­2015,­while­in­2016­it­was­already­incurred­for­the­entire­reporting­period.­In­addition,­the­flat­fee­of­the­security­guarding­services­for­2016­rose­from­1­January.

Personnel costs

In­ 2016,­ personnel­ costs­ (HUF­ 21,146­ million)­exceeded­ the­previous­year’s­costs­by­7.3­per­cent­(by­HUF­1,434­million).

Compared­to­2015,­the­closing­headcount­was­up­by­117­employees­(9.2­per­cent),­while­the­change­in­the­average­headcount­was­over­4­per­cent,­ i.e.­ it­ rose­from­1,274­in­2015­to­1,326­in­2016.

The­ impact­on­costs­of­ the­aforementioned­factors­and­of­ the­wage­adjustment­performed­within­ the­framework­of­the­wage­bill­management­appeared­in­2016.­In­addition­to­the­foregoing,­the­difference­in­personnel­costs­is­also­attributable­to­the­fact­that­the­cost­of­meal­allowances­was­incurred­in­respect­of­the­whole­year­in­2016.­Moreover,­the­health­programme­(general­ medical­ screening)­ was­ introduced­ mid-year­in­2015,­while­in­2016­the­service­was­available­throughout­the­year.

General operating costs

In­2016,­general­operating­costs­(HUF­14,249­million)­were­ 7.5­ per­ cent­ higher­ than­ in­ 2015­ (up­ HUF­988­ million);­ the­ changes­ in­ the­ components­ are­attributable­to­the­following­reasons.

IT costs­increased­by­HUF­132­million­(7.0­per­cent)­in­year-on-year­terms.­This­was­mostly­attributable­to­the­rise­in­IT­security­services­and­data­transmission­fees,­related­ to­ the­ high-level­ protection­ of­ confidential­data­and­new­data­relations.­The­excess­costs­were­mitigated­by­the­optimisation­of­the­use­of­consulting­services.

Compared­to­2015,­operating costs­also­rose­(by­HUF­1,177­million,­20.4­per­cent),­which­is­mostly­due­to­the­increase­in­security­guarding­expenses.­The­cost­of­the­outsourced­activity­ in­2015­was­ incurred­for­10­months,­while­in­2016­for­12­months,­and­the­flat­rate­of­the­service­also­rose­in­2016.­The­excess­costs­of­ security­ guarding­were­mitigated­ by­ a­ technical­

decrease­ in­ property­ maintenance­ costs:­ from­ 1­January­2016­the­upkeep­expenses­of­the­Training­and­Leisure­Centre­are­recognised­among­personnel­costs,­which­represents­a­saving­in­operating­expenses,­but­in­fact­is­not­a­saving­in­terms­of­the­total­costs­of­the­MNB.­Consulting­fees­related­to­upkeep,­as­well­as­the­vehicle,­stationery,­telephone­costs­and­postage­also­decreased,­albeit­to­a­smaller­degree.

The­ annual­ amount­ of­ the­ depreciation charge­ of­tangible­and­intangible­assets­(HUF­2,951­million)­in­2016­exceeded­that­of­the­previous­year­by­10.6­per­cent,­primarily­as­a­result­of­the­investments­realised­in­2015.

Other expenses­ in­ 2016­ fell­ by­ 15.7­ per­ cent­ (HUF­605­million)­ compared­ to­ the­expenses­ incurred­ in­2015,­which­is­the­combined­result­of­several­factors­working­ in­ opposite­ directions.­ Legal­ consultancy­costs­ decreased­ substantially,­ as­most­ of­ the­ costs­related­ to­ the­ set-up­ of­ the­ central­ bank’s­ asset­management­ agency­ were­ incurred­ in­ 2015;­ in­addition,­the­legal­resolutions,­related­to­the­activity­of­the­Financial­Arbitration­Board,­prescribed­by­the­MNB­Act­were­obtained­to­a­much­lower­degree­than­in­2015­(compared­to­the­number­of­cases­in­2015,­substantially­ fewer­ legal­ disputes­ arose­ in­ 2016).­Communication­costs­also­decreased­in­2016,­due­to­the­delay­in­the­new­public­procurement­procedure­announced­for­the­use­of­communication­services.­On­the­other­hand,­expert­fees­substantially­increased,­because­ the­ costs­ of­ the­ complex­ central­ bank­research­and­analysis,­research-supported­consultancy­and­study­compilation­ tasks­ in­2015­were­ incurred­only­from­the­second­half­of­the­year,­while­in­2016­throughout­the­year,­together­with­the­costs­of­ad­hoc­works.­The­amount­of­the­membership­fees­related­to­the­supervisory­activity,­prescribed­by­EU­regulations,­also­increased.

Capital expenditure

In­ order­ to­ achieve­ the­ MNB’s­ objectives­ and­maintain­the­volume­and­quality­of­tangible­assets,­development­ projects­ and­ asset­ procurements­became­necessary.­In­relation­to­the­normal­course­of­ business,­ the­ approved­ capital­ expenditure­budget­ for­ 2016­ amounted­ to­ HUF­ 8,829­ million.­An­ appropriation­ was­ also­ approved­ for­ the­implementation­of­the­Corporate­Social­Responsibility­Programme,­for­purchasing­the­properties­serving­as­venues­for­internal­training,­and­for­the­renovation,­

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ANNUAL REPORT • 2016 62

rebuilding­or­reconstruction­of­existing­property­and­for­property­to­be­purchased­in­the­future.­(The­2016­budget­contained­only­the­property­renovations­and­modernisation­related­to­the­usual­course­of­business­against­this­real­property­appropriation.)­In­relation­to­the­Corporate­Social­Responsibility­Programme,­the­MNB­supports­the­purchase­of­art­treasures­as­part­of­the­Depository­Programme,­for­the­implementation­of­ which­ the­ approved­ capital­ expenditure­ plan­includes­a­separate­appropriation.­In­2016,­HUF­4,910­million­was­paid­in­relation­to­capital­expenditure,­of­which­HUF­559­million­ is­ related­to­ the­Depository­programme.

Purchases­made­for­IT­operating­purposes­comprise­a­ large­ portion­ of­ the­ information­ technology­investment.­ Investments­ included­ the­ purchase­ of­Microsoft­licences,­the­developer­and­test­servers,­as­well­as­the­licences­necessary­for­the­implementation­of­ the­STAFIR­programme­aimed­at­ the­ integration­of­ the­ statistical­ and­ supervisory­ systems,­ and­ the­development­of­the­system­also­continued.­The­version­change­of­the­KONDOR­system­was­also­completed.­The­major­purchases­of­IT­equipment­also­include­the­expansion­of­the­capacity­of­the­central­data­storage­system­ and­ the­ renewal­ of­ the­ network­ devices.

One­of­the­most­important­investments­in­the­area­of­IT­security­was­the­procurement­of­intrusion­detection­and­ prevention­ systems­ and­ the­ purchase­ of­ the­privileged­user­management­system,­which­ensures­the­management­and­protection­of­the­accounts­of­users­with­privileged­access.

The­ procurement­ procedure­ related­ to­ the­replacement­ of­ the­ security­ technology­ system­ of­

the­building­at­Szabadság­square­and­of­the­Logistics­Centre,­as­part­of­the­enhancement­of­the­security­technology­environment,­was­closed­with­no­result.­The­investments­provide­assistance­for­the­work­of­the­armed­security­guards­by­the­complex­replacement­of­the­bank­security­electronic­and­mechanical­systems,­and­they­are­also­aimed­at­preventing­extraordinary­situations.­The­procurement­procedure­related­to­the­investments­will­be­launched­in­2017­again­based­on­new­concept.

The­ most­ important­ property-related­ investments­included­the­development­of­the­social­area­on­the­7th­ floor­ of­ Eiffel­ Palace,­ the­ strengthening­ of­ the­front­gates­of­the­building­at­Szabadság­square­and­the­ replacement­ of­ the­ electric­ noise­ traps­ in­ the­computer­room.

Personnel management at the MNB

The­ MNB­ continues­ to­ treat­ human­ resource­management­ as­ a­ strategic­ issue­ with­ a­ view­to­ fostering­ efficient­ and­ profitable­ operation.­Accordingly,­ it­ provides­ its­ employees­ who­ are­committed­to­the­central­bank’s­goals­over­the­long­run­and­are­ready­to­enhance­their­professional­skills­on­an­ongoing­basis­with­stable­employment,­moral­and­professional­appreciation,­competitive­ income,­advancement,­training­and­education­opportunities.

The­ MNB­ has­ developed­ a­ work­ culture­ where­in­ a­ value-driven­ atmosphere­ employees­ are­able­ to­ perform­ their­ tasks­ efficiently,­ focusing­on­ performance.­ They­ acquire­ and­ enhance­ the­knowledge,­ skills­ and­ competence­ necessary­ for­efficient­work,­and­the­productive­work­performed­by­the­employees­is­supported­by­incentives­and­moral­appreciation.­ All­ these­ help­ the­ employees­ realise­their­individual­interests­in­harmony­with­the­interests­of­the­institution.

The­ MNB’s­ human­ resource­ strategy­ is­ able­ to­secure­the­required­number­of­highly­educated­and­motivated­employees­ and­employ­ the­professional­skills­and­abilities­of­the­available­resources­efficiently.­Its­goal­is­not­only­to­integrate­excellent­employees,­but­also­retain­them;­thus,­it­also­helps­support­the­individual­ ambitions­ in­ line­ with­ objectives­ of­ the­organisation.­The­MNB­still­considers­it­important­to­employ­ highly­ qualified,­ knowledgeable,­ dedicated­and­loyal­employees,­relying­on­whom­it­ is­capable­of­ taking­ part­ in­ the­ changes­ along­ the­ renewing­domestic­economic­and­social­interests­and­values.

Chart 15Trends in the MNB’s capital expenditure in 2016*

2016Actual

2016Budget

HUF Million

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 1,0000

BuildingsInformation – technology

Other investments and assets

* Excluding the appropriation for property purchases and renovations and the Depository Programme.

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ANNUAL REPORT • 2016 63

Following­ its­ proven­ practice,­ the­ MNB­ elaborated­a­ new­ three-year­ training­ concept­ in­ 2016­ as­ well,­as­ part­ of­ which­ it­ prepared­ a­ Training­ Catalogue­and­Training­Plan­with­a­view­to­providing­a­pool­of­highly­qualified­employees­ representing­professional­excellence.­Employees­typically­attended­professional,­personal­skills­development­programmes­and­language­trainings,­which­–­tailored­to­individual­needs­–­served­the­ participants’­ development­ in­ the­most­ effective­and­efficient­manner­possible­in­terms­of­efficiency­and­approach­as­well­as­the­development­cooperation­skills.

Within­the­framework­of­the­internship­system,­the­MNB­ also­ contributed­ to­ ensuring­ that­ university­students­can­acquire­as­much­professional­ skills­as­possible.­ Within­ the­ framework­ of­ the­ internship­system,­the­MNB­received­higher-education­students­for­the­period­of­their­field­practice­and­also­within­the­framework­of­dual­training.­The­new­system­allows­the­ selection­ and­ employment­ of­ students­ whose­performance­is­outstanding.

In­ 2016,­ the­ human­ resource­ area­ continued­ the­development­of­HR­systems,­which­also­ensure­the­employment­framework,­support­the­integration­of­new­entrants,­ the­relations­between­the­employee­and­the­organisation­during­the­existence­of­the­legal­relationship,­and­support­the­process­of­leaving­the­organisation.­ The­ human­ resource­ functional­ area­communicates­the­human­policy­goals­and­principles­to­ the­ employees,­ and­ facilitates­ information­ flow­between­the­employer­and­the­staff.

The­ head­ of­ the­ functional­ area­ plays­ a­ dominant­role­in­the­elaboration­of­the­headcount­and­wages­necessary­ for­ fulfilling­ the­ tasks.­ The­MNB’s­ wage­and­ income­ policy­ reflects­ its­ special­ position­ and­supervisory­ function.­ The­ wages­ reflect­ the­ due­recognition­of­the­special­knowledge­that­the­staff­of­the­functional­areas­ in­charge­of­monetary­control,­financial­supervision­or­cash­supply­have.

The­MNB­operated­a­wage­bill­management­system­in­ 2016­ as­well,­ which­ is­ suitable­ for­ the­ fast­ and­flexible­management­of­the­changes­and­requirements­arising­ in­ the­ various­ functional­ areas­ by­ the­(temporary)­ regrouping­ of­ employees.­ In­ addition,­the­wage­bill­management­also­supports­ leaders­ in­the­most­complete­performance­of­the­tasks­of­the­areas­managed­by­them­in­a­way­that­the­heads­of­the­ various­ areas­ can­ directly­ evaluate­ excellent­

work­and­the­relevant­achievements,­which­may­be­reflected­ in­ the­ remuneration­of­ the­employees­as­well.­ Accordingly,­ the­ system­ that­ was­ introduced­became­suitable­for­the­long-term­retention­of­high-quality,­ highly­ qualified­personnel­ and­ also­ for­ the­strengthening­of­responsible­financial­management­by­granting­much­wider­possibilities­for­the­heads­of­wage­management­areas­to­give­proposals.

The­long-term­goal­of­the­wage­bill­management­is­that­the­fulfilment­of­the­strategic­objectives­and­tasks­of­individual­areas­can­be­reflected­in­wage­setting­as­well;­ it­should­help­determine­competitive­salaries,­motivate­a­more­thorough­assessment­of­employees­and­acknowledge­expertise­and­skills­in­the­salary,­as­well­as­encourage­ the­heads­of­ functional­areas­ to­manage­human­resources­in­a­way­that­is­even­more­reasonable­ and­ economical­ than­ the­ current­ one,­providing­ at­ the­ same­ time­ greater­ opportunities­to­ ensure­ competitive­ income­ for­ knowledgeable,­experienced­ employees.­ Within­ the­ framework­ of­the­ incentive­ system,­ in­ 2016­ it­ was­ also­ possible­to­ recognise­ individual­ efforts­ and­ responsible­professional­work,­within­the­limits­permitted­by­the­rules­of­wage­bill­management.

With­ its­ multi-component­ fringe­ benefit­ system,­the­MNB­ provided­ a­ wide­ range­ of­ benefits­ to­ its­employees­ in­ 2016­ as­well,­ and­ also­ preserved­ its­family­welfare­scheme.­Within­the­framework­of­this,­it­provided­special­support­for­families­with­children­and­contributed­to­the­mitigation­of­burdens­related­to­the­occurrence­of­unexpected­situations­in­life.­For­the­preservation­of­the­personnel’s­health,­a­complete­check-up­programme­is­available­for­each­employee­once­a­year.

It­ is­of­key­ importance­ in­ the­MNB’s­organisational­culture­ that­ employees­ can­ fulfil­ their­ family­ roles­as­ well­ and­ can­ perform­ their­ workplace­ tasks­with­ a­ balanced­ family­ background.­ As­ a­ result­ of­a­ number­ of­ measures­ and­ successful­ initiatives­and­ as­ an­ acknowledgement­of­ its­ Child-focus­ and­Family-friendly­Programme,­the­MNB­won­the­title­of­‘Family-friendly­Workplace’­presented­by­the­Ministry­of­Human­Capacities­in­2016­as­well.­With­this­title,­the­Ministry­ appreciated­ the­ efforts,­ programmes,­initiatives­ and­ system-level­ solutions­ undertaken­by­ the­ central­ bank­ voluntarily­ and­ irrespective­ of­competition,­ in­ order­ to­ support­ employees­ with­family­and­children.

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Changes in staff number

Changes­ in­ the­ staff­ number­ of­ the­MNB­ in­ 2016­were­determined­by­the­labour-intensiveness­of­the­tasks­to­be­completed­and­by­measures­related­to­the­transformation­of­the­organisation.

As­a­result­of­the­natural­migration­and­quality-driven­replacements,­the­employment­of­171­employees­was­terminated­during­the­year.

In­ order­ to­ secure­ an­ adequate­ workforce­ for­ the­operating­structure­aligned­with­the­challenges­and­the­MNB’s­expanded­tasks,­276­new­entrants­were­recruited­ to­ fill­ vacant­ or­ new­ positions­ in­ 2016.­During­the­year,­the­number­of­employees­joining­the­so-called­‘inactive­payroll’­–­who­are­not­included­in­the­statistical­headcount­–­fell­short­of­the­number­of­those­returning­from­the­‘inactive­payroll’­by­12.­The­relevant­effect­also­increased­the­closing­headcount.

At­ end-2016,­ the­ total­ staff­ number­ was­ 1,384­employees;­ the­ number­ of­ employees­ was­ 117­persons­higher­than­at­end-2015.

In­2016,­the­average­staff­number­of­the­MNB­was­1,326­employees,­exceeding­that­of­the­previous­year­by­52.

In­dual­education,­the­MNB­supported­and­accepted­17­students­as­trainees.

As­regards­the­average­age­of­employees,­ it­can­be­stated­that­the­staff­became­even­younger:­in­2016­the­average­age­of­employees­was­40.

Procurement

Like­other­central­banks­in­the­European­Union,­the­MNB­ conducts­ public­ procurement­ procedures­ in­respect­ of­ purchases­where­ the­ value­ reaches­ the­value­ limits­ of­ national­ public­ procurements.­ The­MNB­is­still­subject­to­public­procurement­jurisdiction­based­on­Commission­Decision­2008/963­amending­the­Annexes­to­Directives­2004/17/EC­and­2004/18/EC­of­the­European­Parliament­and­of­the­Council­on­public­procurement­procedures,­as­regards­their­lists­of­contracting­entities­and­contracting­authorities.

The­procurement­processes­of­the­MNB­are­regulated­by­the­internal­regulations­of­the­Director­General­and­the­business­management­manual,­in­accordance­with­the­prevailing­Act­on­Public­Procurement.

As­regards­procurements­in­2016,­there­were­three­types­of­procurement­procedures­at­the­MNB:

–­­other­procurement­below­a­net­amount­of­HUF­2­million;

–­­other­procurement­reaching­a­net­amount­of­HUF­2­million,­but­not­reaching­the­public­procurement­value­ limit­ (in­ 2016­ this­ included­ procurements­between­ the­net­ amount­of­HUF­2­and­8­million­based­on­value­);­and

–­­public­procurement.

Procurement­ procedures­ below­ net­ HUF­ 2­million­are­ conducted­ by­ the­ cost-bearing­ organisational­units­within­their­own­sphere­of­responsibility,­while­procurements­and­public­procurements­reaching­the­value­of­net­HUF­2­million­are­arranged­by­the­Central­Procurement­Department­of­the­Central­Procurement­and­ Operation­ Directorate­ with­ support­ from­ the­organisational­units­concerned.

In­2016,­207­procurement­requests­were­received­and­procedures­launched,­of­which­62­procedures­were­carried­over­to­2017.

Number­ of­ procedures­ in­ 2016­ (closed­ with­ the­conclusion­ of­ a­ contract):­ 149­ (of­ these­ 62­ were­brought­forward­from­2015)

–­­public­procurement:­60;

–­­other­procurement­in­excess­of­net­HUF­2­million:­89.

The­total­value­of­completed­procedures­with­a­value­in­excess­of­a­net­amount­of­HUF­2­million­represented­a­total­expenditure­of­HUF­4,571­million­for­the­central­bank.

Environmentally-conscious operation

In­ 2016­ again,­ the­ environmental­ activity­ of­ the­MNB­was­determined­by­the­environmental­strategy­applicable­to­the­period­2014-2016.­Along­with­the­environmentally-conscious­development­of­buildings,­the­measures­ implemented­were­ aimed­ at­ further­enhancing­the­environmental­performance­of­the­cash­supply­chain.

In­2014,­the­MNB­set­the­goal­for­its­head­office­to­achieve,­by­the­end­of­2016,­the­‘very­good’­building­

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certification­in­the­international­environmental­rating­system­(BREEAM­In-Use),­which­is­one­grade­higher­than­the­current­rating.­It­implemented­the­changes­and­developments­necessary­for­the­upgrading.­The­external­audit­of­the­comprehensive­building­rating­(MNB­Head­Office,­Logistics­Centre)­was­performed­in­ November­ 2016,­ and­ the­ MNB­ obtained­ the­‘very­Good’­rating.­Based­on­the­assessment­of­the­buildings’­ certification­ result­by­external­ auditor,­ it­should­be­emphasised­that­no­listed­building­has­ever­obtained­ such­high-level­ certification,­which­ in­ the­case­of­the­MNB­Head­Office­is­an­outstanding­result­by­international­standards­as­well.­From­the­data­of­the­BREEAM­In-Use­building­certification­performed­in­various­countries­of­the­world­it­can­be­established­that­more­than­50­per­cent­of­the­buildings­do­not­reach­the­“very­Good”­rating.­Based­on­this,­the­MNB­Head­Office­and­the­Logistics­Centre­buildings­belong­to­the­top­50­per­cent­globally­as­well.­According­to­the­external­expert­assessment,­the­Logistics­Centre­performs­in­line­with­its­age,­while­the­Head­Office’s­performance­is­outstanding­by­international­standards­as­well,­since­in­that­category­the­most­typical­rating­of­the­buildings­of­similar­age­is­“Pass”­and­“Good”.

In­ 2017,­ the­MNB’s­ environmental­ strategy­will­ be­reviewed,­ which­ will­ also­ include­ the­ analysis­ of­the­further­steps­related­to­the­development­of­the­buildings.­Based­on­the­score­achieved­in­the­case­of­the­Logistics­Centre,­it­is­not­unfeasible­to­set­the­goal­of­achieving­the­“Excellent”­rating.­In­the­case­of­the­Head­Office,­ the­ retention­and­confirmation­of­ the­“very­Good”­rating­may­be­set­as­a­target.

The­ 2014-2016­ environmental­ strategy­ period­was­ closed­ at­ the­ end­ of­ 2016.­ In­ relation­ to­ the­improvement­of­the­cash­supply­chain’s­environmental­performance,­based­on­the­detailed­environmental­review­ of­ the­MNB’s­ subsidiaries­ involved­ in­ cash­production,­ in­ 2016­ Pénzjegynyomda­ Zrt.­ and­Diósgyőri­Papírgyár­Zrt.­ started­ the­preparation­ for­the­ implementation­ of­ the­ MNB’s­ environmental­management­ system­ (KÖvHIR).­ In­ 2017,­ the­subsidiaries­ will­ obtain­ the­ EMAS­ certificate­ –­ the­international­accreditation­recognising­environmental-friendly­ operation.­ In­ relation­ to­ the­ further­enhancement­of­the­cash­supply­chain’s­environmental­performance,­in­the­medium-term­strategic­period­of­2017-2019­the­focus­will­be­on­the­survey­of­the­cash­logistics­providers’­environmental­performance.

The­trends­in­the­MNB’s­environmental­performance­are­ mostly­ determined­ by­ energy­ consumption,­

and­ particularly­ by­ energy­ consumption­ related­to­ the­operation­of­ the­buildings.­The­ total­energy­consumption­ of­ the­ properties­ included­ in­ the­environmental­ management­ system­ (Head­ Office,­Logistics­Centre,­business­site­at­Krisztina­krt.)­declined­in­the­last­three­years,­falling­short­of­the­2013­base­by­2.6­per­cent.­(According­to­the­environmental­target,­the­ goal­ was­ to­ reduce­ total­ energy­ consumption­by­ 10­ per­ by­ 2016­ compared­ to­ the­ 2013­ base.)­Although­ the­ target­ was­ not­ achieved­ in­ nominal­terms,­ the­ improvement­ in­ the­ efficiency­ of­ total­energy­consumption­is­well­reflected­by­the­fact­that­the­MNB’s­per­capita­(specific)­energy­consumption­fell­by­18.5­per­cent­in­the­last­three­years.

In­ the­ case­ of­ the­ targets­ set­ for­ the­ reduction­ of­energy­ consumption,­ it­ is­ difficult­ to­ formulate­a­ responsible­ undertaking­ due­ to­ the­ extreme­weather­ conditions­ accompanying­ global­warming;­nevertheless,­continuous­efforts­should­be­made­to­improve­specific­energy­consumption.

The­ operation­ of­ the­ MNB’s­ environmental­management­ system­ (KÖvHIR)­ allows­ for­ the­continuous­monitoring­of­the­environmental­factors­that­ result­ in­ significant­ environmental­ impacts,­and­ also­ allows­ intervention­ if­ necessary­ for­ the­improvement­of­environmental­performance­year­by­year.­The­MNB­intends­to­maintain­and­enhance­this­system­in­the­2017-2019­strategic­period­as­well.­ In­relation­to­this,­it­is­advisable­to­examine­the­possibility­of­integrating­the­environmental­management­systems­to­ be­ implemented­ by­ the­ subsidiaries­ involved­ in­banknote­production­in­the­MNB’s­system.

In­2016,­the­system­of­selective­waste­collection­was­standardised­ in­ the­ MNB’s­ properties,­ as­ a­ result­of­ which­ the­ possibility­ of­ recycling­ metal,­ plastic­and­glass­waste,­in­addition­to­paper,­is­guaranteed­in­ all­ Budapest-based­ MNB­ properties.­ Important­progress­was­achieved­in­the­development­of­waste­management­ in­ connection­ with­ the­ utilisation­ of­‘banknote­briquettes’.­From­1­January­2016,­instead­of­the­previous­utilisation­for­charity­purposes,­so-called­‘green­electricity’­ is­ generated­ from­ the­ ‘banknote­briquettes’­in­domestic­power­plants,­which­is­a­more­advantageous­solution­in­terms­of­the­protection­of­the­ environment.­ The­ new­ system­ lived­ up­ to­ the­expectations;­based­on­the­experiences,­the­service­provider­ is­flexible­ in­accepting­and­processing­ the­waste­ consignments­ that­ occasionally­ exceed­ the­usual­volume,­and­the­recycled­product­enters­ into­business­circulation.

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Operational risk management

The­successful­implementation­of­the­MNB’s­strategic­objectives­and­the­protection­of­its­good­reputation­and­assets­are­crucially­important­values.­An­efficient­operational­ risk­ management­ system­ plays­ an­important­role­in­the­protection­of­these­objectives­and­ values.­ With­ that­ in­ mind,­ the­ identification,­assessment­ and­ continuous­ internal­ monitoring­of­ operational­ risks­ and­ the­ implementation­ of­the­ appropriate­ response­ measures­ constitute­ an­integral­part­of­the­MNB’s­corporate­governance.­In­order­to­continuously­maintain­the­operational­risk­management­activity­at­a­high­level,­it­is­essential­to­monitor­international­best­practices­and­to­improve­the­MNB’s­systems­in­line­with­such.

In­ order­ to­ be­ able­ to­ adequately­ discharge­ its­fundamental­ tasks­ in­ critical­ situations­ as­ well,­the­ MNB­ operates­ efficient­ business­ continuity­management.­Within­that,­it­continuously­updates­its­business­continuity­and­disaster­recovery­plans,­the­reliability­of­which­is­tested­every­year.­The­1-week­real­time­integrated­test­performed­in­respect­of­the­operation­of­the­payment­system­and­foreign­reserve­management­bears­utmost­importance.

3.13 INTRODUCTION OF THE ESCB COMMITTEES

Since­ Hungary’s­ accession­ to­ the­ European­ Union,­the­ MNB’s­ management­ and­ experts­ have­ been­participating­in­the­work­of­the­ESCB­committees­and­their­working­groups.­This­membership­and­cooperation­provides­ an­ opportunity­ for­ national­ central­ banks­to­work­ together­ and­ formulate­ joint­ positions­ and­also­ enables­ the­ representatives­ of­ national­ central­banks­to­obtain­information­on­the­ECB’s­activities­on­a­regular­basis.­On­31­December­2016,­fifteen­ESCB­committees­and­two­other­committees­assisting­the­work­ of­ the­ ESCB­were­ in­ operation.­ In­ connection­with­ the­ launch­ of­ the­ so-called­ Single­ Supervisory­Mechanism­(SSM)­ in­November­2014,­ in­addition­to­the­two­existing­configurations­(euro­area­composition­and­ESCB­composition)­some­committees­have­held­meetings­in­SSM­composition­since­2014­as­well,­with­the­attendance­of­representatives­of­the­supervisory­authorities­operating­as­organisations­independent­of­the­central­banks­of­the­Member­States­participating­in­the­SSM.

The­following­provides­a­brief­summary­of­the­fields­of­activity­(mandates)­of­each­ESCB­committee:

Accounting and Monetary Income Committee (AMICO):­ This­ Committee­ develops­ and­ regularly­reviews­the­accounting­policy­principles­which­define­the­framework­of­financial­statements­in­accordance­with­the­Statute­of­ the­ESCB­and­the­methodology­of­ the­ preparation­ of­ regular­ financial­ reports,­facilitating­ their­ co-ordination­ at­ an­ international­level.­It­monitors­the­calculation­of­monetary­income­in­ accordance­ with­ the­ risk­ management­ process­developed­ by­ the­ security­ framework­ system­ of­accounting.

Banknote Committee (BANCO):­ This­ Committee­determines­ the­ euro­banknote­needs­of­ euro­ area­countries,­coordinates­the­production­of­banknotes­and­works­out­the­stockpiling­and­banknote­processing­policies­of­euro­banknotes.­Its­tasks­include­sharing­experience­in­the­production­of­euro­banknotes,­the­examination­and­development­of­security­features­to­prevent­ euro­ banknotes­ from­ being­ counterfeited,­and­ the­ assessment­ of­ security­ risks­ related­ to­the­ production­ of­ the­ euro.­ It­ contributes­ to­ the­harmonisation­of­practices­applied­in­the­euro­area,­the­ development­ of­ the­ system­ which­ monitors­counterfeiting­ and­ the­ verification­ of­ statistics­regarding­euro­banknotes­and­coins.

Committee on Controlling (COMCO):­ COMCO­ has­been­an­ESCB­committee­since­July­2007­(only­euro­area­NCBs­participate­in­the­work­of­this­committee).­It­ contributes­ to­ the­application­and­enhancement­of­the­Common­Eurosystem­Cost­Methodology,­and­prepares­analyses­on­the­cost­data­and­cost­structure­of­certain­functions­and­products­of­the­Eurosystem/ESCB.­In­the­area­of­management­information­systems,­it­serves­as­an­important­forum­for­co-operation­and­information­exchange­on­issues­concerning­the­ESCB­as­a­whole.

Eurosystem/ESCB Communications Committee (ECCO):­ This­ Committee­ contributes­ to­ the­development­of­the­external­communication­policy­of­the­Eurosystem,­the­ESCB­and­the­ECB,­with­the­aim­of­making­the­objectives­defined­by­the­Eurosystem/ESCB­ more­ transparent­ and­ understandable,­ and­informing­the­public­of­the­tasks­and­activities­of­the­Eurosystem­and­the­ESCB.

Financial Stability Committee (FSC):­The­FSC­has­been­operational­since­2011,­when­the­Banking­Supervision­Committee­ (BSC)­ ceased­ operation.­ Its­ task­ is­ to­provide­professional­support­to­the­decision-making­bodies­of­the­European­Central­Bank­in­their­functions­

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relating­ to­ financial­ stability­ and­ macroprudential­policy­issues.

Internal Auditors Committee (IAC):­By­reviewing­the­relevant­ common­ projects,­ systems­ and­ activities­and­by­providing­for­co-operation­in­certain­auditing­issues­which­are­of­‘common­interest’­for­the­ECB­and­national­ central­ banks,­ this­ Committee­ assists­ the­ESCB­in­achieving­its­targets.

International Relations Committee (IRC):­ The­ IRC­assists­in­carrying­out­those­tasks­of­the­ESCB­that­are­related­to­international­cooperation­and­contributes­to­formulating­the­position­of­the­Eurosystem­regarding­the­various­areas­of­relations­with­non-EU­countries.

Information Technology Committee (ITC):­ This­Committee­ contributes­ to­ the­ development­ of­ the­information­ technology­ policy­ and­ strategy­ of­ the­Eurosystem­ and­ the­ ESCB­ as­ well­ as­ the­ related­guidelines­with­ special­ regard­ to­ security­ concerns,­and­provides­ technical­ advice­ to­ other­ committees.­Furthermore,­it­initiates­and­implements­Eurosystem­and­ESCB­level­developments­and­independent­projects.

Legal Committee (LEGCO):­ LEGCO­ provides­ legal­assistance­for­the­work­of­the­ESCB;­in­particular,­it­contributes­ to­ the­ maintenance­ of­ the­ regulatory­framework­of­ the­Eurosystem­and­the­ESCB­and­to­the­ review­of­ the­ transposition­of­ legal­ regulations­into­national­law,­and­monitors­and­reports­on­how­national­ authorities­ and­ EU­ institutions­ comply­with­ their­ consultation­ obligations­ relating­ to­draft­ legislation­ in­ areas­ falling­ within­ the­ ECB’s­competence.

Market Infrastructure and Payments Committee (MIPC): The­ Payment­ and­ Settlement­ Systems­Committee­(PSSC)­continues­its­operation­under­the­name­ of­MIPC­ since­ 1­ April­ 2016.­ This­ Committee­assists­the­ESCB­in­the­smooth­operation­of­payment­systems­ and­ in­ connection­ with­ the­ cross-border­use­ of­ collaterals.­ Furthermore,­ it­ supports­ the­ESCB­ in­ general­ and­ ‘oversight’­ issues­ relating­ to­payment­ systems,­ as­ well­ as­ in­ strategic­ decisions­related­ to­ securities­ clearing­ and­ settlement­systems.­ In­ accordance­with­ its­ new­ name,­ in­ the­future­the­committee­will­pay­more­attention­to­the­strengthening­of­oversight­activity,­ the­ fostering­of­pan-European­ developments­ in­ the­ area­ of­ high-­and­small-value­payments,­ securities­and­collateral­management.

Market Operations Committee (MOC):­ The­ MOC­assists­the­ESCB­in­the­implementation­of­the­single­monetary­policy­and­the­execution­of­foreign­exchange­transactions,­ the­management­of­ the­ECB’s­ foreign­reserves­ and­ in­ the­ appropriate­ adaptation­ of­ the­monetary­policy­tools­applied­by­the­central­banks­of­Member­States­where­the­euro­is­yet­to­be­introduced,­as­well­as­in­the­implementation­of­ERM­II.

Monetary Policy Committee (MPC):­This­Committee­assists­the­ESCB­in­the­implementation­of­the­single­monetary­and­exchange­rate­policy­of­the­Community.­In­addition,­it­provides­assistance­in­the­execution­of­the­ESCB’s­ tasks­ related­ to­ the­ coordination­of­ the­monetary­and­exchange­rate­policies­of­the­NCBs­of­non-euro­area­Member­States­and­the­ECB.

Organisational Development Committee (ODC): The­ ODC­ was­ set­ up­ in­ July­ 2013­ with­ only­ euro­area­members.­ It­assists­ the­work­of­ECB­decision-makers­with­ proposals­ regarding­ the­ planning­ and­organisational­issues­related­to­the­operation­of­the­Eurosystem­and­ the­Single­Supervisory­Mechanism­(SSM).­In­addition,­it­also­coordinates­the­work­of­the­Eurosystem­Procurement­Coordination­Office­(EPCO),­and­ runs­ the­ operational­ risk­ management­ and­business­continuity­system­of­the­Eurosystem/ESCB.

Risk Management Committee (RMC):­The­RMC­was­set­up­in­September­2010­and­consists­of­euro­area­members­only.­ Its­ task­ is­ to­assist­ the­work­of­ECB­decision-makers­ in­ managing­ and­ controlling­ risks­arising­from­the­market­operations­of­the­Eurosystem­by­means­of­analyses­and­proposals.

Statistics Committee (STC):­ The­ STC­ assists­ in­ the­collection­ of­ statistical­ information­ required­ for­carrying­out­the­tasks­of­the­ESCB.­It­contributes,­inter­alia,­to­the­elaboration­and­cost­effective­application­of­necessary­modifications­in­statistical­data­collection.

Other­committees­assisting­the­work­of­the­ESCB:

Budget Committee (BUCOM):­This­Committee­assists­the­Governing­Council­of­the­ECB­on­issues­concerning­the­budget­of­the­ECB;­its­members­are­the­central­banks­of­the­euro­area­Member­States.

Human Resources Conference (HRC):­The­objective­of­ this­ committee,­ established­ in­ 2005,­ is­ to­ serve­as­a­forum­for­the­central­banks­of­the­Eurosystem/ESCB­ in­ the­ exchange­ of­ information,­ opinion­ and­

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experiences­on­ issues­concerning­the­management­of­human­resources.

3.14 THE MNB’S RESEARCH ACTIVITIES IN 2016

Academic­ research­ is­ typically­ carried­ out­ by­ the­Research­ Directorate,­ while­ applied­ research­ is­conducted­both­by­the­Research­Directorate­and­the­analysts­ of­ other­ economic­ directorates.­ Academic­research­is­ultimately­published­in­international­and­domestic­scientific­journals.­Applied­research­is­mostly­presented­in­the­dedicated­publications­of­the­MNB:­the­MNB Working Papers­(issued­in­English­only),­the­MNB Occasional Papers­series­and­the­Financial and Economic Review.­ In­ addition­ to­ the­ publications,­participation­in­international­conferences­and­in­the­research­networks­and­working­groups­coordinated­by­the­ECB­all­form­part­of­the­MNB’s­research­activity.

Publications

In­2016,­five­papers­of­the­MNB’s­researchers­were­published­ in­ highly­ ranked­ international­ journals.­One­of­the­journals­that­published­a­study­that­was­prepared­ in­the­MNB­was­the­ International Journal of Central Banking,­ which­ is­ the­ top­ international­journal­ in­ central­ banking.­ The­ other­ four­ MNB­papers­ were­ published­ by­ the­ European Economic Review,­ the­Economics of Transition,­ the­ Journal of Corporate Finance,­ and­ the­ Industrial and Labour Relations Review.­ In­ addition,­ two­ papers­ written­by­ MNB­ authors­ were­ published­ in­ Közgazdasági Szemle­(Economic Review),­and­the­Statisztikai Szemle (Statistical Review)­ also­ published­ a­ central­ bank­study.­Applied­ research­findings­were­presented­ in­the­MNB’s­publications.­Four­papers­were­published­in­the­MNB Working Papers­series­and­three­in­the­MNB Occasional Papers­ series,­ while­ the­ MNB’s­employees­ contributed­ to­ the­ 2016­ issues­ of­ the­Hitelintézeti Szemle (Financial and Economic Review) with­fourteen­studies,­eleven­book­reviews­and­four­conference­reports.

Conferences and lectures

The­MNB­organised­the­Budapest­Economic­Seminar­Series­ (BESS)­ in­ 2016­ again,­ with­ internationally­acknowledged­ economists­ presenting­ their­ studies­to­ those­ interested.­ In­ 2016,­ presentations­ were­made­ in­ the­ MNB­ by­ researchers­ from­ the­ UK,­Austrian,­ Portuguese­ and­ Slovakian­ central­ banks­and­colleagues­ from­ the­ following­ top­universities:­

HEC­Montreal,­CERGE­(Prague),­Colegio­Carlo­Alberto­(Torino),­Tilburg­University,­University­of­Bonn,­and­Sapientia­University.

The­ MNB’s­ researchers­ held­ presentations­ at­ a­number­ of­ international­ conferences­ as­ well­ as­ at­several­ central­banks­and­universities.­Of­ the­main­conferences,­ ones­ that­ deserve­ mention­ include­the­ conference­ organised­ jointly­ by­ the­ European­Economic­ Association­ (EEA)­ and­ the­ Econometric­Society­(ES)­in­August­in­Mannheim,­the­conference­of­the­Royal­Economic­Society­(RES)­in­May­in­Bristol,­the­North­American­Summer­Meeting­of­the­Econometric­Society­ in­ Philadelphia,­ each­ of­ which­ included­a­ presentation­ by­ a­ researcher­ from­ the­MNB.­ In­addition,­ the­MNB’s­ studies­were­presented­at­ the­June­annual­conference­of­Computing­in­Economics­and­Finance­(CEF)­in­Bordeaux­and­at­the­prestigious­conference­ series­ entitled­ Money­ in­ Macro­ and­Finance­in­Bath.­Regarding­presentations­in­Hungary,­two­MNB­studies­were­presented­in­the­seminar­series­of­ the­Research­Centre­ for­ Economic­ and­Regional­Studies­ of­ the­ Hungarian­ Academy­ of­ Sciences­ as­well,­and­many­lecturers­also­represented­the­MNB­at­the­December­conference­of­the­Hungarian­Society­of­Economics.

Several­ MNB­ staff­ members­ participated­ in­ the­research­networks­and­working­groups­coordinated­by­the­ECB.­The­analysts­and­researchers­participated­in­ the­ regular­ meetings­ of­ the­Working­ Group­ on­Econometric­Modelling­(WGEM),­the­Wage­Dynamics­Network­ (WDN)­ and­ the­ Household­ Finance­ and­Consumption­Network­(HFCN);­at­one­of­the­WGEM­meetings­ in­ Frankfurt­meetings­ of­ the­WGEM­one­of­the­presentations­was­delivered­by­an­MNB­staff­member.

3.15 PUBLICATIONS AND CONFERENCES ORGANISED BY THE MNB IN 2016

Publications

Regular publications

Inflation Report

The­Inflation­Report­is­published­quarterly­in­order­to­enable­the­public­to­understand­and­follow­the­Bank’s­policies.­The­Report­provides­a­regular­presentation­of­past­and­expected­future­trends­in­inflation,­evaluates­the­macroeconomic­ developments­ that­ determine­

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inflation,­and­provides­a­summary­of­the­forecasts­and­considerations­on­the­basis­of­which­the­Monetary­Council­takes­its­decisions.

Financial Stability Report

Published­biannually,­this­Report­outlines­the­position­of­ the­Bank­regarding­the­changes­observed­ in­ the­financial­ system­ and­ describes­ the­ effect­ of­ these­changes­on­the­stability­of­the­financial­system.­The­analysis­in­the­Report­focuses­on­the­forward-looking­assessment­of­long-term­trends­and­risks.

Growth Report

The­ annually­ published­Growth­Report­ is­ intended­to­ present­ Hungary’s­ longer-term­ growth­ path­(occasionally­encompassing­an­entire­business­cycle)­and­its­determinants,­using­standard­and­alternative­indicators.­The­Report­provides­an­annual­overview­of­the­most­important­trends­shaping­economic­growth­over­the­short,­medium­and­longer­term.

Macroprudential Report

The­ purpose­ of­ the­ Macroprudential­ Report,­published­annually,­is­to­present­the­macroprudential­instruments­ applied­ by­ the­ MNB­ to­ prevent­and­ address­ the­ systemic­ risks­ identified­ and­communicated­ in­ the­ Financial­ Stability­ Report,­ as­well­ as­ their­ effects­ and­ the­adjustment­of­market­participants.­ In­ line­ with­ the­ MNB’s­ Statute­ and­macroprudential­strategy,­the­publication­intends­to­make­ the­MNB’s­macroprudential­measures­ easier­to­follow­and­understand­both­for­the­actors­of­the­sector­and­the­general­public.

Trends in Lending

The­ objective­ of­ the­ publication­ entitled­ Trends­ in­Lending­is­to­present­a­detailed­picture­of­the­latest­trends­ in­ lending­ and­ to­ facilitate­ the­ appropriate­interpretation­of­these­developments.­To­this­end,­it­elaborates­on­the­developments­in­credit­aggregates,­the­demand­for­loans­perceived­by­banks­and­credit­conditions.

Housing Market Report

The­ MNB’s­ new­ “Housing­ Market­ Report”,­ which­was­first­ published­ in­ the­ spring­of­ 2016,­ presents­current­ trends­ in­ the­ Hungarian­ housing­ market­semi-annually.­The­purpose­of­ the­publication­ is­ to­

provide­a­comprehensive­overview­of­the­short-term­and­long-term­trends­affecting­the­residential­property­market­ and­ to­ present­ the­ regional­ differences­ in­the­ domestic­market.­ The­ Housing­Market­ Report­presents­a­topic­which­has­special­relevance­for­the­central­bank­as­well.­The­housing­market­represents­a­ key­ area­ at­ the­ level­ of­ the­ individual­ economic­operators­ (households,­ financial­ institutions),­ as­well­ as­ at­ the­ level­ of­ national­ economy.­ Housing­market­developments­are­not­only­closely­related­to­the­financial­stability­issues,­but­also­fundamentally­determine­the­short-term­and­long-term­prospects­of­economic­activity.­Housing­market­developments­and­in­particular­the­volatility­of­housing­prices­influence­the­ sector’s­ savings­ and­ consumption­ decisions­through­ households’­ wealth,­ while­ influencing­ the­portfolio,­profitability­and­lending­activity­of­financial­institutions­via­mortgage­loan­collateral.­Overall,­we­can­state­that­the­housing­market­is­integrally­linked­to­all­areas­of­the­national­economy.

Financial Consumer Protection Report

The­MNB­has­published,­online­and­in­printed­form,­its­Financial­Consumer­Protection­Report­once­a­year­since­2016.­The­purpose­of­the­publication­is­to­inform­the­institutions­of­the­financial­system­and­the­public­about­current­financial­consumer­protection­issues,­thereby­also­ enhancing­ the­ risk­ awareness­ of­ stakeholders,­while­at­the­same­time­maintaining­and­strengthening­confidence­ in­ the­financial­ system.­The­objective­of­the­MNB­is­to­ensure­that­the­administrative­activity­performed­to­identify­and­mitigate­risks,­the­central­bank’s­ informative­ and­ educational­ activity­ and­ its­work­aimed­at­the­improvement­of­financial­literacy­in­Hungary­all­contribute­to­ensuring­that­the­necessary­information­ is­ readily­ available­ for­ stakeholders­ to­make­ financial­ decisions,­ and­ to­ strengthening­ the­stability­ of­ the­ financial­ system­ as­ a­ whole.­ After­summarising­ the­priorities,­ the­ report­ presents­ the­MNB’s­financial­consumer­protection,­administrative­and­customer­service­activity,­the­priority­cases­that­affected­ a­ wide­ range­ of­ consumers­ in­ the­ period­under­ review,­ as­well­ as­ the­ risks­ identified­ by­ the­MNB,­which­may­bear­special­importance­in­terms­of­consumer­protection.­Previously,­the­publication­was­issued­under­the­title­of­Financial­Consumer­Protection­and­Market­Supervision­Report.

Risk Outlook for Non-Bank Financial Sectors

Starting­from­2015,­the­report­Risk­Outlook­for­Non-Bank­Financial­Sectors­has­been­published­by­the­MNB­

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once­a­year.­This­report­presents­the­risks­of­insurers,­funds,­financial­enterprises­and­ intermediaries,­ co-operative­credit­institutions­and­the­capital­market.­The­ Risk­ Outlook­ for­ Non-Bank­ Financial­ Sectors­mainly­ focuses­on­a­deeper­analysis­of­ the­ sectors­that­are­not­presented­or­only­touched­upon­briefly­in­the­Financial­Stability­Report,­and­thus­it­does­not­contain­findings­related­to­the­banking­sector­outlined­in­detail­therein.­The­main­objective­of­this­publication­is­to­increase­the­risk­awareness­of­those­active­in­the­supervised­markets­and­to­strengthen­the­confidence­in­ the­ sectors.­ The­ report­provides­ an­overview­of­the­ key­ observations­ from­ official­ investigations­and­continuous­supervision­broken­down­by­areas,­highlighting­the­main­prudential­risks­identified­in­the­period­under­review.

Report on the Balance of Payments

The­Report­is­published­four­times­annually­to­inform­market­ participants­ on­ developments­ in­ balance­of­ payments­ and­ to­ provide­ deeper­ insight­ into­the­ correlations­ in­ the­ economy.­ Developments­ in­the­ external­ balance­ are­ key­ to­ financial­ stability,­as­ processes­ relating­ to­ the­ balance­ of­ payments­allow­ for­ conclusions­ to­ be­ drawn­ concerning­ the­sustainability­of­economic­growth­and­the­relevant­risks.­The­MNB­carries­out­comprehensive­and­regular­analyses­ of­ trends­ relating­ to­ Hungary’s­ external­balance,­examining­a­number­of­indicators­to­assess­macroeconomic­imbalances.

Payment Systems Report

Once­a­year,­ the­Report­provides­a­ comprehensive­review­of­the­trends­in­payments­and­the­functioning­of­ the­overseen­payment­and­securities­settlement­systems­in­Hungary,­the­main­risks­and­any­measures­taken­by­the­MNB­which­are­necessary­to­maintain­the­smooth­provision­of­payment­services­and­facilitate­the­reliable­and­efficient­operation­of­the­supporting­payment­and­settlement­systems.

Public Finance Report

With­ the­ aim­ of­ supporting­ the­ fulfilment­ of­ its­fundamental­duties­stipulated­ in­the­MNB­Act,­and­particularly­ the­ task­ related­ to­ the­ definition­ and­implementation­of­monetary­policy,­the­MNB­analyses­the­developments­in­the­budgetary­deficit­and­debt,­monitors­ the­financing­of­ the­general­ government,­analyses­ the­ impact­ of­ financing­ on­ the­monetary­

processes,­ on­ the­ capital­markets­ and­on­ liquidity,­and­ researches­fiscal­policy­ issues.­Pursuant­ to­Act­CXCIv­of­2011­on­the­Economic­Stability­of­Hungary,­the­Governor­of­the­MNB­is­a­member­of­the­Fiscal­Council­ (FC),­ and­ thus­ the­ professional­ expertise­and­accumulated­ information­available­ in­the­MNB­can­indirectly­support­the­work­of­the­FC.­The­MNB­prepares­background­analyses­for­the­duties­of­the­FC­ stipulated­ in­ the­ Stability­ Act,­ and­makes­ them­available­for­the­FC.­The­general­public­can­learn­about­the­most­important­results­of­these­expert­analyses­from­the­publication­entitled­Public­Finance­Report­(formerly­entitled:­General government analysis).

Annual Report

Published­ once­ annually,­ this­ report­ presents­ the­Bank’s­business­report­on­the­previous­year­and­its­audited­annual­financial­statements.

Semi-annual Report: Semi-annual Report on the MNB’s Activities

The­Semi-annual­Report­is­published­once­a­year,­in­September.­The­report­is­the­central­bank’s­business­report­related­to­the­first­half­of­the­year.

Interim Report: Quarterly Report on the MNB’s Activities

The­ Interim­ Report­ is­ published­ twice­ a­ year,­ in­April­and­November,­between­the­annual­and­semi-annual­ reporting­ periods.­ It­ gives­ account­ of­ the­basic­activities­of­the­operating­units­of­the­Bank­as­stipulated­in­the­MNB­Act,­in­respect­of­the­first­and­the­third­quarters:­monetary­policy,­overview­of­the­financial­system,­FX­reserves,­payment­transactions,­cash­logistics­activities,­and­statistical­changes.

Supervisory Board Report

Act­CXXXIX­of­2013­on­the­Magyar­Nemzeti­Bank­(MNB­Act)­prescribes­that­the­members­of­the­Supervisory­Board­ have­ a­ reporting­ obligation­ to­ the­ National­Assembly­that­elects­them­and­to­the­Minister­who­appoints­them.­In­respect­of­the­reporting­obligation,­the­ rules­ of­ procedures­ of­ the­MNB’s­ Supervisory­Board,­ adopted­ in­ 2015,­ state­ the­ following:­ “The­chairman­ and­ members­ of­ the­ Supervisory­ Board­prepare­–­in­line­with­the­obligation­set­forth­by­the­MNB­Act­–­a­ joint­report­on­their­activity­annually,­and­ send­ it­ to­ the­ National­ Assembly­ and­ the­

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Minister.­ Beyond­ this,­ the­ chairman­ and­members­of­the­Supervisory­Board­also­have­ad­hoc­reporting­obligation­to­the­National­Assembly­and­the­Minister­electing­and­appointing­them,­respectively.”­The­focus­of­the­Supervisory­Board’s­duties­specified­in­the­MNB­Act­is­on­the­control­of­the­central­bank’s­continuous­operation.­The­Supervisory­Board­performs­its­activity­based­on­the­ laws­applicable­to­ it,­ its­own­rules­of­procedure,­ and­ the­ internal­ operational­ principles­defined­by­the­members­jointly­during­the­operation­of­the­board.­The­main­form­of­the­control­activity­is­the­meetings­of­the­Supervisory­Board.­The­topics­at­ these­ meetings­ are­ determined­ by­ the­ annual­rolling­work-plan­based­on­ the­audit­universe.­ The­Supervisory­Board’s­ report­ is­ a­presentation­of­ the­Supervisory­Board’s­activity.

Central Bank Almanac

In­ a­ comprehensible­ format,­ the­ Central­ Bank­Almanac­ provides­ a­ retrospective­ summary­ of­ the­most­important­events­of­economic­life­and­the­main­steps­of­monetary­policy­in­the­year­under­review.­The­volume,­which­gives­a­comprehensive­presentation­and­ evaluation­ of­ decisions­ and­ results­ already­published­earlier,­allows­a­review­and­reassessment­of­the­events­of­the­past­months­for­the­public­that­is­interested­in­the­subject.­The­Central­Bank­Almanac­is­also­designed­to­summarise­all­the­professional­MNB­articles­published­during­ the­year­ the­messages­of­which­–­although­they­may­not­be­eternal­–­aid­in­the­understanding­of­the­main­economic­developments­and­central­bank­decisions­over­the­longer­term.­This­publication­is­released­once­a­year,­in­Hungarian.

Analyses, studies, statistics

MNB Occasional Papers

This­ series­ presents­ economic­ analyses­ related­to­ the­ MNB’s­ monetary­ policy­ decision-making­process.­ It­ aims­ at­ increasing­ the­ transparency­ of­monetary­policy.­Accordingly,­ in­addition­to­studies­also­describing­ technical­ details­ of­ forecasting,­ the­publication­covers­economic­issues­surrounding­the­preparatory­work­ for­ decision-making­ as­well.­ The­Occasional­ Paper­ (OP)­ series­of­ the­MNB­primarily­presents­practical­ (applied)­ research­ related­ to­ the­central­bank’s­professional­areas,­summarises­theories­and­international­findings­in­relation­to­specific­topics,­and­provides­analyses­facilitating­the­understanding­of­central­bank­decision-making.

MNB Working Papers

The­MNB­Working­Papers­series­presents­the­results­of­theoretical­research­conducted­at­the­MNB.­The­studies­ published­ in­ this­ series­ primarily­ address­the­ audience­ of­ academic,­ central­ bank­ and­ other­researchers,­ with­ the­ goal­ of­ encouraging­ readers­to­offer­comments­that­the­authors­may­use­in­their­future­research.­Since­the­autumn­of­2005,­this­series­has­been­available­only­in­English.

Financial and Economic Review

With­a­history­of­over­ a­decade,­ the­ Financial­ and­Economic­ Review­ is­ a­ recently­ rejuvenated­ social­and­scientific­journal­offering­an­increasing­range­of­content­and­a­gradually­developing­set­of­topics,­with­contemporary­typography.­It­is­published­in­separate­volumes­in­Hungarian­and­in­English.­Since­the­end­of­2014,­the­journal­has­been­edited­and­published­by­the­MNB.­The­writings­published­in­the­journal­include­revised­ studies,­ essays,­ book­ reviews,­ conference­reports­and­reports­on­other­scientific­activities.­It­is­available­on­the­website­of­the­Financial­and­Economic­Review­(http://english.hitelintezetiszemle.hu/).­

Educational Booklets

The­ MNB­ considers­ the­ development­ of­ financial­literacy­in­Hungary­as­one­of­its­priority­tasks,­hence,­relying­on­the­available­means,­it­intends­to­facilitate­education­ in­ the­ field­ of­ economics­ as­well­ as­ the­widening­ and­ enhancement­ of­ financial­ literacy.­In­May­2016,­the­central­bank­ launched­a­series­of­educational­ booklets­ on­ economic,­ financial­ and­monetary­policy­matters­in­Hungarian­and­in­English.

Other publications

70 years of the forint: Road from hyperinflation to price stability

The­everyday­ role­and­ importance­of­ inflation­also­justify­the­birth­of­this­publication.­The­anniversary­of­the­introduction­of­forint­on­1­August­1946­offered­a­proper­opportunity­to­draw­the­conclusions­in­respect­of­inflation­in­Hungary.

The first two years of the Self-financing Programme

The­MNB­announced­the­Self-financing­Programme­in­spring­2014.­The­programme,­which­entailed­the­

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transformation­of­the­entire­set­of­monetary­policy­instruments,­as­an­unconventional­tool,­contributed­–­in­addition­to­the­reduction­of­gross­external­debt­and­foreign­currency­debt­–­to­monetary­easing,­and­also­played­a­substantial­role­ in­the­upgrade­of­the­Hungarian­debt­rating­to­the­investment­grade­in­May­2016.­The­MNB’s­experts­analyse­the­experiences­of­the­first­two­years­of­the­Self-financing­Programme­in­a­volume­of­studies­comprising­of­four­analyses.

Funding for Growth Scheme – Experience with the Magyar Nemzeti Bank’s instrument to incentivise bank lending

The­ objective­ of­ the­ publication­ is­ to­ present­ the­results­achieved­by­the­Funding­for­Growth­Scheme­launched­in­2013­until­the­end­of­2015.

By­ publishing­ the­ volume­ of­ five­ studies­ the­MNB­wishes­to­help­the­Hungarian­and­the­international­public­to­gain­a­deeper­insight­into­the­effects­of­the­programme­so­far.

2016 Macroprudential strategy of the MNB

The­macroprudential­strategy­of­the­MNB­presents­the­operation­of­the­macroprudential­function­in­detail.­The­ identification­and­monitoring­of­systemic­risks,­the­ application­of­ the­macroprudential­ toolkit,­ the­evaluation­and­follow-up­of­the­interventions’­effects,­and­coordination­with­Hungarian­and­ international­stakeholders­ constitute­ the­ main­ components­ of­the­ macroprudential­ function.­ The­ clear­ statutory­mandate­and­institutional­independence­of­the­MNB­can­ only­ properly­ serve­ macroprudential­ strategic­objectives­if­macroprudential­policy­is­as­transparent­and­credible­as­possible.­In­the­future,­the­MNB­will­give­an­account­of­the­adjustment­to­macroprudential­interventions­ and­ the­ impact­ and­ follow-up­of­ the­interventions­in­its­annual­Macroprudential­Reports.

Half-Term Report 2013-2016

The­Half-Term­Report­summarises­and­evaluates­the­work­performed­in­the­period­since­March­2013­and­provides­an­overview­of­the­most­important­changes­in­monetary­policy­and­ its­related­ instruments,­ the­new­tasks­and­initiatives.­It­also­presents­the­changes­in­the­last­three­years­in­the­central­bank’s­approach,­the­expansion­of­the­former­duties­and­the­differences­in­the­central­bank’s­work­compared­to­the­pre-2013­period.

The Self-financing Programme of the Magyar Nemzeti Bank

Prior­to­the­global­financial­crisis­that­erupted­in­2008,­the­Hungarian­economy­had­accumulated­high­external­debt,­ and­ thus­ its­ external­ exposure­ increased.­ In­recent­years,­however,­the­external­balance­position­of­the­country­has­improved­considerably,­and­external­vulnerability­has­declined,­allowing­a­targeted­use­of­foreign­ exchange­ reserves.­ The­ central­ bank’s­ self-financing­programme­announced­in­April­2014­aims­at­reducing­the­risks­stemming­from­the­high­external­and­FX­government­debt.­This­publication­presents­how­Hungary­was­able­to­renew­its­maturing­external­FX­debt­from­forints­and­how­it­was­facilitated­by­the­MNB’s­programme­over­the­past­more­than­one­year,­i.e.­the­transformation­of­the­main­policy­instrument­and­the­introduction­of­the­central­bank­interest­rate­swap­tenders.

The Renewed Magyar Nemzeti Bank 2013–2015

The­global­economic­crisis­of­2008–2009­opened­a­new­era­in­monetary­policy.­Partly­out­of­necessity,­and­partly­because­they­recognised­the­shortcomings­of­their­earlier­perceptions­concerning­their­own­roles,­the­central­banks­of­the­world­started­to­play­a­more­and­more­active­role­ in­the­stabilisation­and­ in­the­recovery­from­the­serious­economic­damages­caused­by­the­crisis.­In­terms­of­domestic­monetary­policy,­this­turnaround­only­started­in­the­summer­of­2012­and­unfolded­after­March­2013.­Following­its­appointment,­the­new­central­bank­management­attempted­to­take­careful­but­determined­steps­to­work­off­the­backlog­accumulated­ before­ against­ the­ best­ international­practice,­and­thus­renewed­domestic­monetary­policy­in­a­number­of­areas.­This­publication­provides­a­brief­summary­of­these­eventful­two­years,­taking­stock­of­the­most­important­domestic­monetary­policy­steps.

The­MNB’s­publications­are­available­on­its­website­(http://www.mnb.hu/en/publications).

Series of books published by the MNB

On­5­March­2015,­the­central­bank­launched­a­new­series­ of­ books­ on­ the­ subjects­ of­ economic­ and­monetary­policy.­The­first­volume­of­the­series­was­written­ by­ Dr­ György­Matolcsy.­ The­ book­ entitled Balance and Growth­provides­a­detailed­presentation­of­all­the­new­economic­policy­concepts,­innovations­and­instruments­that­resulted­in­the­success­of­the­

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Hungarian­economy­between­2010­and­2014,­which­was­significant­from­the­aspect­of­economic­history­as­ well,­ achieving­ fiscal­ and­ financial­ stabilisation,­and­ thus­ creating­ the­ fundamental­ conditions­ for­sustainable­growth.

Competitiveness and Growth­is­the­second­volume­of­the­series­of­MNB­books­on­economics­and­monetary­policy.­It­was­published­in­2016­and­edited­by­Dániel­Palotai­and­Barnabás­virág,­Executive­Directors­of­the­central­bank.­The­MNB­decided­to­launch­this­series­of­trade­books­in­compliance­with­its­mandate,­as­its­statutory­tasks­include­the­development­of­financial­literacy­ and­ economic­ thinking­ in­ Hungary­ and­ –­without­jeopardising­the­Bank’s­primary­objective­–­the­support­of­the­economic­policy­of­the­government.

Complying­with­its­statutory­tasks,­with­the­volume­Competitiveness­ and­ Growth,­ the­ Bank­ intends­ to­contribute­to­the­collective­thinking­about­sustainable­growth­and­competitiveness.­The­book­provides­an­overview­of­domestic­and­international­experiences­as­well­as­a­comprehensive­picture­of­the­most­important­determinants­of­economic­convergence.­In­addition,­it­identifies­areas­where­progress­is­most­necessary,­and­gives­proposals­for­reforms­that­may­contribute­to­the­increasing­of­competitiveness.

Events organised by the MNB

As­ for­ events,­ the­ MNB­ pursues­ a­ strategy­ of­openness­with­its­associate­and­partner­institutions,­which­ strengthens­ professional­ partnership.­ The­events­organised­by­ the­MNB­ include­ international­conferences,­ internal­ events­ and­ so-called­ cultural­events­as­well.

International conferences

The­ majority­ of­ the­ international,­ professional­conferences­that­last­for­several­days­usually­involve­50–60­people,­although­the­number­of­participants­in­ some­ events­ may­ reach­ 150–200­ people.­ The­majority­of­the­international­conferences­are­held­in­the­building­of­the­MNB.

The­most­important­international­conference­events­organised­in­2016­were­as­follows:

Lamfalussy Lectures Conference

The­objective­of­this­annual­event­launched­in­2014­under­the­name­‘Lamfalussy­Lectures­Conference’­is­to­

invite­distinguished­lecturers­to­Hungary­to­share­with­and­present­to­the­audience­and­fellow­professionals­their­ views­ on­ current­ issues­ in­ global­ economic­policy,­specifically­in­monetary­policy­and­the­financial­system.­Parallel­to­launching­the­Lamfalussy­Lectures­Conference,­ the­Governor­ of­ the­MNB­ established­the­ Lámfalussy­ Award­ to­ recognise­ outstanding­international­professional­performance­and­lifetime­achievements­that­influence­the­MNB’s­activity­and­have­a­major­long-term­impact­on­developments­in­international­ monetary­ and­ financial­ policies.­ The­award­is­presented­annually­at­a­gala­ceremony­linked­to­the­conference.

The­ conference,­ organised­ for­ the­ third­ time­ in­February­ 2016,­was­ entitled­ “Professor Lamfalussy Commemorative Conference – His contribution to economic policy and the birth of the euro”­ and­paid­tribute­to­the­oeuvre­of­Alexandre­Lamfalussy,­who­passed­away­in­2015.­The­presentations­of­the­conference­were­ delivered­ by­ renowned­ lecturers,­including­ Luiz­ Awazu­ Pereira­ da­ Silva,­ Deputy­General­Manager­of­the­BIS­(representing­the­Bank­for­ International­Settlements,­the­2016­recipient­of­the­ Lámfalussy­ Award),­ Benoît­ Coeuré,­ Executive­Board­Member­ of­ the­ European­ Central­ Bank­ and­Ewald­ Nowotny,­ Governor­ of­ the­ Oesterreichische­Nationalbank­ (both­ of­ whom­ have­ already­ been­honoured­with­the­Lámfalussy­Award),­the­Governor­of­ the­ National­ Bank­ of­ Belgium,­ the­ President­of­ the­ Euro50­ Group­ and­ the­ Managing­ Director­of­ the­ European­ Stability­ Mechanism­ (ESM).­ The­presentations­were­ followed­by­ a­ panel­ discussion­on­ the­ circumstances­ of­ the­ establishment­ of­ the­monetary­union,­with­the­participation­of­renowned­economists.

The­conference­was­held­at­an­external­ location­ in­Budapest­and­was­attended­by­more­than­400­guests.

2016 summer committee session and seminar of the International Association of Insurance Supervisors

In­the­summer­of­2016,­the­International­Association­of­ Insurance­ Supervisors­ (IAS)­ held­ its­ summer­committee­session­and­related­seminar­in­Budapest;­both­events­were­organised­and­hosted­by­the­MNB.

The­ IAIS­ is­ an­ organisation­ covering­ over­ 200­institutions­ from­ almost­ 140­ countries,­ with­ the­Hungarian­ authority­ in­ charge­ of­ supervision­ as­ a­founding­ member.­ The­ summer­ session­ included­meetings­of­the­most­important­IAIS­committees,­with­

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the­participation­of­middle­and­top­ level­managers­of­the­ insurance­supervisory­authorities­of­the­ IAIS­member­countries.

The­5-day­conference­was­organised­at­an­external­location,­with­around­400­attendees.

2016 external meeting of the ESCB Legal Committee

In­ September­ 2016,­ the­ Legal­ Committee­ (LEGCO)­of­ the­ European­ System­ of­ Central­ Banks­ (ESCB)­held­its­annual­external­meeting­in­Budapest­at­the­invitation­of­the­MNB.­The­LEGCO­is­a­committee­of­legal­professionals­of­the­EU­Member­States’­national­central­banks­and­of­the­ECB.­Current­legal­issues­and­topics­related­to­the­ESCB­were­discussed­at­the­two-day­meeting.

OMFIF Economists Meeting

In­ September­ 2016,­ for­ the­ second­ time­ the­MNB­hosted­the­so­called­Economists­Meeting,­which­is­one­of­the­prestigious­events­of­the­Official­Monetary­and­Financial­Institutions­Forum­(OMFIF).­The­discussion­focused­on­“The role of monetary policy in promoting growth in the CESEE region and wider Europe”.­At­the­half-day­roundtable,­senior­officials­from­the­Polish,­Czech­and­Romanian­central­banks,­and­from­domestic­and­ international­ financial­ institutions­ reviewed­the­ post-crisis­ role­ of­ the­ Hungarian,­ regional­ and­European­ monetary­ policy­ and­ the­ European­ and­global­future­of­monetary­policy.

Adam Smith seminar

In­November­2016,­the­Autumn­meeting­of­the­Adam­Smith­Seminar­was­organised­in­Budapest,­at­which­policy-makers­ active­ in­ the­ field­ of­ international­economics­ and­ finances­ reviewed­ and­ discussed­the­current­developments­and­outlook­of­the­global­economy­at­an­informal­gathering.­This­was­the­second­time­that­the­MNB­hosted­the­event,­which­looks­back­on­a­history­of­almost­twenty-five­years.­During­the­seminar,­ presentations­were­delivered­by­ top­ level­managers­of­foreign­peer­institutions­–­including­the­US­ Fed,­ the­ Czech,­ Icelandic,­ Japanese,­ Polish­ and­Turkish­ central­ banks­ –­ and­ international­ financial­institutions­and­universities.­The­two-day­programme­also­included­several­round-table­discussions­with­the­active­involvement­of­the­participants.

MNB-EBRD conference on the out-of-court settlement of corporate non-performing loans

The­MNB­and­the­European­Bank­for­Reconstruction­and­ Development­ (EBRD)­ have­ been­ closely­cooperating­since­2014­with­the­aim­of­promoting­the­efficient­management­of­non-performing­loans,­which­in­ the­medium­ term­also­ contributes­ to­ improving­Hungary’s­competitiveness­and­may­prevent­the­build-up­ of­ non-performing­ portfolios­ in­ the­ future.­ The­cooperation­is­led­by­the­European­Bank­Coordination­vienna­Initiative,­which­calls­for­determined,­timely­and­targeted­action­in­this­area.

At­ the­ conference­ organised­ on­ 3­ October­ 2016,­the­almost­100­participants­reviewed­the­guidelines­related­ to­ the­ best­ practices­ of­ the­ out-of-court­debt­ rescheduling­and­ the­ settlement­of­ corporate­non-performing­ loans­ through­ compromise,­which­ were­ prepared­ jointly­ by­ the­MNB­ and­ the­EBRD.­ The­ Hungarian­ Banking­ Association­ and­ the­representatives­ of­ the­ banking­ system­ were­ also­involved­ in­ the­ discussions.­ The­ purpose­ of­ the­guidelines­ is­ to­ encourage­ banks­ to­ follow­ a­more­cooperative­and­coordinated­approach­in­those­cases­when­several­financial­lenders­are­involved.

Other international events

BESS at MNB lectures

9 March 2016, Martin Brown­(University­of­St.­Gallen)­–­Deposit­Withdrawals­from­Distressed­Commercial­Banks

7 April 2016, Stephen Millard­(Bank­of­England)­–­A­Dynamic­Model­of­Financial­Balances­for­the­United­Kingdom

27 April 2016, Zsolt Sándor­ (Sapienta­University)­–­Random­Coefficient­Demand­Estimation­by­Optimal­Instrument-Based­ Continuously­ Updated­ GMM­(Generalised­Method­of­Moments)

4 May 2016, Burak Uras­(Tilburg­University)­–­Efficient­Asset­Opacity­with­Banks­and­Markets

18 May 2016, Alessandro Barattieri­ (Collegio­Carlo­Alberto)­–­Banks­Interconnectivity­and­Leverage

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26 May 2016, Thomas Hintermaier (University­ of­Bonn)­–­Household­Debt­and­Crises­of­Confidence

1 June 2016, Helmut Stix­ (Oesterreichische­Nationalbank)­–­Banking­Crises,­Bail-ins,­and­Depositor­Confidence:­Lessons­from­Cyprus

14 September 2016, Pavel Gertler­ (National­ Bank­of­Slovenia),­Boris Hofmann­(BIS)­–­Monetary­Facts­Revisited

28 September 2016, Matteo Cacciatore­ (HEC­Montreal)­–­Hours­and­Employment­Over­the­Business­Cycle

16 November 2016, Sudipto Karmakar­ (Banco­ De­Portugal)­–­Real­Effects­of­Financial­Distress:­the­Role­of­Heterogeneity

Courses of the central bank’s “Budapest School for Central Bank Studies” Training Centre

Spring courses 2016

Enrique Sentana (CEMFI)­ –­ The econometrics of financial markets, 21-25­March­2016

–­­Boundaries­ of­ mean-variance­ estimate.­ GMM­estimates­and­conclusions.

–­­Impact­ of­ the­ boundaries­ of­ the­ mean­ variance­estimation­ on­ the­ arbitrage­ portfolios­ and­ gross­yield.

–­­Time­series­models­for­the­analysis­of­volatility.

–­­Methods­beyond­the­mean-variance­analysis.

Fabio Canova (BI­ Norwegian­ Business­ School)­ –­Empirical methods for the study of the monetary transmission mechanism, 29­March­–­1­April­2016

–­­Structural­vector­autoregression.

–­­Factor­and­FAvAR­models.

–­­Structural­ time­ series­ analysis­ with­ Bayesian­estimation.

–­­Panel­models,­Panel­vAR­models­and­partial­pooled­models.

Summer courses 2016

Barbara Rossi (Universitat­Pompeu­Fabra)­–­Exchange rate dynamics and predictability,­ 27­ June­–­ 1­ July­2016

–­­Dynamics­of­exchange­rates.

–­­Time­series­models­of­exchange­rates.

–­­Forecasts­and­their­evaluation.

–­­Connection­of­non-normal­distribution,­time-varying­forecasts.

Jesper Lindé (Stockholm­ School­ of­ Economics­ and­Sveriges­Riksbank)­– Monetary and fiscal interactions in modern central banking analysis, 4-8­July­2016

–­­Practical­guide­for­Bayesian­DSGE­estimates.

–­­Impacts­of­the­fiscal­policy­in­non-crisis­periods­and­close-to-zero­interest­environment.

–­­Impacts­of­fiscal­policy­in­a­monetary­union.

–­­International­spillover­of­fiscal­policy­impacts­ in­a­monetary­union.

–­­Impacts­ of­ deteriorated­ credibility­ on­ budgetary­consolidation.

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4 Additional information on the supervisory activity of the MNB in 2016

4.1 INSTITUTION OVERSIGHT

As­ at­ 31­ December­ 2016,­ the­ MNB­ performed­oversight­ of­ 1,608­ institutions­ according­ to­ the­breakdown­in­Table­10.

4.2 INSPECTIONS COMPLETED

The­MNB­carries­out­the­inspections­on­the­basis­of­an­annual­planning­system,­according­to­detailed­daily­schedules.

In­preparing­the­inspection­plans,­the­MNB­considers­the­following­criteria:

–­­the­cycle­plan­of­supervisory­inspections­defined­in­the­MNB­Act;

–­­the­risk­rating­of­the­institutions­and­the­resource­requirement­ and­ inspection­duration­determined­accordingly;

–­­the­supervisory­scoring­system­designed­to­establish­the­ order­ of­ institutions­ to­ be­ inspected,­ also­ in­consideration­of­other­individual­characteristics­of­the­institutions­concerned;­and

–­­the­available­resources.

The­ number­ of­ prudential­ on-site­ inspections­ and­their­breakdown­by­sector­and­ inspection­ type­are­summarised­in­Table­11.

Table 10Number of institutions supervised in 2016

Capital markets 85

Investment­fund­manager 65

Commodities­exchange­service­provider 1

Investment­firm 15

Trust 1

Clearing­house 1

Central­counterparty 1

Stock­exchange 1

Funds 69

Private­pension­fund 4

voluntary­funds 64

­­­­voluntary­health­fund 16

­­­­voluntary­pension­fund 41

­­­­voluntary­mutual­fund 7

Occupational­pension­fund 1

Financial market 958

Non-financial­institution 612

­­­­Electronic­money­issuer 1

­­­­Independent­intermediary 605

­­­­Payment­service­provider 6

Financial­institutions 346

­­­­Credit­institution 93

­­­­­­­­Bank 29

­­­­­­­­Specialised­credit­institution 11

­­­­­­­­Cooperative­credit­institution 53

­­­­Financial­enterprises 253

­­­­­­­­Financial­enterprise­equivalent­to­credit­institutions 2

­­­­­­­­Other­financial­enterprises 251

Insurance 496

Insurance­institutions 45

­­­­Insurance­association 18

­­­­Insurance­company 27

Insurance­intermediaries 450

­­­­Independent­insurance­intermediary 395

­­­­Tied­insurance­intermediary 55

Advocacy 1

Total 1,608

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Table 11Inspection statistics

Number of prudential on-site inspections

2015 2016 2017 planned

Comprehensive Other* Comprehensive Other* Comprehensive Other*

Large­banks­and­bank­groups 4 20 3 14 3 27

Small­and­medium-sized­banks 5 3 2 5 5 2

Integration­(acceded­credit­institutions) 8 8 10 7 0 16

Specialised­credit­institutions 1 3 5 4 0 5

Branch­of­banks 0 0 0 1 0 0

Non-banking­group­financial­enterprises 0 7 0 3 0 1

Payment­service­providers 2 1 2 0 2 0

Insurance­companies 7 3 6 2 9 0

Insurance­associations 1 2 1 0 8 0

Intermediaries 0 6 0 4 0 3

Funds 16 3 13 2 13 2

Capital­market­institutions 9 22 30 9 24 0

Occupational­pension­funds 0 0 1 0 0 0

Total 53 78 73 51 64 56

* Including the ICAAP inspections and validations.

4.3 LICENSING AND LEGAL ENFORCEMENT

The­ licensing­and­ legal­enforcement­activity­of­ the­MNB­comprises­the­entire­spectrum­of­legal­activities­linked­to­the­supervision­of­the­financial­intermediary­system,­ including­the­execution­of­all­authorisation­

procedures­related­to­the­overseen­institutions­and­the­performance­of­the­legal­enforcement­tasks­of­the­prudential­inspection­activity.

The­ statistics­ on­ the­ licensing­ and­ prudential­ legal­enforcement­activities­of­the­MNB­are­shown­in­the­Tables­12-15,­broken­down­by­sector.

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Table 12Measures taken in the financial market sector(Pieces)

Prudential measures

Resolutions­closing­supervisory­proceedings 258

­­­­of­which:­resolutions­imposing­fines 139

Other­prudential­measures,­resolutions 335

Rulings 66

Total amount of fines (million HUF) 753.4

Authorisation resolutions/rulings

Authorisation­of­the­foundation­of­credit­institutions 2

Refusal­of­the­foundation­of­credit­institutions 0

Authorisation­of­the­operation­of­credit­institutions 2

Refusal­of­the­operation­of­credit­institutions 0

Withdrawal­of­authorisation­for­the­foundation­of­credit­institutions 0

Authorisation­of­the­operation­of­payment­service­provider 1

Authorisation­of­the­electronic­money­issuing­activity­of­electronic­money­issuers 0

Authorisation­of­the­foundation­and­the­operation­of­financial­enterprises 4

Refusal­of­the­foundation­and­the­operation­of­financial­enterprises 2

Authorisation­of­the­operation­of­financial­enterprise­equivalent­to­credit­institutions 0

Withdrawal­of­authorisation­for­operations­of­financial­enterprises 4

Resolutions­concerning­the­amendment­of­the­scope­of­activities 7

Authorisation­of­the­election­of­senior­executives 314

­­­­of­which:­credit­institutions'­senior­executives 181

Refusal­of­the­election­of­senior­executives 3

Approval­of­the­amendment­of­agency­contract 146

Authorisation­of­multiple­special­services­intermediary 1

Authorisation­of­multiple­agents 20

Authorisation­of­brokers 1

Authorisation­of­­the­employment­of­intermediaries 65

Resolution­withdrawing­the­activity­license­of­intermediaries 18

Authorisation­of­the­amendment­of­the­bylaws 19

Authorisation­of­other­regulations 11

Authorisation­of­the­acquisition­of­qualifying­holdings 53

Refusal­of­the­acquisition­of­qualifying­holdings 3

Authorisation­of­merger­and­division 14

Authorisation­of­transformation 0

Authorisation­of­the­acquisition­of­qualifying­holdings­in­a­nonresident­enterprise 2

Authorisation­of­the­transfer­of­client­accounts 17

Resolutions­issued­under­CRR 34

of­which:­–­Resolution­concerning­the­calculation­of­capital­adequacy­of­operational­risk–­Resolution­concerning­the­calculation­of­capital­adequacy­of­credit­risk–­Resolution­concerning­Tier1,­additional­Tier1­and­Tier2­capital­instruments–­Resolution­concerning­supervision­on­a­consolidated­basis

23

1013

Other­resolutions 107

Rulings 79

Total number of resolutions and rulings 1,588

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Table 13Measures taken in the capital market sector(Pieces)

Prudential measures

Resolutions­closing­supervisory­proceedings 45

­­­­of­which:­resolutions­imposing­fines 44

Other­prudential­measures,­resolutions 66

Rulings 68

Total amount of fines (million HUF) 377.5

Authorisation resolutions/rulings

Authorisation­for­operations 4

Withdrawal­of­authorisation­for­operations 5

Authorisation­of­regulations 56

Authorisation­of­senior­executives 112

Authorisation­of­the­acquisition­of­qualifying­holdings 4

Rulings 148

Other­resolutions 186

Total number of resolutions and ruings 694

Table 14Measures taken in the insurance sector(Pieces)

Prudential measures

Resolutions­closing­supervisory­proceedings 112

­­­­of­which:­resolutions­imposing­fines 102

Other­prudential­measures,­resolutions 50

Rulings 44

Total amount of fines (million HUF) 246.8

Authorisation resolutions/rulings

Authorisation­of­executive­officers 75

Authorisation­of­professional­executives 55

Withdrawal­of­authorisation­for­operations­at­request 14

Other­resolutions 73

Authorisation­of­activities­closely­related­to­insurance­activities 5

Authorisation­of­the­activities­of­insurance­intermediaries 17

Conditional­decision 19

Rulings 35

Total number of resolutions and rulings 499

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Table 15Measures taken in the funds sector(Pieces)

Prudential measures

Resolutions­closing­supervisory­proceedings 22

­­­­of­which:­resolutions­imposing­fines 18

Other­prudential­measures,­resolutions 52

Rulings 16

Total amount of fines (million HUF) 11.4

Authorisation resolutions/rulings

Authorisation­of­executive­officers 0

Authorisation­of­professional­executives 5

Withdrawal­of­authorisation­for­operations­at­request 5

Other­resolutions 22

Conditional­decision 3

Rulings 5

Total number of resolutions and rulings 130

4.4 MARKET SURVEILLANCE

The­summary­data­on­measures­required­within­the­framework­of­the­MNB’s­market­surveillance­activity­in­2016­are­presented­in­the­Tables­16-17.

Table 16Market surveillance and supervision related measures(Pieces)

Market surveillance and supervisory measures

Resolutions­related­to­market­surveillance 44

­­­­of­which:­resolutions­imposing­fines 34

Rulings­related­to­market­surveillance 310

Resolutions­related­to­issuers­supervision 42

Rulings­related­to­issuers­supervision 3

Other­resolutions­and­rulings 20

Fines­–­market­surveillance­(million­HUF) 3,837.4

­­­–­related­to­unauthorised­and­unreported­activities 3,672.3

­­­–­related­to­insider­dealing­and­unlawful­market­manipulation 125.1

­­­–­related­to­compliance­with­company­takeover­rules 40

Fines­–­supervisory­(million­HUF) 52

­­­–­related­to­issuers­supervision 42

Total amount of fines (million HUF) 3,889.4

Total number of resolutions and rulings 419

ADDITIONAL­INFORMATION­ON­THE­SUPERvISORy­ACTIvITy­OF­THE­MNB­IN­2016

ANNUAL REPORT • 2016 81

Table 17Licensing related to securities issuance(Pieces)

Licensing related to securities issuance

Number­of­issues 10

­­­–­stock 2

­­­–­bonds­and­mortgage­bonds­program 8

Number­of­stock­exchange­listings 4

­­­–­stock 3

­­­–­bonds­and­mortgage­bonds 1

Number­of­resolutions­related­to­issuers 851

Number­of­rulings 21

Number­of­applications­to­be­put­in­order 222

Total number of resolutions and rulings 1,094

4.5 CONSUMER PROTECTION

Tables­18-19­contain­a­summary­related­to­the­MNB’s­administrative­activity­performed­in­2016­in­the­area­of­financial­consumer­protection.

Table 18The MNB’s consumer protection administrative activity, number of procedures

Type of entities Targeted inspections ex

officio

Targeted consumer protection

inspections ex officio

Inspected entities Inspections along with prudential

inspections

Consumer protection

inspections by request

Credit­institutions­sector,­Bank 19 1 14 1 114

Credit­institutions­sector,­Cooperative­credit­institution

9 0 0 1 0

Financial­enterprise­equivalent­to­credit­institutions

2 0 0 1 4

Independent­money­market­broker 4 0 0 0 1

Pawnbroker­enterprises­ 3 1 4 1 0

Debt­collection­and­management­enterprises

1 0 0 0 3

Insurance­sector 1 0 0 10 89

Capital­market­sector 2 0 0 6 5

Funds­sector 0 0 0 1 6

Total: 41 2 18 21 222

MAGYAR NEMZETI BANK

ANNUAL REPORT • 2016 82

Table 19The MNB’s consumer protection administrative activity, result of the procedures

Sector/measures Financial market Insurance Capital market Funds Total

Rulings 2,520 473 19 12 3,024

­­­­of­which:­substantive 333 118 5 1 457

non­substantive­ 2,187 355 14 11 2,567

Resolutions 496 84 6 2 588

­­­­of­which:­without­breach­of­law 107 39 3 0 149

with­breach­of­law 223 45 3 2 273

Total amount of consumer protection fines (million HUF)

158.6 89.5 9.9 0.4 258.4

Tables­20–22­show­the­main­data­related­to­the­activity­of­the­Financial­Consumer­Protection­Centre.

Table 20Distribution of customer inquiries and requests received by receipt channel

Channel of receipt No. Per cent

Mail 3,698 9.0

E-mail 7,393 17.9

Personal 4,264 10.3

Phone 25,886 62.8

Total 41,241 100.0

Table 21Customer inquiries and requests broken down by sectors

Sector No. Per cent

Financial­markets 20,162 48.9

Capital­markets 2,893 7.0

Insurance 9,432 22.9

Pension,­health­and­mutual­aid­funds 305 0.7

Other 8,449 20.5

Total 41,241 100.0

Table 22Number of customer inquiries and requests broken down by sector and quarter

Sector Q1 Q2 Q3 Q4 2016 Total

Financial­markets 6,839 4,814 4,403 4,106 20,162

Capital­markets 933 889 627 444 2,893

Insurance 3,331 2,047 1,951 2,103 9,432

Pension,­health­and­mutual­aid­funds 99 93 47 66 305

Other 2,435 2,246 2,056 1,712 8,449

Total 13,637 10,089 9,084 8,431 41,241

:

ADDITIONAL­INFORMATION­ON­THE­SUPERvISORy­ACTIvITy­OF­THE­MNB­IN­2016

ANNUAL REPORT • 2016 83

4.6 ADMINISTRATIVE REPRESENTATION AT PROCEEDINGS

Administrative­ representation­ at­ proceedings­comprises­ the­ representation­ of­ the­ MNB­ in­ the­assertion­ of­ claims­ of­ public­ interest,­ as­ well­ as­litigation­and­non-litigious­proceedings­related­to­the­

MNB’s­administrative­decisions­passed­in­the­context­of­its­supervisory­and­consumer­protection­activities,­and­also­the­representation­of­the­Financial­Arbitration­Board­in­litigation­launched­for­the­abrogation­of­the­FAB’s­resolutions­or­recommendations,­and­keeping­records­pertaining­to­such­procedures.

Chart 16Number of customer inquiries and requests in a sectoral and monthly breakdown

0

1,000

2,000

3,000

4,000

5,000

6,000

0

1,000

2,000

3,000

4,000

5,000

6,000

Janu

ary

Febr

uary

Mar

ch

April

May

June July

Augu

st

Sept

embe

r

Oct

ober

Nov

embe

r

Dece

mbe

r

Pension, health and mutual aid fundsInsuranceCapital marketsFinancial markets

Other

Table 23Cases commenced in 2016, broken down by type and sector

Type No. Per cent Sector No. Per cent

Judicial­review­of­administrative­decisions­(litigous)

43 68.3 Financial­markets 29 46.0

Non-litigous 12 19.0 Capital­markets 23 36.5

Non-litigous­(rulings­imposing­fines) 2 3.2 Insurance 8 12.7

Financial­Arbitration­Board 6 9.5 Pension,­health­and­mutual­aid­funds

3 4.8

Total 63 100.0 Total 63 100.0

ANNUAL REPORT • 2016 84

5 Explanation of abbreviations and terms specific to central banking

ABBREVIATIONS

BIS: Bank­for­International­Settlements

BISZ Zrt.:­BISZ­Central­Credit­Information­Plc.

BREEAM:­ Building­ Research­ Establishment­Environmental­Assessment­Methodology

BRRD:­Bank­Recovery­and­Resolution­Directive

BSE:­Budapest­Stock­Exchange

CCB:­Countercyclical­Capital­Buffer

CCIS:­Central­Credit­Information­System

CEBS: Committee­of­European­Banking­Supervisors

EBA:­European­Banking­Authority

ECB:­European­Central­Bank

EIOPA:­European­Insurance­and­Occupational­Pensions­Authority

EMU:­Economic­and­Monetary­Union

ESCB:­European­System­of­Central­Banks

ESRB:­European­Systemic­Risk­Board

FCPC:­Financial­Consumer­Protection­Centre

FGS:­Funding­for­Growth­Scheme

FSC:­Financial­Stability­Council

GIRO: Giro­Clearing­House­Ltd.

GSP:­Growth­Supporting­Programme

HCSO:­Hungarian­Central­Statistical­Office

ICS: Interbank­Clearing­System

IMF:­International­Monetary­Fund

ISDA: International­Swaps­and­Derivatives­Association

KELER: KELER­Central­Clearing­House­and­Depository­Ltd.

LCR:­Liquidity­Coverage­Ratio

MLS: Market-Based­Lending­Scheme

MNB:­Magyar­Nemzeti­Bank

MNE:­Ministry­for­National­Economy

OECD:­Organisation­for­Economic­Co-operation­and­Development

PIP (‘FCP’):­Financial­Compass­Programme

POP (‘FTP’):­Financial­Training­Programme

SRB: Systemic­Risk­Buffer

SRM:­Single­Resolution­Mechanism

SSM:­Single­Supervisory­Mechanism

VIBER:­real-time­gross­settlement­system,­a­payment­system­operated­by­the­MNB

GLOSSARY

Cash turnover: The­sum­of­exchanges­and­payments­to­and­from­the­central­bank.

Clearing: Control­ and­ transmission­ of­ payment­transactions,­ calculation­ of­ interbank­ balances­in­ accordance­ with­ specified­ rules;­ in­ the­ case­ of­securities­transactions:­matching­and­confirmation­of­positions,­calculation­of­accounts­receivable/payable­and­managing­the­arising­financial­risk.

EXPLANATION­OF­ABBREvIATIONS­AND­TERMS­SPECIFIC­TO­CENTRAL­BANKING

ANNUAL REPORT • 2016 85

CLS (Continuous Linked Settlement): A­clearing­and­settlement­ model­ that­ enables­ the­ elimination­ of­FX­settlement­ risks.­ It­ is­based­on­a­multi-currency­payment­versus­payment­(PvP)­mechanism.­The­CLS­is­operated­by­the­CLS­Bank.

Currency interest rate swap, CIRS:­Usually­a­medium­or­ long-term­ transaction­ involving­ the­exchange­of­different­currencies,­a­series­of­interest­payments­on­the­principal­and­repayment­of­principals­when­the­transaction­is­settled.

Duration: Average­remaining­maturity­of­bonds.­It­is­an­indicator­measuring­the­level­of­risk­associated­with­the­bond­portfolio.

ERM II, Exchange Rate Mechanism II: An­exchange­rate­mechanism­for­establishing­the­conditions­for­an­exchange­rate­policy­co-operation­between­euro­area­countries­and­EU­Member­States­not­participating­in­the­third­stage­of­EMU.­The­ERM­II­ is­a­multilateral­system­of­fixed­but­adjustable­exchange­rates,­where­the­mid-rate­ is­ surrounded­by­a­normal,­+/−15­per­cent­ fluctuation­ band.­ All­ decisions­ in­ relation­ to­the­mid-rate­ and,­ as­ the­ case­may­ be,­ a­ narrower­fluctuation­band,­ are­made­on­ the­ basis­ of­ a­ joint­agreement­between­the­Member­State­concerned,­the­euro­area­countries,­the­ECB­and­the­other­Member­States­participating­in­the­mechanism.

Foreign exchange funding adequacy ratio (FFAR):­The­ratio­of­the­sum­of­stable­foreign­exchange­funds­and­net­foreign­exchange­swap­stock­with­a­maturity­over­a­year­and­the­weighted­foreign­currency­denominated­assets­to­be­financed.

Foreign exchange swap: Usually­ a­ short-term­transaction­ involving­ the­ exchange­ of­ different­currencies­ and,­ when­ the­ transaction­ is­ settled,­exchange­ of­ the­ currencies­ again­ at­ the­ price­determined­in­the­contract­by­the­cross­rate­and­the­interest­rate­of­the­currencies.

FX swap:­See­Foreign­exchange­swap.

IMF reserve quota:­ The­ freely­ drawable,­ i.e.­ not­yet­ drawn­ portion­ of­ the­ IMF­ quota­ paid­ to­ the­International­Monetary­Fund­in­SDR­(Special­Drawing­Right).

Interest rate futures:­A­stock­exchange­ transaction­where­ the­ basis­ of­ future­ settlement­ is­ a­ certain­

amount­ of­ standardised­ (expressed-in-contract)­deposits­with­ interest­ rate­ specified­at­ the­time­of­the­deal.

Interest rate swap, IRS:­The­exchange­of­fixed­rate­and­variable­rate­interest­on­principal­at­pre-determined­intervals,­ adjusted­ to­ certain­ market­ rates­ and­conditions.

MNB Act:­Act­CXXXIX­of­2013­on­the­Magyar­Nemzeti­Bank.

Monetary financial institutions: The­ central­ bank,­financial­ institutions­ and­ money­ market­ funds­together­constitute­this­institutional­category­within­financial­corporations.

Money market funds: Money­ market­ funds­ are­investment­funds,­the­mutual­fund­shares­of­which­are­similar­to­bank­deposits­from­the­aspect­of­liquidity.­Money­market­funds­invest­85­per­cent­of­their­assets­in­money­market­ instruments­ or­ transferable­ debt­securities­with­a­remaining­maturity­of­maximum­one­year­or­instruments­with­a­return­similar­to­that­of­the­interest­rate­of­money­market­instruments.

Money market instruments: Low-risk,­liquid­securities­traded­in­large­amounts­on­markets­where­they­can­be­exchanged­for­cash­immediately­at­a­low­cost.

Omnibus II directive:­See­Solvency­II­directive.

O/N: Overnight­deposit/loan.

Option contract: For­ the­ owner­ of­ the­ foreign­exchange­ option­ this­ means­ a­ right,­ but­ not­ an­obligation,­to­buy­or­sell­a­certain­amount­of­currency­against­another­currency­at­a­pre-determined­rate,­at­or­before­a­pre-determined­date.­If­the­possessor­of­the­option­exercises­this­right,­ it­will­become­an­obligation­for­the­seller­(writer)­of­the­option.

Payment System Forum: An­ independent,­ self-organising,­ open­ professional­ organisation­ with­consultative­character­committed­to­the­matters­of­the­domestic­payment­system­and­operating­on­the­MNB’s­initiative,­with­the­support­of­the­Hungarian­Banking­Association­and­the­involvement­of­market­participants­ that­ play­ a­ decisive­ role­ in­ payment­transactions­as­well­as­the­Hungarian­State­Treasury,­GIRO­Zrt.­and­KELER­Zrt.­The­supreme­body­of­ the­Forum­is­the­Payment­System­Council,­which­consists­

MAGYAR NEMZETI BANK

ANNUAL REPORT • 2016 86

of­the­representatives­of­the­members­and­operates­under­ the­ co-chairmanship­ of­ the­ MNB­ and­ the­Hungarian­Banking­Association.

Payment System Council:­The­decision-making­body­of­the­Payment­System­Forum.

Revaluation reserve: The­revaluation­reserve­of­the­forint­exchange­rate­and­the­revaluation­reserve­of­foreign­exchange­securities­are­reserves­that­are­part­of­ the­ equity­ of­ the­MNB.­ If­ they­ have­ a­ negative­balance,­the­central­government­is­liable­to­reimburse­the­negative­portion,­and­credit­the­amount­to­the­respective­revaluation­reserve­account­by­31­March­of­the­year­following­the­current­year.­The­amount­of­the­reimbursement­is­recorded­in­the­balance­sheet­of­the­current­year­as­a­receivable­from­the­central­budget.

Revaluation reserve due to forint exchange rate changes:­Unrealised­exchange­rate­gains­and­losses­on­the­forint­exchange­rate­changes­of­foreign­currency­assets­ and­ liabilities­ are­ indicated­ in­ the­ forint­exchange­rate­revaluation­reserve,­which­constitutes­a­part­of­the­equity.

Revaluation reserve of foreign exchange securities: The­valuation­difference­between­the­market­value­and­ cost­ rate­ of­ foreign­ exchange­ assets­ based­ on­securities­(except­for­repurchased­foreign­exchange­bonds)­ is­ indicated­ in­ the­ revaluation­ reserve­ of­foreign­exchange­securities,­which­constitutes­a­part­of­the­equity.

Repurchase and reverse repurchase transaction: An­agreement­ on­ the­ transfer­ of­ the­ ownership­ right­of­a­security­with­a­repurchase­obligation­at­a­pre-determined­price­at­a­future­date­specified­or­to­be­specified­at­the­time­when­the­contract­is­concluded.­During­ the­ term­ of­ the­ contract­ the­ buyer­ may­either­obtain­the­security­which­is­the­subject­of­the­transaction­and­freely­dispose­over­it­(delivery­repo­transaction)­or­may­not­obtain­it­and­may­not­freely­dispose­over­it,­in­which­case­the­security­is­deposited­as­a­bail­to­the­benefit­of­the­buyer­during­the­term­of­the­contract­(hold-in-custody­repo).

ROA:­Return­on­assets.

ROE: return­on­equity.

SEPA:­Single­Euro­Payments­Area,­an­area­within­which­economic­operators­can­effect­and­receive­payments­in­euro­anywhere,­using­one­single­payment­account,­in­ the­ same­ manner­ as­ in­ their­ own­ respective­countries.­ Geographically,­ the­ Area­ covers­ the­ 28­EU­Member­States,­ Iceland,­Liechtenstein,­Norway,­Switzerland­and­Monaco.

Settlement: Final­ settlement­of­ interbank­ liabilities­and­receivables­on­an­account­managed­by­a­common­bank,­typically­the­MNB.

Solvency II directive:­ Directive­ 2009/138/EC­ of­the­ European­ Parliament­ and­ of­ the­ Council­ of­25­ November­ 2009­ on­ the­ taking-up­ and­ pursuit­of­ the­ business­ of­ Insurance­ and­ Reinsurance.­ A­new,­ risk-based­ regulatory­ framework­ for­ insurers­which­is­based­on­three­pillars,­namely,­quantitative­requirements,­ qualitative­ requirements­ and­ public­disclosure.­It­is­a­European­standard­based­on­which­the­ supervisory­ authorities­ can­ create­ standard­rules­ for­ capital­ in­ order­ to­ reduce/avoid­ the­ risk­of­ insolvency.­Applicable­ from­1­ January­2016.­The­Omnibus­ II­ directive­ (Directive­ 2012/23/EU­ of­ the­European­ Parliament­ and­ of­ the­ Council)­ includes­the­amending­provisions­of­the­Solvency­II­directive­–­which­has­been­approved­but­ it­ is­yet­to­become­valid­and­applicable­–­and­the­Prospectus­directive­(Directive­2003/71/EC­of­the­European­Parliament­and­of­the­Council).

TARGET2-Securities (T2S):The­ single­ technical­platform­ of­ the­ Eurosystem­ through­which­ central­depositories­and­national­central­banks­can­provide­basic,­cross-border­and­neutral­securities­settlement­services­in­central­bank­funds­across­all­Europe.

VaR: value­at­ risk­ –­ a­method­ for­measuring­ risks.­vaR­quantifies­ the­maximum­amount­of­ loss­ to­be­expected­at­a­given­confidence­level­for­a­specific­time­horizon.

ANNUAL REPORT • 2016 87

Part B Audited financial statements of the Magyar Nemzeti Bank

ANNUAL REPORT • 2016 89

1 Independent auditor’s report

A member firm of Ernst & Young Global Limited

Page 1 / 3

Ernst & Young Kft. Ernst & Young Ltd. H-1132 Budapest Váci út 20. 1399 Budapest 62. Pf.632, Hungary

Tel: +36 1 451 8100 Fax: +36 1 451 8199 www.ey.com/hu Cg. 01-09-267553

This is a translation of the Hungarian Report

Independent Auditors Report

To the Shareholder of Magyar Nemzeti Bank Opinion We have audited the accompanying 2016 annual financial statements of Magyar Nemzeti Bank (“the Company”), which comprise the balance sheet as at 31 December 2016 - showing a balance sheet total of HUF 10,054,901 million and a profit for the year of HUF 54,281 million -, the related profit and loss account for the financial year then ended and notes to the annual financial statements, including a summary of significant accounting policies. In our opinion the annual financial statements give a true and fair view of the equity and financial position of Magyar Nemzeti Bank as at 31 December 2016 and of the results of its operations for the financial year then ended in accordance with the Act C of 2000 on Accounting (“Hungarian Accounting Law”). Basis for opinion We conducted our audit in accordance with Hungarian National Auditing Standards and with applicable laws and regulations in Hungary. Our responsibilities under those standards are further described in the “Auditor’s responsibilities for the audit of the annual financial statements” section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the annual financial statements in Hungary, and we have fulfilled our ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Other information Other information consists of the 2016 business report of Magyar Nemzeti Bank. Management is responsible for the preparation of the business report in accordance with the Hungarian Accounting Law and other relevant legal requirements, if any. Our opinion on the annual financial statements does not cover the business report. In connection with our audit of the annual financial statements, our responsibility is to read the business report and, in doing so, consider whether the business report is materially inconsistent with the annual financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.

MAGYAR NEMZETI BANK

ANNUAL REPORT • 2016 90A member firm of Ernst & Young Global Limited

Page 2 / 3

Concerning the business report it is our responsibility also, in accordance with the Hungarian Accounting Law, to consider whether the business report has been prepared in accordance with the Hungarian Accounting Law and other relevant legal requirements, if any. In our opinion, the business report of Magyar Nemzeti Bank for 2016 corresponds the 2016 annual financial statements of Magyar Nemzeti Bank and has been prepared in accordance with the Hungarian Accounting Law. Since no other legal regulations prescribe for the Company further requirements with regard to its business report, our opinion on the business report does not include opinion in this regard as required by Subsection (5) h) of Section 156 of the Hungarian Accounting Law. Further to the above, based on the knowledge we have obtained about the Company and its environment in the course of the audit we are required to report whether we have identified any material misstatement in the business report, and if so, the nature of the misstatement in question. We have nothing to report in this regard. Responsibilities of management and those charged with governance for the annual financial statements Management is responsible for the preparation and fair presentation of the annual financial statements in accordance with the Hungarian Accounting Law, and for such internal control as management determines is necessary to enable the preparation of annual financial statements that are free from material misstatement, whether due to fraud or error. In preparing the annual financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. Auditor’s responsibilities for the audit of the annual financial statements Our objectives are to obtain reasonable assurance about whether the annual financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Hungarian National Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these annual financial statements.

INDEPENDENT­AUDITOR’S­REPORT

ANNUAL REPORT • 2016 91

A member firm of Ernst & Young Global Limited

Page 3 / 3

As part of an audit in accordance with Hungarian National Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: ► Identify and assess the risks of material misstatement of the annual financial

statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

► Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

► Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

► Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the annual financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.

► Evaluate the overall presentation, structure and content of the annual financial statements, including the disclosures, and whether the annual financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Budapest, 24 April 2017 (The original Hungarian language version has been signed.) Szabó Gergely Szabó Gergely Ernst & Young Kft. Registered auditor 1132 Budapest, Váci út 20. Chamber membership No.: 005676 Registration No.: 001165

A member firm of Ernst & Young Global Limited

Page 2 / 3

Concerning the business report it is our responsibility also, in accordance with the Hungarian Accounting Law, to consider whether the business report has been prepared in accordance with the Hungarian Accounting Law and other relevant legal requirements, if any. In our opinion, the business report of Magyar Nemzeti Bank for 2016 corresponds the 2016 annual financial statements of Magyar Nemzeti Bank and has been prepared in accordance with the Hungarian Accounting Law. Since no other legal regulations prescribe for the Company further requirements with regard to its business report, our opinion on the business report does not include opinion in this regard as required by Subsection (5) h) of Section 156 of the Hungarian Accounting Law. Further to the above, based on the knowledge we have obtained about the Company and its environment in the course of the audit we are required to report whether we have identified any material misstatement in the business report, and if so, the nature of the misstatement in question. We have nothing to report in this regard. Responsibilities of management and those charged with governance for the annual financial statements Management is responsible for the preparation and fair presentation of the annual financial statements in accordance with the Hungarian Accounting Law, and for such internal control as management determines is necessary to enable the preparation of annual financial statements that are free from material misstatement, whether due to fraud or error. In preparing the annual financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. Auditor’s responsibilities for the audit of the annual financial statements Our objectives are to obtain reasonable assurance about whether the annual financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Hungarian National Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these annual financial statements.

ANNUAL REPORT • 2016 92

2 Balance sheet of the Magyar Nemzeti Bank

HUF millions

Reference number to notes on

the Accounts

A S S E T S 31 Dec 2015* 31 Dec 2016 Change

1 2 3 4 4–3I. Receivables denominated in forint 1,446,828 1,590,537 143,709

4.3. ­­­­­­1.­Receivables­from­the­central­government­ 39,178 39,178 04.7. ­­­­­­2.­Receivables­from­credit­institutions 1,405,552 1,548,530 142,978

4.10. ­­­­­­3.­Other­receivables 2,098 2,829 731II. Receivables denominated in foreign currency 9,843,344 8,286,460 –1,556,884

4.9. ­­­­­­­1.­Gold­and­foreign­exchange­reserves 9,436,975 7,557,282 –1,879,6934.4. ­­­­­­­2.­Receivables­from­the­central­government 0 0 04.8. ­­­­­­­3.­Receivables­from­credit­institutions 6,962 62 –6,900

4.10. ­­­­­­­4.­Other­receivables­ 399,407 729,116 329,709III. Banking assets 109,638 108,684 –954

4.12. ­­­­­­­­­­­­­of­which:­invested­assets 107,137 108,271 1,1344.14. IV. Prepaid expenses/accrued income 95,697 69,220 –26,477

V. Total assets (I+II+III+IV) 11,495,507 10,054,901 –1,440,606

Reference number to notes on

the Accounts

L I A B I L I T I E S A N D E Q U I T Y 31 Dec 2015* 31 Dec 2016 Change

1 2 3 4 4–3VI. Liabilities denominated in forint 9,527,734 7,833,804 –1,693,930

4.5. ­­­­­1.­Central­government­deposits 403,624 785,648 382,0244.7. ­­­­­2.­Deposits­by­credit­institutions 4,772,252 2,408,122 –2,364,130

­­­­­­­­­­­­­of­which:­the­main­policy­instrument 2,986,826 899,987 –2,086,839­­­­­3.­Banknotes­and­coins­in­circulation 4,304,879 4,580,614 275,735

4.11. ­­­­­4.­Other­deposits­and­liabilities 46,979 59,420 12,441 VII. Liabilities denominated in foreign currency 1,407,934 1,798,115 390,181

4.5. ­­­­­1.­Central­government­deposits 416,115 544,616 128,5014.8. ­­­­­2.­Deposits­by­credit­institutions 58,378 75,866 17,488

4.11. ­­­­­3.­Other­deposits­and­liabilities 933,441 1,177,633 244,1924.13. VIII. Provisions 1,978 689 –1,289

IX. Other banking liabilities** 17,839 17,847 84.14. X. Accrued expenses/deferred income 31,044 32,483 1,4394.15. XI. Equity 508,978 371,963 –137,015

­­­­­­1.­Share­capital 10,000 10,000 0­­­­­­2.­Retained­earnings 63,417 107,869 44,452­­­­­­3.­valuation­reserves 0 0 0

4.16. ­­­­­­4.­Revaluation­reserves­due­to­exchange­rate­changes 312,599 182,459 –130,1404.16. ­­­­­­5.­Revaluation­reserves­of­foreign­currency­securities 28,510 17,354 –11,156

­­­­­­6.­Profit/Loss­for­the­year** 94,452 54,281 –40,171XII. Total equity and liabilities (VI+VII+VIII+IX+X+XI) 11,495,507 10,054,901 –1,440,606

* Presented in the 2016 balance-sheet structure.** In the new balance-sheet structure for 31 December, 2015 dividend payable was replaced from line IX. Other banking liabilities to line XI. 6. Profit for the year.

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­ Dr­György­Matolcsy­ Governor­of­the­Magyar­Nemzeti­Bank

ANNUAL REPORT • 2016 93

3 Income statement of the Magyar Nemzeti Bank

HUF millionsReference number to notes on

the Accounts

I N C O M E 2015 2016 Difference

1 2 3 4 4–34.18. I. Interest and interest-related income denominated in forint 10,817 17,406 6,589

­­­1.­Interest­on­receivables­from­the­central­government 2,706 329 –2,377­­­2.­Interest­on­receivables­from­credit­institutions­ 3,128 3,981 853­­­3.­Interest­on­other­receivables 771 124 –647­­­4.­Interest-related­income­ 4,212 12,972 8,760

4.18. II. Interest and interest-related income denominated in foreign currency 215,866 154,036 –61,830­­­1.­Interest­on­foreign­exchange­reserves­ 123,495 78,010 –45,485­­­2.­Interest­on­receivables­from­the­central­government 3,235 0 –3,235­­­3.­Interest­on­receivables­from­credit­institutions 0 0 0­­­4.­Interest­on­other­receivables 54 0 –54­­­5.­Interest-related­income 89,082 76,026 –13,056

4.19. III. Income arising from exchange rate changes 184,568 117,716 –66,8524.18. IV. Realised gains arising from financial operations 18,190 23,700 5,5104.21. V. Other income 14,524 17,250 2,726

­­­1.­Fees­and­commissions­ 1,033 941 –924.22. ­­­2.­Income­other­than­fees­and­commissions 1,380 1,634 2544.23. ­­­3.­Income­from­supervisory­activities 12,111 14,675 2,5644.13. VI. Provisions released 2,933 1,569 –1,3644.13. VII. Impairment released 1,399 520 –8794.24. VIII. Operating income 1,466 1,337 –129

IX. Total income (I+II+III+IV+V+VI+VII+VIII) 449,763 333,534 –116,229

Reference number to notes on

the Accounts

E X P E N S E S 2015 2016 Difference

1 2 3 4 4–34.18. X. Interest and interest-related expenses denominated in forint 103,825 45,866 –57,959

­­­1.­Interest­on­central­government­deposits 11,229 5,680 –5,549­­­2.­Interest­on­deposits­by­credit­institutions 92,498 32,853 –59,645­­­­­­­­­­­­­­­­of­which:­­interest­on­the­main­policy­instrument* 74,063 23,535 –50,528­­­3.­Interest­on­other­deposits­ 98 89 –9­­­4.­Interest-related­expenses 0 7,244 7,244

4.18. XI. Interest and interest-related expenses denominated in foreign currency 165,561 141,203 –24,358­­­1.­Interest­on­central­government­deposits –1,737 –1,845 –108­­­2.­Interest­on­deposits­of­credit­institutions­ –29 –173 –144­­­3.­Interest­on­other­liabilities 1,685 3,233 1,548­­­4.­Interest-related­expenses 165,642 139,988 –25,654

4.19. XII. Expenses resulting from exchange rate changes 6,891 22,627 15,7364.20. XIII. Cost of issuing banknotes and coins 11,286 14,163 2,8774.18. XIV. Realised losses arising from financial operations 3,328 6,854 3,5264.21. XV. Other expenses 21,268 5,263 –16,005

­­­1.­Fees­and­commissions 851 693 –1584.22. ­­­2.­Expenses­other­than­fees­and­commissions 20,417 4,570 –15,8474.13. XVI. Provisions charged 644 280 –3644.13. XVII. Impairment 7,556 5,966 –1,5904.24. XVIII. Operating costs and expenses 34,952 37,031 2,079

XIX. Total expenses (X+XI+XII+XIII+XIV+XV+XVI+XVII+XVIII) 355,311 279,253 –76,058XX. Profit/loss for the year (IX-XIX) 94,452 54,281 –40,171

Until 22 September 2015, the 2-week deposit was the main policy instrument; from 23 September 2015 the 3-month MNB deposit became the main policy instrument.

24­April­2017,­Budapest­ Dr­György­Matolcsy­ Governor­of­the­Magyar­Nemzeti­Bank

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4 Notes to the financial statements

4.1 THE MNB’S ACCOUNTING POLICY

The­Magyar­Nemzeti­Bank­(MNB),­the­central­bank­of­Hungary,­is­owned­by­the­Hungarian­State.­Ownership­rights­are­exercised­by­the­minister­in­charge­of­public­finances­(the­shareholder).

The­accounting­policy­of­the­Magyar­Nemzeti­Bank­is­based­on­the­Act­on­Accounting­(Act­C­of­2000),­Act­CXXXIX­of­2013­on­the­Magyar­Nemzeti­Bank­(hereinafter:­the­MNB­Act)­and­Government­Decree­221/2000­(XII.­19)­on­the­special­reporting­and­accounting­requirements­applicable­to­the­Magyar­Nemzeti­Bank­(hereinafter:­the­MNB­Decree).­Since­the­effective­date­of­the­Act­promulgating­the­international­treaty­on­the­accession­of­Hungary­to­the­EU,­i.e.­1­May­2004,­the­Magyar­Nemzeti­Bank­has­been­a­member­of­the­European­System­of­Central­Banks­(ESCB).

The­following­sections­present­a­brief­description­of­the­accounting­system­of­the­MNB,­and­the­valuation­and­profit­recognition­rules,­whenever­these­differ­from­the­general­rules.

4.1.1 The MNB’s accounting framework

One­of­the­key­accounting­principles­of­the­MNB­is­that­transactions­are­booked­for­the­period­ in­which­they­occur,­unless­the­financial­year­is­already­closed.­This­is­especially­important­in­terms­of­the­accurate­measurement­of­exchange­rate­gains­and­losses,­with­special­regard­to­foreign­exchange­sales­and­purchases.­Spot­foreign­currency­transactions­which­involve­foreign­exchange­conversions­are­recorded­in­the­books­at­the­date­of­the­transactions.­Assets­and­liabilities­arising­from­such­transactions­affect­the­MNB’s­foreign­currency­position­from­the­date­of­entering­into­the­transaction.­The­same­procedure­is­applied­to­recording­the­revaluation­difference­in­the­balance­sheet­relating­to­derivative­transactions­for­hedging­purposes.

On­a­daily­basis,­the­MNB­records:

–­­exchange­ rate­ differences­ arising­ from­ revaluation­ of­ its­ foreign­ assets­ and­ liabilities­ and­ derivative­transactions­for­hedging­purposes­recorded­off-balance­sheet;

–­­amortisation­of­the­securities’­premiums­and­discounts;­and

–­­accrued/deferred­ interest­ arising­ from­ on­ and­ off-balance­ sheet­ assets­ and­ liabilities­ from­ hedging­transactions.

Pursuant­to­the­MNB­Decree,­for­the­purpose­of­reporting­data­to­the­owner,­the­MNB­is­required­to­close­accounts­relating­to­its­assets­and­liabilities­and­to­net­income­on­a­quarterly­basis,­and­to­prepare­trial­balances­following­the­procedure­specified­in­its­accounting­policy.

For­internal­use,­the­MNB­compiles­a­balance­sheet­and­income­statement­every­month,­which­are­supported­by­the­following:

–­­market­valuation­of­foreign­currency­securities;

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–­­breakdown­and­recording­of­realised­and­unrealised­portions­of­foreign­exchange­gains­and­losses­deriving­from­daily­revaluation;­and

–­­charging­of­depreciation­and­amortisation.

Upon­the­quarterly­closing­of­accounts,­the­MNB­measures­its­off-balance­sheet­contingent­and­future­liabilities­arising­from­derivative­transactions­for­other­purposes­and­securities­lending­operations­based­on­international­agreements­(in­this­case,­the­liabilities­are­equal­to­the­purchase­value­of­the­collateral­received)­and­other­off-balance­sheet­liabilities.­On­a­quarterly­basis,­the­MNB­also­grades­the­claims­and­securities­in­the­balance­sheet;­in­addition­to­the­foregoing,­it­measures­the­investments­at­the­end­of­the­year­and­at­the­second­quarter.­As­a­result­of­this­measurement,­the­MNB­recognises­ impairment­ losses­as­necessary­and­forms­provisions­for­liabilities­and­expected­losses.

The­balance­sheet­date­is­the­15th­working­day­of­January­of­the­year­following­the­reporting­year.­With­regard­to­this­report,­the­balance­sheet­date­was­20­January­2017.

By­law,­the­MNB­is­also­required­to­report­to­Parliament.­The­MNB­submits­a­single­report­to­both­Parliament­and­the­Ministry­for­National­Economy,­which­–­as­it­is­in­charge­of­public­finances­–­exercises­the­rights­of­ownership­as­laid­down­in­the­MNB­Act.­This­takes­the­form­of­an­Annual­Report,­which­contains­a­business­report­describing­the­MNB’s­structure,­operations­and­state­of­affairs­in­the­reporting­year,­and­the­MNB’s­annual­financial­statements­defined­by­the­Act­on­Accounting,­as­adopted­by­the­Board­of­Directors­and­approved­by­audit­certificate.­The­Supervisory­Board­submits­an­opinion­on­the­Annual­Report­and­makes­a­report­on­such­to­the­shareholder.­The­Annual­Report­is­published­in­unabridged­form­on­the­internet.­The­website­is­accessible­at:­http://english.mnb.hu.

The­Governor­of­the­MNB­also­reports­to­the­Parliament’s­committee­responsible­for­economic­affairs­on­the­half-year­activity­of­the­MNB.­This­report­is­the­Half-year­Report­which­contains­a­business­report­describing­the­MNB’s­structure,­operations­and­state­of­affairs­in­the­reporting­period,­and­the­MNB’s­half-year­financial­statements­defined­by­the­Act­on­Accounting.­The­Half-year­Report­is­also­published­on­the­internet.

Pursuant­to­MNB­Decree,­the­MNB­is­not­obliged­to­draw­up­consolidated­financial­statements.

The­financial­statements­of­the­MNB­must­be­audited­by­the­statutory­auditor­in­compliance­with­the­Act­on­Accounting.­The­registered­auditor­of­the­MNB­is­Gergely­Szabó­(Ernst­&­young­Könyvvizsgáló­Kft.),­Chamber­membership­number:­005676.

The­person­authorised­to­sign­the­Annual­Report­is­Dr­György­Matolcsy,­Governor­of­the­Magyar­Nemzeti­Bank.

The­person­responsible­for­accounting­services­is­Gábor­Kalina,­registration­number:­194599.

4.1.2 Major principles of valuation

Receivables from the central government

Securities­stated­under­receivables­from­the­central­government­are­recorded­in­the­balance­sheet­at­amortised­purchase­price­and­include­no­interest.­The­difference­between­the­purchase­price­excluding­interest­and­the­face­value­is­shown­in­the­MNB’s­income­statement­as­a­valuation­gain­or­loss­in­proportion­to­the­time­elapsed.

Receivables­from­the­central­government­also­include­any­receivables­associated­with­the­reimbursement­of­revaluation­reserves­at­year-end.

Impairment­losses­may­not­be­recorded­in­connection­with­receivables­from­the­central­government.

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Receivables from credit institutions

Mortgage­bonds­stated­under­receivables­from­credit­institutions­are­recorded­in­the­balance­sheet­at­amortised­purchase­price­net­of­interest.­The­market­value­difference­at­acquisition­is­shown­in­the­MNB’s­interest­related­income­as­a­valuation­gain­or­loss­in­proportion­to­the­time­elapsed.

Impairment­losses­on­mortgage­bonds­must­be­accounted­in­proportion­to­the­risk­of­losses.

Interest-free­refinancing­loans­within­the­framework­of­the­Funding­for­Growth­Scheme­(FGS)­and­the­base­rate­fixed­security-backed­loans­provided­to­credit­institutions­must­be­recorded­in­the­balance­sheet­at­the­disbursed­amount.

Other receivables

Receivables­from­supervisory­activities­are­recorded­in­the­balance­sheet­with­their­impairment.­The­MNB­books­the­supervisory­fee­prescriptions­in­line­with­the­incoming­data­reported­by­the­institutions­and­the­penalty­prescriptions­are­recorded­in­line­with­the­finalised­resolutions.­The­supervisory­fees,­levied­and­the­penalties­used­for­support­purposes­defined­by­the­MNB­Act,­as­well­as­the­fees­received­from­public­proceedings­must­be­recorded­as­‘Income­from­supervisory­activities’.

The­balance­of­‘Other­receivables’­also­contains­the­employee­loans­and­the­loans­provided­to­other­legal­entities­at­the­amount­of­the­disbursements.­The­related­interest­income­is­stated­under­‘Interest­on­other­receivables’.

‘Other­receivables’­must­be­qualified­and­impaired­if­necessary.

Valuation of foreign currency assets and liabilities and the recording of exchange rate gains

In­its­books,­the­MNB­records­all­foreign­currency­assets­and­liabilities­at­the­official­exchange­rate­prevailing­on­the­date­of­acquisition.­If­a­foreign­currency­asset­or­liability­is­created­as­a­result­of­foreign­exchange­conversion,­the­exchange­rate­gain­or­loss­arising­from­the­difference­between­the­actual­rate­and­the­official­rate­is­recorded­by­the­MNB­as­conversion­income­for­that­particular­date­and­is­recognised­under­gains/losses­from­exchange­rate­changes­in­the­income­statement.

The­MNB­carries­out­daily­revaluation­of­foreign­currency­assets­and­liabilities­as­well­as­off-balance­sheet­assets­and­liabilities­arising­from­derivative­transactions­for­hedging­purposes,­taking­account­of­variations­in­the­official­exchange­rate.­As­a­result­of­this­revaluation,­balance­sheet­items­denominated­in­foreign­currency­are­stated­in­an­amount­converted­at­the­official­exchange­rate­prevailing­on­the­balance­sheet­date.­Banking­assets­and­banking­liabilities­in­foreign­currencies­(with­the­exception­of­foreign­investments)­and­foreign­currency­accruals­and­derivative­transactions­for­purposes­other­than­hedging­do­not­form­part­of­revaluation.

Income­received­in­foreign­currency­is­stated­at­the­official­exchange­rate­prevailing­on­that­particular­date.

Daily­accounting­for­accrued­income­is­preceded­by­reversing­the­accrued­income­on­the­previous­day.­As­a­result,­foreign­currency­accruals­are­recorded­in­the­balance­sheet­at­the­official­exchange­rate­without­revaluation.

In­respect­of­foreign­exchange­gains­and­losses­arising­in­the­course­of­daily­revaluation,­realised­exchange­rate­gains­and­losses­can­be­stated­as­a­profit­item,­while­the­unrealised­result­is­reported­under­‘Equity’,­in­the­item­‘Revaluation­reserve­due­to­exchange­rate­changes’.

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Realised­income­in­a­particular­currency­arises­as­a­result­of­decrease­in­the­net­foreign­currency­position­(in­absolute­terms).­Realised­income­arises­as­the­difference­between­the­value­of­the­change­in­the­net­foreign­currency­position­at­the­official­exchange­rate­and­the­average­cost­rate­prevailing­on­that­particular­date.

Foreign currency securities

Foreign­currency­securities­are­stated­at­market­price.­The­difference­between­the­market­value­(mid­prices­applied­by­the­portfolio­management­facilitating­tool)­prevailing­on­the­date­of­valuation­and­the­amortised­purchase­value­is­recorded­in­the­revaluation­reserve­of­foreign­currency­securities­as­part­of­equity.­Exchange­rate­gains­or­ losses­ realised­on­selling­and­maturing­are­stated­under­ ‘Realised­gains/losses­arising­ from­financial­operations’.

The­Magyar­Nemzeti­Bank­measures­its­securities­on­the­basis­of­market­prices­prevailing­on­the­last­working­day­of­each­month.­However­if­adequately­liquid­prices­are­not­ensured­on­this­day,­the­valuation­of­securities­is­based­on­the­market­prices­available­on­the­previous­working­day.

The­foreign­currency­securities­managed­by­the­external­trustee­on­the­grounds­of­a­mandate­are­also­stated­at­market­price,­applying­the­prices­received­from­the­custodian.

Security­repurchase­transactions­are­recorded­as­credit/deposit­transactions,­while­the­related­receivables­or­liabilities­are­stated­as­off-balance­sheet­items.

Securities­lent­through­securities­lending­operations­based­on­international­agreements­need­not­be­removed­from­ foreign­ exchange­ reserves;­ they­ are­ recorded­ as­ off-balance­ sheet­ items.­ Non-cash­ collateral­ and­investments­from­cash­collateral­must­be­recorded­as­contingent­ liabilities­under­off-balance­sheet­ items­and­if­their­market­value­is­negative,­a­provision­of­equal­amount­must­be­created­for­the­investments­on­a­quarterly­basis.

Accounting rules relating to the IMF quota

Part­of­the­IMF­quota­subscribed­in­foreign­currency­and­denominated­in­SDR­as­a­callable­loan­is­stated­under­foreign­exchange­reserves.

The­part­of­the­quota­paid­in­forint,­subscribed­in­SDR,­is­presented­under­‘Other­foreign­currency­receivables’­in­the­balance­sheet.­The­related­IMF­forint­deposit­is­presented­on­the­liabilities­side­of­the­balance­sheet.­It­is­the­MNB’s­duty­to­ensure­at­least­annually­that­the­amount­of­the­IMF’s­forint­deposit­is­equal­to­the­amount­of­the­quota­paid­in­forint.­As­this­deposit­account­is­a­HUF­account­only­formally,­it­is­presented­under­‘Other­foreign­currency­payables’­in­the­balance­sheet.

The­SDR­allocation­aims­to­ increase­the­foreign­exchange­reserves­of­the­ IMF’s­members­and­creates­an­unmatured­liability­vis-à-vis­the­IMF­on­the­liability­side­of­the­balance­sheet.­This­transaction­has­an­effect­on­profit­or­loss­(interest­must­be­paid­on­the­SDR­amount­received),­if­it­is­utilised.

Accounting rules relating to derivatives

On­the­basis­of­transaction­purpose,­the­MNB­distinguishes­between­two­groups­of­derivative­transactions:­hedging­transactions­and­derivative­transactions­for­purposes­other­than­hedging.

Hedging­transactions­are­defined­as­transactions­which­reduce­the­risk­arising­from­changes­in­the­exchange­rate­or­market­value­of­a­specific­asset­or­liability­or­open­position,­are­directly­related­to­such,­are­announced­as­hedging­transactions­at­the­start­of­the­deal­and­neutralise­or­significantly­mitigate­the­risk­that­is­intended­to­be­hedged.­Furthermore,­derivative­transactions­with­the­government­or­non-resident­counterparts­to­hedge­these­transactions­are­also­regarded­as­hedging­transactions.

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Derivative­transactions­must­be­stated­under­off-balance­sheet­assets­and­liabilities.­The­aggregate­revaluation­difference­of­foreign­currency­assets­and­liabilities­arising­from­hedging­transactions­must­be­stated­in­the­balance­sheet­(depending­on­their­balance,­either­in­the­item­‘Other­foreign­currency­receivables­or­liabilities’,­or­‘Foreign­currency­receivables­from­or­liabilities­to­the­central­government­or­credit­institutions’),­including­the­interest­accrued­in­proportion­to­the­time­elapsed­(as­accrued­income­or­accrued­expenses).

When­derivative­transactions­for­purposes­other­than­hedging­are­closed,­the­income­from­such­transactions­must­be­stated­in­the­lines­of­income­and­expenses­arising­from­exchange­rate­changes­when­foreign­exchange­transactions­are­involved,­and­in­the­lines­of­interest-related­income­and­interest-related­expenses­in­the­case­of­transactions­linked­to­interest­rate­changes.­While­such­transactions­are­not­revalued,­consistent­with­the­principle­of­prudence,­in­reasonable­cases­–­based­on­the­information­available­at­the­balance­sheet­date­–­a­provision­is­set­aside­on­a­quarterly­basis,­equal­to­the­negative­market­value­of­the­transaction.

Banking assets and liabilities

Banking­assets­and­liabilities­are­stated­on­the­respective­sides­of­the­balance­sheet.­These­are­the­following:

–­­assets­and­liabilities­not­directly­related­to­central­bank­functions­and­bank­operations­(such­as­settlements­relating­to­taxes,­contributions,­payments­to­employees,­creditors,­unsold­precious­metals­held­for­non-central­bank­purposes);­as­well­as

–­­liabilities­arising­from­banknotes­no­longer­accepted­as­legal­tender­but­not­yet­exchanged;

–­­investments;­and

–­­assets­required­for­operating­the­organisation­(such­as­intangibles,­tangibles,­and­inventories).

The­MNB’s­balance­sheet­does­not­state­cash­among­liquid­assets.­The­central­bank­is­the­exclusive­issuer­of­banknotes­and­coins.­Notes­and­coins­held­at­the­Cashier­and­the­Depository­are­not­in­circulation­and­therefore­are­deducted­from­banknotes­and­coins­on­the­liabilities­side­of­the­balance­sheet.

Depreciation rates applied by the Magyar Nemzeti Bank:

Per cent

Description 31 Dec 2016

Concessions,­licences­and­similar­rights 17

Trademarks­patents­and­similar­assets 10–50

Capitalised­value­of­reorganisation 20

Owned­and­managed­buildings 2–3

vehicles* 20

Telecommunication­devices,­office­equipment,­machines 9–50

Office­equipment 14.5–33

Computer­hardware 9–33

Emission­machinery 5–33

Instruments 9–33

Bank­security­devices 2–33

Other­equipment­and­devices 3–33

* Residual value 20 per cent of the vehicles.

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The­depreciation­rates­are­determined­individually­based­on­estimated­useful­economic­life.­Depreciation­is­charged­on­a­straight-line­basis­in­every­case.­The­Bank­records­no­depreciation­if­the­assets­do­not­lose­their­value­in­use­or­if­the­value­increases­from­year­to­year,­given­the­particular­nature­of­the­assets­(e.g.­land,­works­of­art,­art­treasure).

4.2 EFFECTS OF MACROECONOMIC TRENDS ON THE 2016 BALANCE SHEET AND INCOME STATEMENT OF THE MAGYAR NEMZETI BANK

In­2016,­the­MNB­recorded­a­profit­of­HUF­54.3­billion.­Both­the­contraction­of­central­bank’s­balance­sheet­and­the­continued­reduction­of­the­base­rate­contributed­to­the­profit.­Income­arising­from­exchange­rate­changes­was­the­most­significant­item­of­the­profit­in­2016.­The­MNB­quoted­exchange­rate­against­the­euro­fluctuated­in­a­narrower­band­in­the­course­of­2016,­relative­to­2015.­The­MNB­official­exchange­rate­was­EUR/HUF­311.02­at­and-2016,­representing­appreciation­of­0.7­per­cent­relative­to­the­end­of­2015.­The­official­exchange­rate­was­weaker­than­the­average­cost­rate­for­the­entire­year;­the­difference­between­the­two­rates­dropped­from­the­end-2015­EUR/HUF­14.95­to­EUR/HUF­9.86­as­at­31­December­2016.­Due­to­the­decreasing­volume­of­foreign­currency­sales,­the­MNB­realised­less­exchange­rate­gains­(amounting­to­HUF­95.1­billion)­in­the­course­of­2016.

The­balance­of­revaluation­reserves­due­to­exchange­rate­changes,­as­an­unrealised­foreign­exchange­result,­decreased­by­HUF­130.1­billion­from­31­December­2015­and­amounted­to­HUF­182.5­billion­at­end-2016.­The­total­exchange­rate­change­effect­was­a­loss­of­HUF­35.1­billion.

The­balance­sheet­total­according­to­Hungarian­Accounting­Standards­(HAS)­was­HUF­10,054.9­billion­on­31­December­2016,­representing­a­13­per­cent­year-on-year­decrease­compared­to­HUF­11,495.5­billion­at­end-2015.­The­Self-financing­Programme­and­the­conversion­of­households’­FX­loans­into­forints­altogether­induced­a­strong­contraction­in­the­central­bank’s­balance­sheet.­On­the­assets­side,­the­decrease­in­foreign­exchange­reserves­was­mitigated­by­the­increase­in­the­IMF­quota­and­the­rise­in­refinancing­loans­provided­under­the­FGS.­On­the­liabilities­side,­the­deposits­of­credit­institutions­declined­significantly,­while­the­central­government­deposits­and­the­banknotes­and­coins­increased,­along­with­IMF­forint­deposit,­owing­to­the­quota­increase.

The­sum­of­the­net­interest­result­and­realised­gains­arising­from­financial­operations­changed­to­positive­after­the­losses­of­earlier­years­and­showed­a­profit­amounting­to­HUF­1.2­billion.­In­2016,­the­bank­recorded­a­net­interest­and­interest­related­loss­of­HUF­15.6­billion,­representing­an­improvement­of­HUF­27.1­billion­compared­to­the­figure­for­end-2015,­mainly­due­to­the­contraction­in­the­central­bank’s­balance­sheet.­Owing­to­the­decrease­in­foreign­exchange­reserves,­the­amount­of­forint­liabilities­financing­the­reserves­also­declined­and­a­further­reduction­of­the­margin­between­foreign­exchange­yields­and­forint­interest­rates­also­improved­the­interest­result.­The­HUF­64.6­billion­increase­in­the­forint­interest­loss­was­caused­by­a­significant­decrease­of­the­volume­and­by­the­interest­effect.­In­2016,­the­calendar­day­weighted­average­central­bank­base­rate­was­60­basis­points­lower.­The­significant­decrease­in­FX­interest­gains­amounted­to­HUF­37.5­billion,­due­to­the­decline­of­stock­of­foreign­exchange­reserves­and­to­lower­interest­income­because­of­the­lower­foreign­exchange­yields.

The­total­realised­gains­from­financial­operations­amounted­to­HUF­16.8­billion­in­2016.­Both­the­large­volume­of­foreign­currency­securities­sales­and­shrinking­FX­interest­rates­caused­an­increase­of­HUF­2­billion.

For­more­details­on­impacts­on­net­income,­see­Section­3.11­of­the­Business­Report.

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4.3 FORINT RECEIVABLES FROM THE CENTRAL GOVERNMENT

The­line­for­forint­receivables­from­the­central­government­contains­government­bonds,­the­amount­of­which­did­not­change­and­amounted­to­HUF­39.2­billion­at­the­end­of­2016.­The­portfolio­consists­of­a­government­debt­bond­with­a­maturity­over­5­years.

4.4 FOREIGN CURRENCY RECEIVABLES FROM THE CENTRAL GOVERNMENT

Neither­at­end-2015­nor­at­end-2016­was­any­amount­listed­in­the­line­for­foreign­currency­receivables­from­the­central­government.­The­net­balance­of­currency­swaps­with­the­central­government­showed­a­credit­balance,­and­thus­these­items­were­stated­as­‘Foreign­currency­liabilities­of­the­central­government’­(see­Section­4.5).

4.5 FORINT AND FOREIGN CURRENCY LIABILITIES OF THE CENTRAL GOVERNMENT

Forint deposits of the central government

HUF millions

B/S line DescriptionBalance

Change31 Dec 2015 31 Dec 2016

Single­Treasury­Account­(KESZ) 403,218 785,157 381,939

Deposit­by­Government­Debt­Management­Agency­(ÁKK­Zrt) 347 433 86

Other 59 58 –1

VI.1. Forint deposits of the central government 403,624 785,648 382,024

The­total­balance­of­forint­deposits­of­the­central­government­amounted­to­HUF­785.6­billion­at­the­end­of­December­2016­and­was­HUF­382­billion­higher­than­at­the­end­of­2015.­The­change­was­caused­in­the­stock­of­KESZ,­which­remained­at­a­steadily­high­level­in­2016.­Due­to­the­larger­volume­of­government­bond­maturities­and­government­bond­repurchases,­the­balance­of­KESZ­was­unusually­lower.

Foreign currency liabilities of the central government

HUF millions

B/S line DescriptionBalance

Change31 Dec 2015 31 Dec 2016

Foreign­currency­deposits­of­the­central­government 255,939 354,385 98,446

Swap­and­forward­transactions­with­the­central­government 0 0 0

Currency­swaps­with­the­central­government 160,176 190,231 30,055

VII.1. Foreign currency liabilities of the central government 416,115 544,616 128,501

The­balance­of­the­foreign­currency­deposits­of­the­central­government­was­HUF­354.4­billion­on­31­December­2016,­reflecting­an­increase­of­HUF­98.4­billion.­However,­the­average­amount­of­liabilities­for­2015­was­far­lower­and­was­approximately­40­per­cent­below­the­average­of­the­previous­year.­The­balance-reducing­effect­of­the­December­2015­developments­(PEMÁK-maturity­and­foreign­currency­government­bonds­repurchases)­carried­over­to­2016.­The­ÁKK­continuously­refilled­the­foreign­exchange­holdings­which­was­used­to­decrease­the­government­debt.­Owing­to­a­May­and­an­October­PEMÁK-maturity­and­the­July­maturity­of­the­euro-bond­issued­in­the­past­by­the­ÁKK,­the­balance­of­deposits­dropped­in­the­second­half­of­the­year.

Among­ the­ hedging­ transactions­ concluded­with­ the­ central­ government,­ only­ the­ currency­ swaps­ had­outstanding­amount­at­the­times­under­review.­The­cross-rate­changes­caused­the­increase­of­HUF­30.1­billion.

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Foreign currency liabilities of the central government in a breakdown by remaining maturity

HUF millions

B/S line Remaining maturityBalance

Change31 Dec 2015 31 Dec 2016

­­­–­within­1­year­ 255,939 354,385 98,446

­­­–­within­1­to­5­years 38,672 44,840 6,168

­­­–­over­5­years 121,504 145,391 23,887

VII.1. Foreign currency liabilities of the central government 416,115 544,616 128,501

4.6 NET POSITIONS VIS-À-VIS THE CENTRAL GOVERNMENT

HUF millions

B/S line DescriptionBalance

Change31 Dec 2015 31 Dec 2016

I.1.—vI.1. Net­forint­position –364,446 –746,470 –382,024

II.2.—vII.1. Net­foreign­currency­position –416,115 –544,616 –128,501

Total –780,561 –1,291,086 –510,525

4.7 FORINT RECEIVABLES FROM AND LIABILITIES TO CREDIT INSTITUTIONS

Forint receivables from credit institutions

HUF millions

B/S line DescriptionBalance

Change31 Dec 2015 31 Dec 2016

Security-backed­loans 103,061 120,000 16,939

Covered­mortgage­bonds 10,701 10,823 122

FGS­refinancing­loans 1,286,742 1,415,028 128,286

Other­receivables 5,048 2,679 -2,369

I.2. Total receivables from credit institutions 1,405,552 1,548,530 142,978

The­amount­of­receivables­from­credit­ institutions­was­HUF­1,548.5­billion­on­December­2016.­The­total­increase­of­HUF­143­billion­in­the­balance­relative­to­end-2015­appeared­due­to­the­joint­effect­of­a­number­of­factors.

Initiated­on­1­June­2013­as­a­temporary­instrument,­the­Funding­Growth­Scheme­(FGS)­successfully­fulfilled­the­growth­and­market­development­objectives­established­upon­the­announcement­of­the­programme,­and­therefore­the­FGS­was­phased­out­gradually­from­the­beginning­of­2016.­Simultaneously­with­this,­the­Growth­Supporting­Programme­(GSP),­was­announced­in­November­2015,­launched­with­the­aim­of­ensuring­that­banks­return­to­market-based­lending.­Within­the­framework­of­the­programme,­the­MNB­grants­interest-free­refinancing­loans­to­credit­institutions.­The­amount­of­refinancing­loans­granted­under­Pillar­I­and­Pillar­II­of­FGS,­after­deducting­repayments,­totalled­HUF­1,415­billion­on­31­December­2016.­Within­the­overall­volume,­the­amount­from­the­first­phase­was­HUF­286.3­billion,­from­the­second­phase­was­HUF­753.3­billion,­from­the­third­phase­was­HUF­359­billion­and­from­FGS+­was­HUF­16.2­billion­(repayment­of­the­loans­has­started).­The­MNB­accepts­SME­loans­financed­by­credit­institutions­as­collateral,­in­addition­to­the­normal­securities­eligible­for­the­central­bank.­Accepting­the­value­of­collateral­blocked­in­favour­of­the­MNB­must­be­covered­by­the­MNB’s­credit­receivables­vis-à-vis­the­credit­institution­in­question.­The­total­nominal­value­of­these­credits­amounted­to­HUF­834.4­billion­on­31­December­2016.

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The­balance­of­security-backed­loans­rose­by­HUF­16.9­billion­and­amounted­to­HUF­120­billion­at­31­December­2016.­It­only­includes­the­stock­of­1-week­loan­tender­granted­to­credit­institutions,­as­there­was­no­stock­of­overnight­loans­at­end-2016.

The­end-2016­balance­of­other­receivables­from­credit­institutions­decreased­by­HUF­2.4­billion­compared­to­previous­year,­as­the­gross­value­of­non-performing­claims­from­banks­under­liquidation,­due­to­recoveries,­diminished­by­HUF­2.9­billion­to­HUF­8.2­billion­from­end-2015­to­end-2016.­HUF­0.5­billion­from­the­related­impairment­loss­was­wrote­back­as­an­impairment­loss­of­HUF­5.5­billion­was­created­on­these­receivables­on­31­December­2016.

Forint receivables from credit institutions by remaining maturity

HUF millions

No. Remaining maturityBalance

Change31 Dec 2015 31 Dec 2016

1. ­­­–­matured 5,048 2,679 –2,369

2. ­­­–­within­1­year­ 177,991 186,791 8,800

3. ­­­–­within­1­to­5­years 671,253 610,148 –61,105

4. ­­­–­over­5­years 551,260 748,912 197,652

5. Total receivables from credit institutions (1+2+3+4) 1,405,552 1,548,530 142,978

Forint liabilities of credit institutions

HUF millions

B/S line DescriptionBalance

Change31 Dec 2015 31 Dec 2016

Current­accounts 563,071 631,835 68,764

Two-week­MNB­deposits 958,100 0 –958,100

Three-month­MNB­deposits 2,986,826 899,987 –2,086,839

Other­deposits 264,255 876,300 612,045

VI.2. Deposits of credit institutions 4,772,252 2,408,122 –2,364,130

The­line­‘Deposits­of­credit­institutions’­contains­the­liquidity-absorbing­instruments­and­minimum­reserves­of­domestic­credit­institutions,­both­of­which­are­pegged­to­the­base­rate;­the­aggregate­balance­of­such­was­HUF­2,408.1­billion­on­31­December­2016.­The­maturity­dates­of­all­deposits­were­within­one­year.­The­total­decrease­of­HUF­2,364.1­billion­in­the­balance­of­deposits­can­mainly­be­explained­by­the­decline­in­3-month­fixed-rate­deposits.­These­fixed-rate­instruments­are­sold­at­tenders­by­the­MNB;­the­interest­rate­on­deposits­is­the­central­bank­base­rate,­and­it­became­the­MNB’s­main­policy­instrument­from­23­September­2015.­The­2-week­deposit­was­phased­out­in­April­2016.­The­balance­of­overnight­central­bank­deposits­was­HUF­612­billion­higher­at­and-2016­relative­to­31­December­2015,­but­the­average­amount,­calculated­for­2016,­was­lower­by­more­than­40­per­cent.

4.8 NET POSITIONS VIS-À-VIS CREDIT INSTITUTIONS

HUF millions

B/S line DescriptionBalance

Change31 Dec 2015 31 Dec 2016

I.2.—vI.2. Net­forint­position –3,366,700 –859,592 2,507,108

II.3.—vII.2. Net­foreign­currency­position –51,416 –75,804 –24,388

Total –3,418,116 –935,396 2,482,720

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Net­liabilities­to­credit­institutions­decreased­by­HUF­2,482.7­billion­to­HUF­935.4­billion­by­31­December­2016.­Nearly­the­same­amount­of­improvement­was­observed­in­the­line­‘Net­forint­position’,­which­showed­a­net­forint­liabilities­balance­of­HUF­859.6­billion­at­end-2016.­The­decline­in­3-month­deposits­contributed­significantly­to­the­improvement­in­the­net­position,­as­well­as­the­phase-out­of­2-week­deposits­and­the­increase­in­FGS­refinancing­loans­to­credit­institutions­and­in­security-backed­loans.­By­contrast,­the­net­forint­liabilities­position­vis-à-vis­credit­institutions­rose,­owing­to­the­increase­in­overnight­deposits­and­current­accounts­and­the­decrease­in­non-performing­claims­from­credit­institutions­under­liquidation­corrected­by­impairment­loss.

Net­foreign­currency­liabilities­to­credit­institutions­declined­by­HUF­24.4­billion,­showing­a­balance­of­HUF­75.8­billion­at­31­December­2016.­The­net­balance­of­ the­ foreign­currency­position­to­credit­ institutions­included­the­fix­foreign­currency­deposits­on­the­one­hand,­and­the­outstanding­amount­of­foreign­exchange­swaps­at­the­end­of­the­period­under­review­on­the­other­hand.­The­amount­of­foreign­currency­deposited­in­interest-bearing­accounts­at­the­MNB­by­domestic­credit­institutions­rose­by­HUF­36.8­billion­from­end-2015­to­31­December­2016.­There­was­no­demand­for­swaps­providing­EUR­liquidity­to­the­banking­sector.­The­outstanding­amount­of­EUR/HUF­swap­transaction­concluded­from­March­2016­was­HUF­273­billion­at­end-2016­in­connection­with­forint­refinancing­loans­of­Pillar­II­of­the­FGS’­third,­phase-out­stage.­The­MNB’s­FX­swaps­instruments­related­to­Pillar­III­of­the­FGS­(which­was­phased­out­in­2014)­matured­during­the­second­quarter­of­2016.­Foreign­exchange­swaps­concluded­in­line­with­the­phasing-out­of­household’s­foreign­currency­loans­terminated­in­April­2016,­but­the­amount­of­currency­interest­rate­swaps­was­EUR­1.1­billion­at­31­December­2016.­In­connection­with­the­quantitative­restriction­on­3-month­deposits,­in­October­2016,­the­MNB­decided­to­create­the­forint­liquidity­providing­fine-tuning­FX­swaps,­which­amounted­to­EUR­1.3­billion­at­end-2016.

Foreign currency receivables from and liabilities to credit institutions in a breakdown by remaining maturity

HUF millions

No. Remaining maturityBalance

Change31 Dec 2015 31 Dec 2016

1. ­­­–­within­1­year­ 6,962 62 –6,900

2. ­­­–­within­1­to­5­years 0 0 0

3. ­­­–­over­5­years 0 0 0

4. Total foreign currency receivables from credit institutions (1+2+3) 6,962 62 –6,900

5. ­­­–­within­1­year­ 52,445 75,507 23,062

6. ­­­–­within­1­to­5­years 5,933 –9 –5,942

7. ­­­–­over­5­years 0 368 368

8. Total foreign currency liabilities to credit institutions (5+6+7) 58,378 75,866 17,488

9. Net foreign currency position (4-8) –51,416 –75,804 –24,388

4.9 GOLD AND FOREIGN EXCHANGE RESERVES OF THE CENTRAL BANK

Forint balances

HUF millions

B/S line DescriptionBalance

Change31 Dec 2015 31 Dec 2016

Gold­reserve 30,117 0 –30,117

Reserve­position­in­the­IMF 29,353 117,772 88,419

Foreign­currency­deposits 1,020,443 1,648,649 628,206

Foreign­currency­securities 8,305,698 5,787,115 –2,518,583

Foreign­currency­repo­transactions 51,364 3,746 –47,618

II.1. Gold and foreign exchange reserves 9,436,975 7,557,282 –1,879,693

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For­statistical­purposes,­the­MNB­regularly­publishes­the­amount­of­foreign­exchange­reserves.­According­to­the­statistical­rules,­foreign­exchange­reserves­also­include­accrued­interest,­and­consequently,­gold­and­foreign­exchange­reserves­differ­in­amount­according­to­the­statistical­and­accounting­rules.

Foreign­exchange­reserves­not­including­accrued­interest­amounted­to­HUF­7,557.3­billion­at­31­December­2016,­down­HUF­1,879.7­billion­compared­to­the­previous­year-end.

The­reason­for­the­change­in­gold­reserve­is­that­it­was­invested­by­the­MNB­in­gold-currency­swaps,­instead­of­receivables­in­connection­with­gold,­but­the­swaps­had­higher­yields­with­the­same­risk.­The­foreign­exchange­derived­from­the­swaps­raised­the­amount­of­the­line­‘Foreign­currency­deposits’­in­foreign­exchange­reserves.­The­ derivative-type­ gold­ receivables­ appeared­ under­ item­ II.4.­ Other­ foreign­ currency­ receivables.­ This­transaction­does­not­cause­a­change­in­the­level­of­gold­reserve,­but­modified­the­type­of­receivables.

The­IMF­free­quota­rose­by­HUF­88.4­billion­mainly­due­to­the­IMF­quota­increase­carried­out­in­February.­The­Hungary’s­IMF­quota­rose­by­SDR­901.6­million­(HUF­354.4­billion)­to­SDR­1,940­billion.­According­to­IMF­rules,­25­per­cent­of­quota­increase­(amounting­to­SDR­225.4­million)­–­which­is­stated­under­foreign­exchange­reserves­–­had­to­be­satisfied­in­SDR,­and­75­per­cent­(amounting­to­SDR­676.2­million)­in­own­currency,­which­mean­forint­(the­latter­is­shown­under­‘Other­foreign­currency­receivables’;­see­Section­4.10).

The­end-2016­balance­of­foreign­currency­securities­contained­those­securities­which­are­managed­by­the­external­trustee­on­the­ground­of­the­mandate­in­a­total­amount­of­HUF­209.2­billion­(3.6­per­cent­altogether).

Euro balances

EUR millions

B/S line DescriptionBalance

Change31 Dec 2015 31 Dec 2016

Gold­reserve 96 0 –96

Reserve­position­in­the­IMF 94 379 285

Foreign­currency­deposits 3,259 5,301 2,042

Foreign­currency­securities 26,526 18,607 –7,919

Foreign­currency­repo­transactions 164 12 –152

II.1. Gold and foreign exchange reserves 30,139 24,299 –5,840

The official exchange rate of the forint was EUR/HUF 313.12 on 31 December 2015 and EUR/HUF 311.02 on 31 December 2016.

In­the­course­of­2016,­the­most­significant­item­increasing­foreign­exchange­reserves­was­the­incoming­EUR­transfers­from­the­European­Commission;­furthermore,­the­maturity­of­monetary­policy­swaps­with­credit­institutions­and­changes­in­cross­rates­also­increased­the­balance.­The­level­of­reserves­was­reduced­by­the­maturity­and­termination­of­one­part­of­foreign­exchange­swaps­and­currency­interest­rate­swaps­related­to­phasing-out­of­household’s­foreign­currency­loans;­the­sum­of­the­debt­management­and­other­activities­of­the­Government­Debt­Management­Agency;­by­the­net­balance­of­foreign­currency­influx­and­payment­managed­by­the­Hungarian­State­Treasury.­As­a­consequence­of­the­aforementioned­effects,­the­stock­of­foreign­exchange­reserves­denominated­in­euro­decreased­by­EUR­5.8­billion­by­31­December­2016.

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4.10 OTHER FORINT AND FOREIGN CURRENCY RECEIVABLES

Other forint receivables

HUF millions

B/S line DescriptionBalance

Change31 Dec 2015 31 Dec 2016

Receivables­from­supervisory­activities 5,345 8,996 3,651

Employee­loans 2,061 2,552 491

Total other receivables in HUF in gross value 7,406 11,548 4,142

Impairment­loss­for­other­receivables­ –5,308 –8,719 –3,411

I.3. Other forint receivables 2,098 2,829 731

The­balance­of­receivables­from­supervisory­activities­corrected­by­overpayments­amounted­to­HUF­9­billion­at­31­December­2016,­and­an­impairment­loss­was­recognised­for­96.9­per­cent­of­this,­in­line­with­the­internal­rules­of­the­MNB.­The­total­amount­of­the­personal­loans­and­preferential­property­loans­granted­by­the­MNB­to­its­employees­was­HUF­2.6­billion­at­end-2016.

Other foreign currency receivables

HUF millions

B/S line DescriptionBalance

Change31 Dec 2015 31 Dec 2016

Forint­payment­of­IMF­quota 383,432 645,754 262,322

Receivables­from­investment­units 15,796 0 –15,796

Foreign­hedging­transactions* 96 81,951 81,855

Other 83 1,411 1,328

II.4. Other foreign currency receivables 399,407 729,116 329,709

* The revaluation difference of hedging derivative transactions is stated in net terms, in accordance with the MNB Decree.

The­forint­payment­of­the­IMF­quota­rose­by­HUF­262.3­billion­during­the­year­(for­more­details­on­the­IMF­quota­increase,­see­Section­4.9).

The­decline­of­HUF­15.8­billion­observed­in­the­line­‘Receivables­from­investment­units’­was­due­to­the­fact­that­the­Chinese­renminbi-denominated­investment­units­to­be­recorded­at­market­value­were­shown­among­non-foreign­exchange­reserves­before­1­February­2016,­but­they­now­form­a­part­of­foreign­exchange­reserves­(the­transaction­took­place­within­the­framework­of­Central­Bank­Renminbi­Programme­announced­by­the­MNB,­in­the­first­phase­of­which­investment­units­were­purchased­indirectly­from­the­BIS).

The­item­‘Foreign­hedging­transactions’­includes­the­net­debit­balance­of­swap­and­forward­transactions­with­non-resident­counterparties­concluded­by­the­MNB,­including­the­gold-currency­swap­mentioned­in­Section­4.9.

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4.11 OTHER DEPOSITS AND LIABILITIES

Other forint liabilities

HUF millions

B/S line DescriptionBalance

Change31 Dec 2015 31 Dec 2016

International­financial­institutions'­forint­deposits 38,818 50,029 11,211

Other­liabilities 8,161 9,391 1,230

VI.4. Other forint deposits and liabilities 46,979 59,420 12,441

The­item­‘International­financial­institution’s­deposits’­mainly­includes­the­forint­deposits­of­the­European­Commission.

Other foreign currency liabilitiesHUF millions

B/S line DescriptionBalance

Change31 Dec 2015 31 Dec 2016

IMF­deposit 777,395 1,035,803 258,408

Foreign­deposits­and­loans 129,834 141,112 11,278

Hedging­transactions* 25,144 4 –25,140

Other­liabilities 1,068 714 –354

VII.3. Other foreign currency liabilities 933,441 1,177,633 244,192

* The revaluation difference of hedging transactions is stated in net terms, in accordance with the MNB Decree.

The­balance­of­other­foreign­currency­liabilities­increased­by­HUF­244.2­billion­to­HUF­1,177.6­billion­as­at­31­December­2016.­The­IMF­deposit’s­balance­changed­due­to­the­February­quota­increase­amounting­to­HUF­257.1­billion,­along­with­an­April­switch-over­to­the­new­official­exchange­rate­ordered­by­the­IMF­amounting­to­HUF­13.4­billion,­in­addition­to­exchange­rate­changes.

The­total­increase­of­HUF­11.3­billion­in­the­balance­of­foreign­deposits­resulted­from­a­rise­in­the­volume­of­hedging­transactions­marked­to­market,­and­it­was­reflected­in­the­change­in­the­amount­of­the­mark-to-market­deposit,­which­is­for­the­market­price­differences­of­transactions.

The­item­‘Hedging­transactions’­contains­the­net­credit­balance­of­forward­transactions­with­non-resident­counterparties­concluded­by­the­MNB.­At­end-2016,­the­net­debit­balance­of­HUF­82­billion­of­swap­transactions­appeared­under­item­II.4.­Other­foreign­currency­receivables.

Other foreign currency liabilities by remaining maturityHUF millions

B/S line Remaining maturityBalance

Change31 Dec 2015 31 Dec 2016

­­­­­–­within­1­year 539,056 787,152 248,096

­­­­­–­within­1­to­5­years 0 0 0

­­­­­–­over­5­years 0 0 0

­­­­­–­without­maturity 394,385 390,481 –3,904

VII.3. Other foreign currency liabilities 933,441 1,177,633 244,192

The­item­‘Liabilities­without­maturity’­almost­exclusively­includes­the­liabilities­amounting­to­SDR­991.1­million,­which­derived­from­the­SDR­allocation­carried­out­by­the­IMF­in­2009.­Exchange­rate­changes­caused­the­decrease.

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Currency structure of other foreign currency liabilities

HUF millions

No. DescriptionBalance

Change31 Dec 2015 31 Dec 2016

1. ­­­­–­USD 13,853 19,740 5,887

2. ­­­­–­EUR 147,729 103,687 –44,042

3. ­­­­–­JPy 0 –14,619 –14,619

4. ­­­­–­SDR 437,140 429,720 –7,420

5. ­­­­–­Other 309,575 639,101 329,526

6. Other foreign currency liabilities 908,297 1,177,629 269,332

The­item­‘Other’­amounted­to­HUF­639.1­billion­at­the­end­of­2016­and­mainly­contains­the­revaluation-corrected­forint­coverage­of­the­IMF­quota.

4.12 INVESTED ASSETS

In­addition­to­intangibles,­tangibles­and­capital­expenditure­(HUF­41.8­billion),­invested­assets­include­shares­in­investments­(HUF­9.6­billion­in­foreign­investments­and­HUF­56.9­billion­in­domestic­investments).

Changes in the gross value, depreciation, and net value of intangibles, tangibles and capital expenditure

HUF millions

AssetsIntangibles,

tangibles and capital

expenditure

Immaterial goods Tangible assets Capital expenditure

and advances

given

Intangible assets

Software under

development

Buildings and accessories Equipment Depository

Programme

Assets of banknote and coin

Gross value

31 Dec 2015 12,005 101 28,100 15,507 8,867 239 322 65,141

Commissioning/Acquisition

1,478 427 481 1,968 555 4 25 4,938

Other­addition/Reclassificaion

8 8

Scrapping –585 –3 –15 –603

Selling –2 –2

Transfer­free­of­charge

–310 –310

Other­disposal/Reclassification

–83 –505 –2 –2 –7 –599

31 Dec 2016 12,815 528 28,076 17,158 9,430 241 325 68,573

Details of depreciation

31 Dec 2015 10,224 0 4,726 9,910 0 0 0 24,860

Ordinary­depreciation

818 867 1,270 2,955

Derecognition –658 –27 –314 –999

31 Dec 2016 10,384 0 5,566 10,866 0 0 0 26,816

Balance

31 Dec 2015 1,781 101 23,374 5,597 8,867 239 322 40,281

31 Dec 2016 2,431 528 22,510 6,292 9,430 241 325 41,757

Change 650 427 –864 695 563 2 3 1,476

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In­May­2016,­during­the­transfer­of­the­Tiszaroff­Training­and­Recreation­Center­as­contribution­to­MNB-Jóléti­Kft,­the­Tiszaroff­property’s­net­book­value­amounted­of­HUF­486­million­was­removed­from­buildings­and­capital­expenditure.­The­value­of­the­investment­in­MNB-Jóléti­Kft­increased­according­to­the­HUF­510­million­contribution­value­of­the­property,­and­the­price­difference­amounted­to­HUF­24­million­was­recognised­as­income­from­other­than­commissions.

The­net­value­of­the­state-owned,­managed­buildings­(3­buildings­and­2­plots­of­land)­was­HUF­64­million­at­31­December­2016.

Foreign investments and dividends from investments

HUF millions

DescriptionOwnership share (%) Book value Dividends received*

31 Dec 2015 31 Dec 2016 31 Dec 2015 31 Dec 2016 2015 2016

BIS­­­­­ 1.43 1.43 7,888 7,850 761 734

SDR millions 10 10

CHF millions 13.5 13.5

European­Central­Bank­ 1.38 1.38 1,754 1,742 – -–

EUR thousands 5,601 5,601

SWIFT 0.03 0.03 15 14 0 0

EUR thousands 46.4 46.4

Total investments 9,657 9,606 761 734

* Dividends financially settled in the given year.

Ownership distribution in the ECB at 31 December 2016

The­Republic­of­Hungary­joined­the­European­Union­on­1­May­2004.­Consequently,­the­MNB­became­a­member­of­the­ESCB.­The­ESCB­comprises­the­European­Central­Bank­(ECB)­and­the­national­central­banks­of­the­28­EU­Member­States.­The­Eurosystem­is­composed­of­the­ECB­and­of­the­national­central­banks­of­Member­States­which­have­already­adopted­the­euro.

Pursuant­to­the­provisions­of­Article­28­of­the­Statute­of­the­ESCB­and­the­ECB­(hereinafter­referred­to­as­‘the­Statute’),­the­MNB­has­become­an­owner­of­the­ECB.­Subscriptions­depend­on­shares­which­are­fixed­in­accordance­with­Article­29­of­the­Statute­and­must­be­adjusted­every­five­years­based­on­demographic­and­GDP­data­provided­by­the­European­Commission.­Shares­can­additionally­change­with­a­new­accession­to­the­EU­or­with­capital­increase.

Pursuant­to­Article­47­of­the­Statute,­non-euro­area­NCBs­are­required­to­pay­3.75­per­cent­of­their­subscribed­capital­to­the­ECB­as­a­contribution­to­the­operational­costs­of­the­ECB.­As­a­non-euro­area­NCB,­the­MNB­is­not­entitled­to­receive­any­share­of­the­distributable­profits­of­the­ECB,­nor­is­it­liable­to­fund­any­loss­of­the­ECB.

The­MNB’s­participation­in­the­ECB­is­presented­in­the­sub-item­‘Invested­assets’­under­‘III.­Banking­assets’­in­the­balance­sheet­of­the­MNB.­The­value­of­the­investment­(i.e.­paid-up­capital)­amounted­to­EUR­5.6­million­(HUF­1.7­billion)­in­the­MNB’s­balance­sheet­as­at­31­December­2016.

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National Central Banks (NCBs)Subscribed capital Paid-up capital

Capital key (%)EUR thousands

Nationale­Bank­van­België/­Banque­Nationale­de­Belgique 268,222­ 268,222­ 2,4778Deutsche­Bundesbank 1,948,209­ 1,948,209­ 17,9973Eesti­Pank 20,871­ 20,871­ 0,1928Central­Bank­of­Ireland 125,646­ 125,646­ 1,1607Bank­of­Greece 220,094­ 220,094­ 2,0332Banco­de­España 957,028­ 957,028­ 8,8409Banque­de­France 1,534,900­ 1,534,900­ 14,1792Banca­d'Italia 1,332,645­ 1,332,645­ 12,3108Central­Bank­of­Cyprus 16,378­ 16,378­ 0,1513Latvijas­Banka 30,537­ 30,537­ 0,2821Lietuvos­banka 44,729­ 44,729­ 0,4132Banque­centrale­du­Luxembourg 21,975­ 21,975­ 0,2030Central­Bank­of­Malta 7,015­ 7,015­ 0,0648De­Nederlandsche­Bank 433,379­ 433,379­ 4,0035Oesterreichische­Nationalbank 212,506­ 212,506­ 1,9631Banco­de­Portugal 188,723­ 188,723­ 1,7434Banka­Slovenije 37,400­ 37,400­ 0,3455Národná­banka­Slovenska 83,623­ 83,623­ 0,7725Suomen­Pankki­–­Finlands­Bank 136,005­ 136,005­ 1,2564Subtotal for euro area NCBs 7,619,885 7,619,885 70,3915Bulgarian­National­Bank 92,987­ 3,487­ 0,8590Česká­národní­banka 174,012­ 6,525­ 1,6075Danmarks­Nationalbank 161,000­ 6,038­ 1,4873Hrvatska­narodna­banka 65,199­ 2,445­ 0,6023Magyar­Nemzeti­Bank 149,363­ 5,601­ 1,3798Narodowy­Bank­Polski 554,565­ 20,796­ 5,1230Banca­Naţională­a­României 281,710­ 10,564­ 2,6024Sveriges­riksbank 246,042­ 9,227­ 2,2729Bank­of­England 1,480,244­ 55,509­ 13,6743Subtotal for non-euro area NCBs 3,205,122 120,192 29,6085Total NCBs 10,825,007 7,740,077 100,0000

Domestic investments and dividends from investments

HUF millions

DescriptionOwnership share (%) Book value Dividends received*

31 Dec 2015 31 Dec 2016 31 Dec 2015 31 Dec 2016 2015 2016Pénzjegynyomda Zrt. 1055­Budapest,­Markó­utca­13–17. 100.0 100.0 10,627 10,627 0 0

Magyar Pénzverő Zrt. 1239­Budapest,­Európa­u.­1. 100.0 100.0 575 575 0 80

Pénzügyi Stabilitási és Felszámoló Nkft. 1055­Budapest,­Bajcsy-Zsilinszky­út­78. 100.0 100.0 50 50 – –

MARK Magyar Reorganizációs és Követeléskezelő Zrt. 1055­Budapest,­Bajcsy-Zsilinszky­út­78.

100.0 100.0 21,700 19,298 0 0

MNB-Jóléti Kft. 1054­Budapest,­Szabadság­tér­8–9. 100.0 100.0 75 569 – –

MNB-Biztonsági Zrt. 1054­Budapest,­Szabadság­tér­8–9. 100.0 100.0 200 740 0 0

GIRO Elszámolásforgalmi Zrt. 1054­Budapest,­vadász­utca­31. 100.0 100.0 9,779 9,779 0 0

KELER Zrt. 1074­Budapest,­Rákóczi­út­70–72. 53.3 53.3 643 643 0 0

KELER KSZF Zrt. 1074­Budapest,­Rákóczi­út­70–72. 0.2 0.2 7 7 0 0

Budapesti Értéktőzsde Zrt. 1054­Budapest,­Szabadság­tér­7. 75.7 81.4 13,543 14,619 36 0

Befektetések összesen 57,199 56,907 36 80

* Dividends financially settled in the given year.

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Participations of domestic investments

Description

Participations

NameHeadquarter

Ownership share (%)

Share capital (HUF millions)

31 Dec 2016

Pénzjegynyomda­Zrt. DIPA Diósgyőri Papírgyár Zrt.3535­Miskolc,­Hegyalja­út­203/1. 100.0 4,196

MARK­Zrt. MARK Ingatlan Zrt.1055­Budapest,­Bajcsy-Zsilinszky­út­78. 100.0 20

MNB-Biztonsági­Zrt. QUALITAS-Védelmi Tanácsadó Kft.1123­Budapest,­Alkotás­utca­50.­C.­ép.­v.­em. 100.0 140

GIRO­Elszámolásforgalmi­Zrt. BISZ Központi Hitelinformációs Zrt.1205­Budapest,­Mártonffy­utca­25–27. 100.0 217

KELER­Zrt. KELER KSZF Zrt.1074­Budapest,­Rákóczi­út­70–72. 99.7 1,823

Budapesti­Értéktőzsde­Zrt.­ KELER Zrt.1074­Budapest,­Rákóczi­út­70–72. 46.7 4 500

KELER KSZF Zrt.1074­Budapest,­Rákóczi­út­70–72. 0.1 1­823

In­addition­to­banknotes,­Pénzjegynyomda Zrt. produces­documents,­tax­stamps­and­securities­for­domestic­and­foreign­clients.­Developments­and­investments­were­implemented­to­ensure­the­modern,­secure­production­of­forint­banknotes­and­documents­satisfying­customer­needs.­The­main­strategy­of­the­company­is­focused­on­banknote­production­ in­adequate­quantity­and­excellent­quality,­and­ increased­penetration­ in­market­segments­other­than­banknote­production­based­on­competitive­advantages.­This­set­of­goals­can­ensure­the­long-term­growth­path­for­Pénzjegynyomda­Zrt.­and­maintain­and­enhance­shareholder­value. As­part­of­the­programme­for­changing­and­developing­Hungary’s­banknotes­(between­2013­and­2018),­the­company­applies­all­of­its­resources­for­the­production­of­the­developed­banknotes.­Beyond­that­it­has­stabilized­its­presence­in­the­production­and­personalisation­of­important­domestic­documents­for­the­contracting­period­until­2022.­In­2015,­a­new­site­was­set­up­in­accordance­with­the­mounting­demand,­featuring­new­technology­as­well­as­the­implementation­of­equipment­investments­meeting­modern­requirements.­In­the­first­half­of­2016,­the­company­mainly­produced­cards,­printed­documents,­manufactured­tax­stamps/banderoles­on­site,­and­in­2017­it­will­established­a­centre­primarily­providing­the­personalisation­of­passports­and­other­domestic­documents.­The­value­of­the­investments­changed­to­HUF­11,827­million­in­January­2017,­resulting­from­the­increase­in­the­share­capital­of­HUF­1.2­billion,­which­was­necessary­for­the­equipment­investments.­The­primary­function­of­Diósgyőri Papírgyár Zrt.­(DIPA),­with­the­priority­of­serving­its­shareholder,­is­to­produce­banknote­base­paper­in­adequate­quantity,­quality,­and­timing.­At­the­centre­of­the­product­strategy­of­the­company­are­quality­products­applied­with­high-level­security­elements.­Beside­banknote­base­paper,­DIPA­produces­a­significant­share­of­base­papers­for­documents­used­in­public­administration,­base­papers­for­tickets,­as­well­as­the­base­papers­for­the­passports­of­several­countries­and­for­documents,­for­which­it­ensures­complex­solutions.­The­company­stands,­also­in­international­relations,­for­strengthening­the­appreciation­of­its­customers­based­on­tradition­and­innovative­solutions­and­stabilising­or­improving­the­results­achieved,­thereby­ensuring­an­efficient­investment­for­the­shareholder.

Pursuant­to­the­MNB’s­order,­the­primary­duty­of­Magyar Pénzverő Zrt.­is­to­produce­circulation­coins­for­cash­turnover­and­commemorative­coins­issued­by­the­MNB.­Utilisation­of­the­company’s­free­capacity­allows­for­the­production­of­non-legal­tender­commemorative­coins­and­other­medals­on­the­basis­of­its­own­coin­programme­and­customised­orders.­Within­the­range­of­its­commercial­activities,­the­company­sells­commemorative­coins,­collector­banknotes,­medals­and­gold­investment­products­in­Hungary­and­abroad­as­a­wholesaler­and­retailer­as­well.

Pénzügyi Stabilitási és Felszámoló Nonprofit Kft.­(PSFN­Kft.,­Financial­Stability­and­Liquidator­Non-profit­Ltd.)­performs­tasks­related­to­the­administration­and­therefore­to­the­operative­management­and­if­necessary­to­

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the­organised­market­derecognition­of­financial­institutions­in­crisis.­Within­the­frame­of­its­public­function,­PFSN­Kft.­designates­the­supervisory­commissioners­assuming­partial­or­overall­management­of­the­financial­institutions,­which­need­direct­professional­control­and­review­by­the­supervisory­measures­of­the­MNB.­If­it­is­stated­that­in­spite­of­the­supervisory­measures­of­the­MNB­or­the­designation­of­supervisory­commissioners,­the­prudent­and­legal­operation­of­the­financial­institution­is­not­ensured,­the­experts­of­PSFN­Kft.­shall­provide­for­liquidation­or­for­winding-up­proceedings­of­the­financial­institutions.­The­purpose­of­these­procedures­is­to­realise­creditors­interests,­to­satisfy­their­claims­prior­to­the­institution’s­termination.­PSFN­Kft.­performs­its­functions­for­public­use,­protecting­the­interests­of­the­users­of­financial­services.­The­expressed­aim­of­PSFN­Kft.­is­to­perform­the­termination­of­credit­institutions,­financial­enterprises,­insurance­companies,­capital­market­institutions,­funds­and­other­financial­institutions­in­a­unified­approach­and­methodology;­and­to­close­the­terminations­as­soon­as­possible­keeping­in­mind­their­complexity­and­the­interests­of­the­financial­customers.

The­objective­of­Magyar Reorganizációs és Követeléskezelő (MARK) Zrt. (MARK­Hungarian­Restructuring­and­Debt­Management­Private­Company­Limited­by­Shares,­MARK­Ltd.)­is­to­effectively­clean­up­a­significant­portion­of­the­non-performing­commercial­real­estate­loan­portfolios­of­the­banking­sector­from­the­balance­sheet­of­the­banking­system.­In­2016,­MARK­continued­in­the­framework­of­the­agency­contract­to­handle­and­sell­the­receivables­and­properties­registered­in­the­books­of­Magyar­Szanálási­vagyonkezelő­(MSZvK)­group­members.­Following­the­review­of­the­previous­strategic­directions,­the­company­primarily­provides­institutional­or­professional­investors­with­debt­and­real­estate­portfolio­management­services.­The­aim­of­the­MNB­is­to­have­a­successful­precedent­at­the­European­level­set­by­the­operation­of­MARK,­as­a­result­of­which­the­reliance­on­the­central­bank­will­cease­and­its­operation­will­be­placed­on­a­market­basis­over­the­short­term.­The­book­value­of­the­investment­was­modified­by­HUF­2,402­million­to­HUF­19,298­million­in­2016­due­to­the­impairment­based­on­the­year-end­valuation.

MNB-Jóléti Humán Szolgáltató és Üzemeltető Kft.­is­responsible­for­the­maintenance­and­operation­of­the­Tiszaroff­Training­and­Recreation­Center­and­for­the­provision­of­recruitment­and­other­services­determined­by­the­MNB­at­high­level­on-site­(conferences,­trainings,­courses,­external­assemblies).­In­addition,­the­company­operates­the­buffets­at­workplaces­for­employees­of­the­MNB­and­provides­other­services­(e.g.­catering,­operation­of­Teátrum)­for­the­MNB­as­the­owner.­The­book­value­of­the­investment­increased­from­HUF­75­million­to­HUF­569­million­in­2016­due­to­the­share­capital­increase­(real­property­and­cash­contribution)­during­the­year­and­the­impairment­loss­based­on­the­loss­stated­in­the­financial­statement­for­2015­and­the­expected­loss­for­2016.

MNB-Biztonsági Zrt. performs active­personal­guarding­and­protection­activity­in­accordance­with­the­contents­of­the­service­contract.­The­company­carries­out­the­personal­guarding­and­protection­of­the­office­objects­and­premises­of­the­MNB­with­armed­security­guards­under­legal­obligation.­Additionally,­it­is­involved­in­performing­the­tasks­of­money­and­valuables­transport­and­the­maintenance­tasks­of­CIT­vehicles.­MNB-Biztonsági­Zrt.­carries­out­tasks­of­guarding­and­protecting­and­securing­events­for­the­MNB­with­personal­and­property­protection­guards­on­ad­hoc­basis,­beyond­its­main­activity­with­armed­security­guards.­The­personal­and­property­protection­activity­of­the­company­was­integrated­in­2016­with­the­convoy­of­consignments­that­require­security­surveillance.­MNB-Biztonsági­Zrt.­does­not­provide­services­to­third­parties­outside­the­MNB.­A­further­rise,­to­an­extent­ordered­by­the­police,­in­the­number­of­highly­trained­guards­with­special­expertise­is­essential­for­successfully­discharging­the­increased­guarding­and­protection­tasks­(e.g.­guards­authorised­to­handle­new­equipment­required­for­passenger­and­luggage­inspection).­The­book­value­of­the­investment­increased­to­HUF­740­million­in­2016­due­to­the­payment­in­the­share­capital­of­HUF­10­million­and­in­the­capital­reserve­of­HUF­530­million.

By­becoming­the­sole­owner of GIRO Zrt.,­the­MNB­has­the­opportunity­to­directly­implement­its­ideas­for­developing­electronic­money­circulation.­The­company­operates­the­payment­system­for­domestic­interbank­forint­credit­transfers­and­direct­debits,­the­so-called­Interbank­Clearing­System.­The­key­objectives­ in­ its­strategy­include­stable­and­safe­operation,­development­of­the­existing­clearing­services,­implementation­of­new­clearing­services,­and­increasing­the­competitiveness­of­clearing­fees.­In­line­with­this,­after­decreasing­the­clearing­transactions­fees­by­20­per­cent­in­2015,­the­company­carried­out­a­further­reduction­in­the­fees­

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in­January­2016,­as­a­result­of­which­the­interbank­transfer­fee­fell­by­27­per­cent­in­total,­compared­to­the­prices­before­the­acquisition­by­central­bank.­From­1­January­2016­all­forint­credit­transfers­requiring­interbank­clearing,­submitted­to­the­credit­institutions­on­paper,­are­processed­in­the­intraday­settlement­system­of­the­Interbank­Clearing­System,­representing­a­new­step­toward­the­trend­to­move­all­transactions­from­the­overnight­settlement­into­the­quicker­intraday­settlement­system­based­on­modern­standards.­Relating­to­the­implementation­of­the­payment­account­directive,­a­service­facilitating­switching­the­banks­was­introduced­for­the­customers­of­the­payment­service­providers.­The­preparation­for­implementation­of­the­instant­payment­infrastructure­was­started­in­order­to­accelerate­further­the­payment­transactions­and­to­broaden­the­use­of­electronic­payment­methods.­Using­the­new­payment­system­payments­will­be­able­to­be­effected­in­a­few­seconds­24­hours­a­day,­on­every­day­of­the­year.

MNB­increased­its­ownership­in­Budapesti Értéktőzsde Zrt.­(BÉT)­to­a­81.35­per­cent­stake­by­end-2016­by­partially­taking­over­the­stake­of­small­investors.­The­aim­of­the­MNB­is­to­develop­and­build­market­and­to­achieve­an­adequately­sized,­effectively­operating­capital­market­in­Hungary,­since­the­base­of­the­competitive­economy­and­of­the­sustainable­growth­is­a­developed­capital­market­and­diversified­financial­intermediary­system.­The­development­of­the­domestic­capital­market­is­all­the­more­relevant,­because­funds­arising­from­the­European­Union­are­already­expected­to­decline­considerably­before­2020­and­with­the­phasing-out­of­the­FGS­the­MNB­will­also­reduce­its­support­for­corporate­lending.­The­expansion­of­the­stock­exchange­will­be­based­on­the­close­cooperation­of­the­state,­the­market­and­the­BÉT­with­the­development­of­regulation­framework­and­market­structure­stimulating­the­operation­of­the­capital­market.­The­new­strategic­policy­of­the­BÉT­until­2020­consists­of­the­following:­successful­official­listings­on­the­stock­exchange,­government­support,­renewal­of­the­market­structure,­strengthening­investors­and­international­relations,­as­well­as­boosting­bond­and­derivative­markets.­The­strategy­focuses­on­widening­the­investor­base­and­making­more­attractive­the­conditions­of­supply­and­demand­and­liquidity­in­the­domestic­stock­exchange,­contributing­to­establishing­a­healthier­structure­of­the­financial­system­and­improving­interest­rate­transmission.­This­strategy­can­assist­the­further­reduction­of­the­shadow­economy­by­ensuring­the­transparency­of­the­listed­companies.­In­2016,­as­part­of­the­new­strategy­BÉT­carried­out­several­measures:­organising­international­forums­and­conferences­in­order­to­stimulate­the­supply-side­of­the­issues,­encouraging­demand­side­with­education,­the­Stock­Exchange­Advisory­Body­was­established,­and­preparations­were­made­for­developing­the­SME­market.­As­an­important­development,­the­government­launched­the­Stock­Exchange­Development­Found,­which­also­may­contribute­to­supplying­SMEs­with­capital.­Since­the­company­has­a­minority­participation­in­the­KELER­Group­consisting­of­KELER Zrt.­and­KELER KSZF Zrt.,­the­MNB­also­holds­a­strategic­share­in­the­KELER­Group­as­the­majority­owner­of­the­BÉT.­As­the­operator­of­the­post-trade­infrastructure­in­the­Hungarian­securities­market,­the­KELER­Group­accounts,­guarantees­and­settles­the­stock­exchange­transactions­traded­on­the­BÉT­and­transactions­involving­dematerialised­securities­issued­in­Hungary.

Equity of domestic investments

Upon­compilation­of­the­Annual­Report,­the­latest­available­data­are­shown­in­the­following­table.

HUF millions

InvestmentShare capital Reserves Profit/loss

for the year Equity

31 Dec 2016

Pénzjegynyomda­Zrt. 10,627 4,113 1,634 16,374

Magyar­Pénzverő­Zrt. 575 691 148 1,414

Pénzügyi­Stabilitási­és­Felszámoló­Nkft. 50 3 0 53

MARK­­Zrt. 700 20,102 –21 20,781

MNB-Jóléti­Kft. 763 –113 –74 576

MNB-Biztonsági­Zrt. 210 718 675 1,603

GIRO­Elszámolásforgalmi­Zrt. 2,496 6,402 459 9,357

KELER­Zrt. 4,500 23,040 1,272 28,812

KELER­KSZF­Zrt. 1,823 3,857 133 5,813

Budapesti­Értéktőzsde­Zrt. 541 5,432 73 6,046

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The MNB’s receivables from and liabilities to affiliated companies

HUF millions

InvestmentReceivables Liabilities

31 Dec 2016

Pénzjegynyomda­Zrt. 0 1,042

Magyar­Pénzverő­Zrt. 5 1

MNB-Jóléti­Kft. 84 138

MNB-Biztonsági­Zrt. 1 0

GIRO­Elszámolásforgalmi­Zrt. 1 1

KELER­Zrt. 0 1

Total 91 1,183

The­above­table­presents­short-term­receivables­and­liabilities.­Liabilities­to­Pénzjegynyomda­Zrt.­derive­from­invoicing­of­produced­banknotes.­Receivables­from­and­liabilities­to­MNB-Jóléti­Kft.­are­advanced­payments­provided­in­connection­with­operating­of­the­company­and­from­cost­accounting.

4.13 IMPAIRMENT LOSSES AND PROVISIONS

HUF millions

B/S line Description31 Dec 2015 Interim changes in 2016 31 Dec 2016

Impairment losses / provisions Increase (+) Reversal (-) Total impairment

losses / provisions

1 2 3 4 5 3+4+5

I.2. Forint­receivables­from­credit­institutions 5,985 4 –500 5,489

I.3. Other­forint­receivables­ 5,308 3,411 0 8,719

II.4. Other­foreign­currency­receivables 18 0 –18 0

III. Invested­assets 120 2,531 0 2,651

III. Other­assets 9 20 –2 27

vIII. Liabilities 1,978 280 –1,569 689

­­–­litigation­related­liabilities 1,096 131 –687 540

­­–­FGS+­refinancing­loans 0 149 0 149

­­–­derivatives 744 0 –744 0

­­–­bond­lending­ 138 0 –138 0

Total 13,418 6,246 –2,089 17,575

Impairment­losses­and­provisions­increased­by­HUF­4,157­million­to­HUF­17,575­million­in­2016.

Based­on­the­expected­recovery,­an­impairment­loss­of­HUF­5,489­million­was­created­for­forint­receivables­from­credit­institutions;­compared­to­end-2015,­in­total­there­was­a­formation­of­an­impairment­loss­in­the­amount­of­HUF­4­million­and­a­write-back­of­an­impairment­loss­in­the­amount­of­HUF­500­million.

In­relation­to­forint­receivables­from­supervisory­activities,­a­HUF­3,411­million­impairment­loss­appeared­in­total­during­the­quarterly­impairment­testing­in­2016.

The­impairment­balance­of­other­foreign­currency­receivables­was­utilised­in­connection­with­depreciation­of­underlying­receivables­at­the­end­of­the­year.

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In­relation­to­invested­assets,­a­HUF­2,531­million­impairment­loss­was­recognised­according­to­the­accounting­policy.­In­connection­with­the­investment­in­MNB-Jóléti­Kft.,­during­the­semi-annual­impairment­testing­the­impairment­loss­amounted­to­HUF­48­million­based­on­the­2015­loss,­and­during­the­year-end­testing­an­impairment­loss­of­HUF­81­million­was­justified­due­to­the­preliminary­loss­expected­in­2016.­In­relation­to­the­investment­in­MARK­Zrt.,­an­impairment­loss­of­HUF­2,402­million­was­created­in­view­of­the­planned­changes­in­2017­(share­capital­decrease­and­its­operation­need­to­place­on­a­market­basis).­As­a­result­of­impairment­testing,­on­31­December­2016,­the­value­of­the­investment­reflects­the­secure­returns,­consistent­with­the­principle­of­prudence.

In­the­case­of­other­banking­assets,­due­to­uncertainties­of­recoveries­of­receivables­an­impairment­loss­of­HUF­20­million­was­created,­while­HUF­2­million­was­written­back­owing­to­recoveries­in­2016.

In­connection­with­litigation-related­contingent­liabilities,­a­provision­of­HUF­540­million­was­necessary­as­of­31­December­2016;­compared­to­end-2015;­in­total­there­was­a­formation­of­a­provision­of­HUF­131­million­and­a­reversal­in­the­amount­of­HUF­687­million.

In­the­framework­of­FGS+,­up­to­a­maximum­of­50­per­cent­of­credit­institutions’­capital­loss­arising­from­SME­loans­are­reimbursed­by­the­MNB,­within­the­loss­compensation­limit.­In­2016,­provision­of­HUF­149­million­was­created­for­the­compensation­of­expected­loans­in­relation­to­FGS+.

The­whole­amount­of­the­provision­for­derivative­transactions­for­purposes­other­than­hedging­–­due­to­the­maturity­–­was­reversed­in­2016.

According­to­the­international­securities­lending­contracts,­the­MNB­is­charged­with­the­entire­amount­of­potential­losses­arising­from­hedge­investments­made­by­agents.­Based­on­the­principle­of­prudence,­a­provision­must­be­created­to­cover­this­loss­as­a­future­liability.­Because­of­the­recall­of­the­two­underlying­securities­in­2016,­the­entire­provision­created­for­securities­lending­was­released.

4.14 PREPAID EXPENSES/ACCRUED INCOME AND ACCRUED EXPENSES/DEFERRED INCOME

HUF millions

B/S line DescriptionBalance

Change31 Dec 2015 31 Dec 2016

Due­to­banking­transactions 95,500 68,837 –26,663

Due­to­internal­operation 197 383 186

IV. Prepaid expenses/accrued income 95,697 69,220 –26,477

Due­to­banking­transactions 30,806 31,814 1,008

Due­to­internal­operation 238 669 431

X. Accrued expenses/deferred income 31,044 32,483 1,439

Prepaid­expenses,­accrued­income,­accrued­expenses,­and­deferred­income­include­interest­received/charged­and­interest­related­income/charges­and­expenses­incurred­in­the­reporting­period,­independently­of­the­date­of­financial­settlement.

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4.15 CHANGES IN EQUITY

HUF millions

B/S line Description 31 Dec 2015 Interim change 31 Dec 2016

XI.1. Share­capital 10,000 0 10,000

XI.2. Retained­earnings 63,417 44,452 107,869

XI.3. valuation­reserves 0 0 0

XI.4. Revaluation­reserves­due­to­exchange­rate­changes 312,599 –130,140 182,459

XI.5. Revaluation­reserves­of­foreign­currency­securities 28,510 –11,156 17,354

XI.6. Profit/Loss­for­the­year 94,452 –40,171 54,281

XI. Equity 508,978 –137,015 371,963

* Presented in the 2016 balance-sheet structure.

The­share­capital­consists­of­a­single­registered­share­with­a­nominal­value­of­HUF­10­billion.

For­more­details­on­revaluation­reserves,­see­Section­4.16.

4.16 REVALUATION RESERVES

HUF millions

B/S line Description 31 Dec 2015 31 Dec 2016 Változás

XI.4. Revaluation­reserves­due­to­exchange­rate­changes 312,599 182,459 –130,140

XI.5. Revaluation­reserves­of­foreign­currency­securities 28,510 17,354 –11,156

Total revaluation reserves 341,109 199,813 –141,296

The­official­forint­exchange­rate­versus­the­euro­fluctuated­in­a­range­of­EUR/HUF­304.28­to­317.97­in­2016.­It­reached­its­lowest­value­in­early­October­and­its­highest­value­in­mid-January.­Compared­to­31­December­2015,­the­exchange­rate­strengthened­by­0.7­per­cent.­The­exchange­rate­was­EUR/HUF­311.02­as­at­31­December­2016.­The­average­cost­rate­weakened­by­HUF­2.99­to­EUR/HUF­301.16.­As­a­result,­the­difference­between­the­official­and­average­cost­rate­was­lower­compared­to­end-2015­(a­decrease­from­EUR/HUF­14.95­to­EUR/HUF­9.86).­Consequently,­the­revaluation­reserves­due­to­exchange­rate­changes,­calculated­as­the­difference­of­foreign­exchange­items­converted­into­forints­using­the­official­and­average­cost­rate,­decreased­by­HUF­130.1­billion­to­HUF­182.5­billion.

Revaluation­reserves­of­foreign­currency­securities­are­calculated­as­the­difference­between­the­market­value­and­the­amortised­book­value­of­securities.­Market­value­differences­on­the­foreign­currency­securities­in­the­MNB’s­portfolio­showed­a­balance­of­HUF­17.4­billion­as­at­31­December­2016.

Annual changes in the forint exchange rate

EUR/HUF

Date MNB official exchange rate Average cost rate

31­Dec­2015 313.12 298.17

31­Dec­2016 311.02 301.16

Annual appreciation

In­2015 0.6%

In­2016 0.7%

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4.17 OFF-BALANCE SHEET LIABILITIES AND OTHER SIGNIFICANT OFF-BALANCE SHEET ITEMS OF THE MNB

Liabilities arising from hedging transactions and derivative transactions for purposes other than hedging with related receivables

HUF millions

No. Description31 Dec 2015 31 Dec 2016

Receivables Liabilities Net market value Receivables Liabilities Net market

value

1. Interest­rate­swap­transactions 2,634,171 2,634,171 17,976 3,870,739 3,870,739 36,358

­­­­–­IRS­conditional­on­lending­activity­(LIRS) 0 0 0 779,560 779,560 –8,994

­­­­–­­IRS­contracted­with­domestic­credit­institutions

1,296,440 1,296,440 10,636 1,731,290 1,731,290 50,438

­­­­–­IRS­contracted­with­foreign­partners 1,337,731 1,337,731 7,340 1,359,889 1,359,889 –5,086

2. Bond­future­transactions 0 33,695 –19 0 260,719 –2,738

3. FX­swap­and­forward­transactions 3,478,755 3,501,907 –22,971 2,874,990 2,793,117 82,832

­­­­–­Forint­liquidity­providing­FX­swaps 0 0 0 400,487 400,283 126

4. Currency­swap­transactions­(including­transactions­without­capital­replacement)

3,291,513 3,351,549 –187,442 2,052,883 2,105,756 –172,066

­­­­–­­Currency­swap­transactions­linked­to­FGS

148,106 142,494 5,734 84,783 85,143 10,094

5. Total hedging transaction (1+2+3+4) 9,404,439 9,521,322 –192,456 8,798,612 9,030,331 –55,614

6. CDS­transactions 187,872 187,872 –716 0 0 0

7. FX­swap­and­forward­transactions 25,163 25,162 –18 0 0 0

8. Total derivative transactions for purposes other than hedging (6+7)

213,035 213,034 –734 0 0 0

9. Total (5+8) 9,617,474 9,734,356 –193,190 8,798,612 9,030,331 –55,614

The­table­above­includes­all­types­of­off-balance­sheet­liabilities­arising­from­derivative­transactions;­it­also­includes­FX­swaps,­currency­swaps­and­forward­transactions­for­hedging­purposes,­which­are­part­of­the­foreign­currency­position­and­are­recorded­in­the­balance­sheet,­except­for­currency­swaps­without­capital­movement.­Hedging­transactions­reduce­risks­related­to­the­net­foreign­currency­position­and­arising­from­cross-rate­fluctuations­and­interest­rate­changes.­These­transactions­support­the­creation­of­the­benchmark­foreign­currency­structure­determined­by­the­Monetary­Council.

The­aim­of­interest­rate­swap­transactions­for­hedging­purposes­linked­to­specific­bond­issuance­is­to­achieve­the­interest­structure­deemed­desired­by­the­MNB.­Furthermore,­since­2014,­the­MNB­concluded­interest­rate­swap­tenders­with­domestic­credit­institutions­in­order­to­reduce­their­interest­rate­risk,­additionally­in­2016­interest­rate­swaps­conditional­on­lending­activity­(LIRS)­were­concluded.­Most­of­the­approved­transactions­have­a­maturity­of­1­to­5­years,­and­less­than­7­per­cent­have­10-year­maturity.

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The­aim­of­bond­futures­transactions­is­to­reduce­the­duration­of­the­reserve­portfolio;­these­are­hedging­transactions­maturing­within­1­year.

FX­swap­and­forward­transactions­are­the­main­ instruments­ for­hedging­ foreign­exchange­risk,­based­on­expectations­related­to­foreign­exchange­rate­changes;­their­aim­is­to­achieve­the­targeted­foreign­currency­position,­and­their­maturity­is­less­than­1­year.­In­the­fourth­quarter­of­2016,­a­new­forint­liquidity-providing­FX­swap­was­launched­for­monetary­policy­purposes­related­to­the­quantitative­limit­for­the­3-month­deposit.

Currency­swap­transactions­are­for­managing­foreign­exchange­and­interest­rate­risks­jointly­over­the­long­run.­Their­amount­decreased­in­2016,­as­some­of­the­transactions­related­to­phasing­out­households’­foreign­currency­loans­matured.­Of­the­end-2016­balance,­32­per­cent­of­the­currency­swap­transactions­consisted­of­transactions­without­capital­replacement­concluded­in­February­and­November­2013­with­a­maturity­of­10­years.

Liabilities from derivative transactions by remaining maturity

HUF millions

No. Remaining maturityBalance

Change31 Dec 2015 31 Dec 2016

­­­–­within­1­year­ 4,884,234 3,390,360 –1,493,874­­­–­within­1­to­5­years 1,988,576 2,829,416 840,840­­­–­over­5­years 2,648,512 2,810,555 162,043

1. Hedging transactions 9,521,322 9,030,331 –490,991­­­–­within­1­year­ 213,034 0 –213,034­­­–­within­1­to­5­years 0 0 0­­­–­over­5­years 0 0 0

2. Derivative transactions for purposes other than hedging 213,034 0 –213,0343. Total (1+2) 9,734,356 9,030,331 –704,025

Other off-balance sheet liabilities

HUF millions

No. DescriptionBalance

Change31 Dec 2015 31 Dec 2016

1. FGS­residual­drawable­credit­facilities 185,609 121,583 –64,0262. FGS+­related­contingent­liabilities 0 149 1493. Litigation-related­contingent­liabilities 1,564 716 –8484. Guarantees 1,763 1,804 415. Other­off-balance­sheet­liabilities 15 15 06. Total (1+2+3+4+5) 188,951 124,267 –64,684

In­connection­with­the­Funding­for­Growth­Scheme,­the­MNB­reports­the­following­items­as­off-balance­sheet­liabilities:­the­still­available­credit­facilities­allocated­originally­in­the­framework­of­FGS+,­but­now­drawable­both­in­the­additional­phase­of­FGS­Pillar­I­and­in­the­Pillar­of­FGS+­at­the­request­of­the­banks;­furthermore,­the­credit­facilities­drawable­in­the­3rd­phase­of­FGS­Pillar­I­and­Pillar­II­originating­from­2016.

In­accordance­with­the­contracts­concluded­in­the­framework­of­FGS+,­up­to­a­maximum­of­50­per­cent­of­the­capital­loss­of­credit­institutions­arising­from­SME­loans­are­reimbursed­by­the­MNB­to­the­credit­institutions­within­a­limit.­FGS+­related­contingent­liabilities­are­to­record­the­expected­reimbursement­for­which­provisions­have­been­formed­in­line­with­the­rules­of­qualification.

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The­majority­of­the­proceedings­are­connected­to­the­supervisory­activities­and­contain­proceedings­against­penalty­resolutions­as­well­as­indemnity­cases.­The­related­contingent­liabilities­are­to­record­the­paid­but­litigated­penalties­and­other­expected­compensations­connected­to­legal­proceedings­for­which­provisions­have­been­formed.

The­item­‘Guarantees’­consists­of­export­guarantees,­to­which­an­irrevocable­indemnity­bond­is­always­linked.­When­exercising­a­guarantee,­the­MNB­has­the­right­to­a­reverse­guarantee­if­needed.­In­2015,­the­increase­in­the­balance­was­caused­by­exchange­rate­changes.

Recording off-balance sheet security transactions

HUF millions

No. DescriptionBalance

Change31 Dec 2015 31 Dec 2016

1. Face­value­of­securities­lent 555,761 364,807 –190,954–­automatic­securities­lending 48,037 24,457 –23,580–­agency­securities­lending 507,724 340,350 –167,374

2. Purchase­cost­of­the­non-cash­hedge­arising­from­security­lending­transactions 96,973 89,298 –7,675

3. Investment­of­cash­hedge­arising­from­security­lending­transactions–­at­purchase­cost 432,792 236,400 –196,392–­at­market­value 432,654 236,400 –196,254

4. Not­invested­cash­hedge­arising­from­security­lending­transactions­ 0 27,199 27,1995. Face­value­of­securities­bought­under­repo­transactions 51,006 3,670 –47,3366. Face­value­of­securities­sold­under­reverse­repo­and­blocked­to­ECB­repo­

transactions 0 0 0

4.18 NET INTEREST INCOME AND REALISED NET INCOME OF FINANCIAL OPERATIONS

Net forint and foreign currency interest and interest-related income

HUF millions

P/L line Description 2015 2016 Change

1 2 3 4 4–3

(I.1.+II.2.)—(X.1.+XI.1.) Central­government –3,551 –3,506 45

(I.2.+II.3.)—(X.2.+XI.2.) Credit­institutions –89,341 –28,699 60,642

(I.3.+II.1.+II.4.)—(X.3.+XI.3.) Other 122,537 74,812 –47,725

Net profit/loss from interest 29,645 42,607 12,962

Forint­securities­ 485 122 –363

Foreign­currency­securities –91,024 –52,584 38,440

Derivative­transactions­for­hedging­and­other­purposes* 18,218 –5,786 –24,004

Other –27 14 41

(I.4.+II.5.)—(X.4.+XI.4.) Net interest-related profit/loss –72,348 –58,234 14,114

(I.+II.)—(X.+XI.) Net interest and interest-related income –42,703 –15,627 27,076

* For details on derivative transactions for hedging and other purposes, see the last table in this section.

In­ 2016,­ the­MNB­ recorded­ a­ net­ interest­ and­ interest-related­ loss­ of­HUF­15.6­billion,­ representing­ an­improvement­of­HUF­27.1­billion­compared­to­the­figure­for­end-2015,­when­a­loss­of­HUF­42.7­billion­was­reported.

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Net­ interest­ income­improved­by­HUF­13­billion­ in­comparison­to­end-2015,­due­to­the­drop­in­ liquidity-absorbing­instruments­(main­policy­instruments­and­O/N­deposits)­as­a­result­of­the­shrinkage­of­the­central­bank­balance­sheet­and­the­decrease­in­the­average­base­rate.

Positive­factors­in­net­interest­income­were:

–­­interest­expenses­on­the­main­policy­instruments­(on­three-month­MNB­deposits)­were­HUF­50.5­billion­lower;

–­­interest­paid­on­the­forint­deposits­of­the­central­government­decreased­by­HUF­5.5­billion­compared­to­2015,­due­to­the­falling­forint­interest­rates;

–­­an­increase­in­interest­income­on­loans­to­credit­institutions­and­mortgage­bonds­of­HUF­0.9­billion­stemmed­from­the­rise­in­security-backed­loans.

Negative­factors­in­net­interest­income­were:

–­­a­decline­of­HUF­45.5­billion­in­interest­income­on­foreign­exchange­reserves­relative­to­2015;

–­­a­decrease­of­HUF­5.6­billion­in­interest­income­on­receivables­from­the­central­government­arising­from­the­lower­amount­of­government­bonds.

Net­interest-related­income­increased­by­HUF­14.1­billion;­it­includes­mainly­the­net­gain­or­loss­on­derivative­transactions­which­are­not­ related­to­exchange­rate­changes­and­the­amortisation­of­ the­purchase­price­difference­(premium)­of­securities.

Negative sums for interest income/expenses in the net forint and foreign currency interest and interest-related income for 2016

HUF millions

P/L line Description Totalof which:

Negative sums for interest

INCOME

II. Interest and interest-related income denominated in foreign currency 154,036 –2,942

II.­1. Interest­on­foreign­exchange­ 78,010 –2,908

II.­5. Interest-related­income 76,026 –35

EXPENSES

X. Interest and interest-related expenses denominated in forint 45,866 –17

X.­1. Interest­on­central­government­deposits 5,680 0

X.­2. Interest­on­deposits­by­credit­institutions 32,853 –17

X.­3. Interest­on­other­deposits­ 89 0

X.­4. Interest-related­expenses 7,244 0

XI. Interest and interest-related expenses denominated in foreign currency 141,203 –4,258

XI.­1. Interest­on­central­government­deposits –1,845 –1,848

XI.­2. Interest­on­deposits­by­credit­institutions –173 –178

XI.­3. Interest­on­other­liabilities 3,233 –410

XI.­4. Interest-related­expenses 139,988 –1,822

MAGYAR NEMZETI BANK

ANNUAL REPORT • 2016 120

Details of income from derivative transactions for hedging and for purposes other than hedging represented in interest-related income

HUF millions

No. Description 2015 2016 Change

1. Net­interest­on­currency­swaps­ –2,288 –14,414 –12,126

2. Interest­margin­on­hedge­interest­rate­swaps­ 15,798 11,047 –4,751

3. Net­interest­gains­on­hedge­FX­swaps­ 5,902 –2,203 –8,105

4. Net­interest­gains­on­hedge­forward­transactions 652 –1,015 –1,667

5. Net­interest­gains­on­hedge­futures­transactions­ –1,624 –2,956 –1,332

6. Net­interest-related­income­on­hedge­swap­transactions­ –148 3,270 3,418

7. Net­interest-related­income­on­hedge­option­transactions 137 95 –42

8. Net­interest­and­interest-related­income­on­other­transactions –211 390 601

9. Net income from derivative transactions (1+2+3+4+5+6+7+8) 18,218 –5,786 –24,004

Currency­ swap­ transactions­ include­ derivative­ transactions­ concluded­ with­ foreign­ partners,­ with­ the­Government­Debt­Management­Agency­(ÁKK),­and­with­domestic­credit­institutions.­The­average­amount­of­transactions­concluded­with­the­Government­Debt­Management­Agency­increased­in­2016,­but­changes­in­FX­market­yields­(euro­and­US­dollar­yields)­had­an­unfavourable­impact­on­the­result.­The­transactions­concluded­with­foreign­partners­serve­mainly­to­hedge­transactions­concluded­with­the­Government­Debt­Management­Agency.­The­average­amount­of­transactions­did­not­change­in­2016,­but­changes­in­FX­market­yields­caused­a­slightly­increase­in­the­interest­income.­The­average­amount­of­transactions­concluded­with­domestic­credit­institutions­dropped­considerably­compared­to­2015,­resulting­from­the­maturity­of­a­part­of­the­transactions­related­to­the­phasing-out­of­households’­foreign­currency­loans.­The­net­interest­result­of­the­currency­swaps­was­a­loss­of­HUF­14.4­billion,­and­there­was­a­deterioration­of­HUF­12.1­billion­compared­to­2015.

The­HUF­4.8­billion­decrease­in­the­interest­result­on­interest­rate­swaps­was­caused­by­those­conditional­on­lending­activity­(LIRS).­Under­the­facility,­the­MNB­offers­the­banks­a­fixed­rate­construction­below­the­market­rate,­which­is­expected­to­promote­lending­by­managing­banks’­interest­rate­risks­arising­from­lending,­through­the­partial­assumption­of­such­risks­by­the­MNB.

Hedge­FX­swaps­include­short-term­transactions­concluded­with­foreign­partners,­with­the­Government­Debt­Management­Agency,­and­with­domestic­credit­institutions.­Net­interest­gains­on­these­swaps­decreased­by­HUF­8.1­billion­caused­mainly­by­maturity­in­2016­of­transactions­related­to­the­phasing-out­of­households’­foreign­currency­loans.­Interest­expenses­on­transactions­concluded­with­foreign­partners­increased­as­a­result­of­the­change­in­their­foreign­exchange­composition.

The­ amount­ of­ hedge­ forward­ transactions­ concluded­with­ foreign­partners­ increased,­ but­ transactions­concluded­with­ the­ Government­ Debt­Management­ Agency­were­ terminated,­ and­ there­were­ no­ such­transactions­in­2016.­The­foreign­exchange­composition­of­the­transactions­differed­significantly­in­2016­from­2015­because­the­transactions­were­concluded­with­different­partners.­Net­interest­gains­on­hedge­forward­transactions­decreased­by­HUF­1.7­billion,­resulting­from­the­less­favourable­difference­in­interest.

Net­interest­loss­on­hedge­futures­transactions­increased­by­HUF­1.3­billion,­due­to­the­greater­amount­and­the­higher­interest­expense­on­bond­futures­transactions.

Net­interest-related­income­on­hedge­swap­transactions­includes­the­exchange­rate­gains­or­losses­of­the­transactions.­The­HUF­3.4­billion­increase­in­the­net­interest-related­result­on­hedge­swaps­was­caused­mainly­by­the­exchange­rate­gains­arose­from­the­termination­of­interest­rate­swaps­concluded­with­credit­institutions.

INDEPENDENT­AUDITOR’S­REPORT

ANNUAL REPORT • 2016 121

Realised gains/losses from financial operations

HUF millions

P/L line Description 2015 2016 Change

Realised­gains­on­bonds­issued­by­the­Hungarian­Government 2,694 132 –2,562

Realised­gains­on­covered­mortgage­bonds 417 0 –417

Realised­gains­on­coupon­bearing­bonds­denominated­in­foreign­currency 15,079 23,568 8,489

Realised­gains­related­to­CDS­transactions 0 0 0

IV. Realised gains from financial operations 18,190 23,700 5,510

Realised­losses­on­bonds­issues­by­the­Hungarian­Government 0 0 0

Realised­losses­on­covered­mortgage­bonds 0 0 0

Realised­losses­on­coupon­bearing­bonds­denominated­in­foreign­currency 2,388 6,123 3,735

Realised­losses­related­to­CDS­transactions 940 731 –209

XIV. Realised losses from financial operations 3,328 6,854 3,526

IV.-XIV. Net financial gains/losses 14,862 16,846 1,984

Realised­gains­and­loss­from­financial­operations­include­gains­and­losses­arising­from­sales­of­securities,­from­sales­of­investments­arising­from­security­lending­transactions­and­gains­and­losses­related­to­CDS­transactions.

Net­realised­gains­from­financial­operations­amounted­to­HUF­16.8­billion­in­2016,­improving­by­HUF­2­billion­compared­to­2015.­These­were­mainly­exchange­rate­gains­arising­from­the­sales­of­coupon-bearing­foreign­exchange­bonds.

4.19 COMPONENTS OF INCOME FROM THE REVALUATION OF FOREIGN EXCHANGE HOLDINGS

HUF millions

Description 2015 2016

Net­income­from­exchange­rate­changes­(realised­and­conversion­spread)* 177,677 95,089

Change­in­revaluation­reserves­in­the­balance­sheet**­(due­to­unrealised­revaluation­net­income) –205,385 –130,140

Total effect of exchange rate changes –27,708 –35,051

* P/L line: III.-XII.** Revaluation reserves due to exchange rate changes (balance sheet line XI.4.).

In­2016,­the­total­exchange­rate­change­effect­was­a­loss­of­HUF­35.1­billion,­due­to­the­changes­in­the­exchange­rate­of­the­forint.­In­the­sales­related­to­decreasing­the­daily­net­FX­position,­the­MNB­realised­a­gain­of­HUF­95.1­billion,­while­the­amount­of­the­revaluation­reserve­was­decreased­by­the­unrealised­exchange­rate­changes­losses­of­HUF­130.1­billion­during­the­year.

For­more­details­on­revaluation­reserves,­see­Section­4.16.

MAGYAR NEMZETI BANK

ANNUAL REPORT • 2016 122

4.20 COST OF ISSUING BANKNOTES AND COINS

HUF millions

P/L line Description 2015 2016 Change

Cost­of­banknote­production 7,925 11,712 3,787

Cost­of­coin­production 3,025 1,988 –1,037

Cost­of­production­of­commemorative­and­collector­coins 336 463 127

XIII. Cost of issuing banknotes and coins 11,286 14,163 2,877

The­total­cost­of­issuing­banknotes­and­coins­amounted­to­HUF­14.2­billion­in­2016,­representing­an­increase­of­HUF­2.9­billion­compared­to­the­figure­for­2015.­The­growth­originated­in­particular­in­the­higher­manufacturing­needs­resulting­from­the­programme­for­changing­and­developing­the­new­banknotes,­which­caused­an­increase­of­HUF­3.8­billion­in­the­cost­of­banknote­production.­In­2016,­no­increased­demand­for­coins­was­seen­as­was­the­case­in­2015,­and­therefore­the­cost­of­coin­production­decreased­by­more­than­HUF­1­billion­compared­to­the­previous­year.­The­cost­of­production­of­commemorative­and­collector­coins­substantially­exceeded­the­figure­for­2015,­as­demand­for­commemorative­coins­increased­significantly.­The­commemorative­coin­for­the­5th­anniversary­of­the­Fundamental­Law­of­Hungary­was­an­unplanned­issue,­which­also­raised­the­costs.

4.21 OTHER INCOME/EXPENSES

HUF millions

P/L line Description 2015 2016 Change

v.1. Income­from­fees­and­commissions­ 1,033 941 –92

Xv.1. Expenses­of­fees­and­commissions 851 693 –158

Net income from fees and commisssions 182 248 66

v.2. Income­from­other­than­fees­and­commissions 1,380 1,634 254

Xv.2. Expenses­of­other­than­fees­and­commissions 20,417 4,570 –15,847

Net income from other than fees and commisssions –19,037 –2,936 16,101

V.3. Income from supervisory activities 12,111 14,675 2,564

V.–XV. Other net results –6,744 11,987 18,731

Income­from­fees­and­commissions­mainly­relates­to­payment­services.­In­2016,­the­income­from­fees­and­commissions­decreased­mainly­because­from­1­January­2016­the­fee­per­item­for­submitted­orders­sank.­The­decline­in­expenses­for­fees­and­commissions­was­caused­by­the­lower­costs­related­to­the­management­of­foreign­securities­accounts.

For­more­details­on­income­other­than­fees­and­commissions,­see­Section­4.22;­in­respect­of­income­related­to­supervisory­activities,­see­Section­4.23.

INDEPENDENT­AUDITOR’S­REPORT

ANNUAL REPORT • 2016 123

4.22 INCOME OTHER THAN FEES AND COMMISSIONSHUF millions

P/L line Description 2015 2016 Change

Income­related­to­coins­and­commemorative­coins 471 609 138

Dividends­from­investments 797 814 17

Income­related­to­invested­financial­assets 0 24 24

Income­from­assets­assigned­free­of­charge 1 0 –1

Recommitment­of­financial­money­transfer 13 93 80

Other­income 98 94 –4

V.2. Income from other than commissions and charges 1,380 1,634 254

Financial­money­transfer 15,288 3,697 –11,591

Expenses­related­to­coins­and­commemorative­coins 458 569 111

Expenses­related­to­public­proceedings 98 217 119

Expenses­from­assets­assigned­free­of­charge 4,545 18 –4,527

XV.2. Expenses from other than commissions and charges 20,417 4,570 –15,847

V.2.–XV.2. Net income/expenses from other than commissions and charges –19,037 –2,936 16,101

Income­other­than­fees­and­commissions­includes­the­following­in­2016:

–­­Net­income­related­to­coins­and­commemorative­coins­depends­on­the­commemorative­coin­programme,­and­arises­mainly­from­the­difference­between­the­income­from­sales­of­commemorative­coins­and­the­expenses­related­to­the­removal­of­the­coins’­face­value.­Related­income­and­expenses­are­almost­equal,­since­by­agreement,­the­sale­of­commemorative­coins­is­accounted­with­the­Pénzverő­Zrt.­at­face­value,­except­when­the­production­cost­exceeds­the­face­value.

–­­Dividends­from­investments­increased­by­HUF­17­million­compared­to­2015.­In­2016,­Magyar­Pénzverő­Zrt.­paid­a­dividend­of­HUF­80­million­to­the­MNB,­and­BIS­paid­EUR­2.3­million­(HUF­734­million)­to­the­MNB.

–­­The­item­‘Income­related­to­invested­financial­assets’­includes­the­price­difference­between­the­book­value­and­the­transactional­value­of­the­real­property­at­Tiszaroff­transferred­as­contribution­to­the­MNB-Jóléti­Kft.­(see­Section­4.12).

–­­In­2016,­the­item­‘Financial­money­transfer’­includes­the­HUF­600­million­allocation­of­founders’­financial­assets­ related­ to­ the­ Pallas­ Athena­ Public­ Thinking­ Programme­ and­money­ transfers­ for­ financial­ and­professional­purposes,­mainly­to­foundations,­professional­organisations­and­to­schools,­as­well­as­donations­for­charitable­purposes.­After­the­settlement­donations­not­allocated­are­remitted­to­the­MNB.

–­­Expenses­related­to­public­proceedings­arising­mainly­from­remittance­of­penalties­related­to­inoperative­decisions­and­accounted­earlier­as­income,­moreover­cancellation­of­penalties.

4.23 INCOME FROM SUPERVISORY ACTIVITIES

HUF millions

P/L line Description 2015 2016 Change

Supervisory­fee­and­default­interest 8,940 9,119 179

Received­penalties­and­reimbursement­from­public­proceedings 2,913 5,255 2,342

Administrative­servicing­fee­from­public­proceedings 180 281 101

Late­payment­surcharge­for­supervisory­claims 23 10 –13

Other­income­arising­from­administrative­procedures 55 10 –45

V.3. Income from supervisory activities 12,111 14,675 2,564

MAGYAR NEMZETI BANK

ANNUAL REPORT • 2016 124

The­main­ item­of­ income­from­supervisory­activities­ is­ the­supervisory­ fee­received­from­the­supervised­institutions­obliged­to­pay­this­fee.­In­2016,­the­income­arising­from­the­assessment­of­the­minimum­charges­for­the­entire­year­and­of­the­quarterly­payable­variable-rate­fees­amounted­to­HUF­9.1­billion,­while­in­2015­the­declared­obligation­amounted­to­HUF­9­billion.­Penalties­imposed­by­the­MNB,­which­became­final­and­from­reimbursements­added­up­to­HUF­5.3­billion.­In­connection­with­penalties,­an­impairment­of­HUF­3.4­billion­was­also­created­in­the­period­under­review­for­the­recoveries,­as­well­as­for­litigation­items­based­on­the­probability­of­losing­a­lawsuit­(see­Section­4.13).­Administrative­servicing­fees­and­magisterial­exam­fees­amounted­to­HUF­0.3­billion­in­2016.

4.24 OPERATING INCOME AND EXPENSES

HUF millions

P/L line Description 2015 2016 Change

Income­from­assets­and­inventories 62 20 –42

Income­from­subcontracted­services 454 224 –230

Income­from­invoiced­services 931 1,052 121

Other­income 19 41 22

VIII. Total operating income 1,466 1,337 –129

Expenses­of­materials 11,677 12,372 695

­­­­Cost­of­materials 464 432 –32

­­­­Cervices­contracted 11,182 11,899 717

­­­­­­­­–­Maintenance,­operation­and­rent­of­properties 1,944 1,806 –138

­­­­­­­­–­Maintenance­and­rent­of­equipments 649 675 26

­­­­­­­­–­Postal­and­telecommunication­services 618 684 66

­­­­­­­­–­Consultancy­services 1,657 1,138 –519

­­­­­­­­–­IT­security­services 1,338 1,375 37

­­­­­­­­–­Membership­fees 487 606 119

­­­­­­­­–­Guarding­services,­transport­of­banknotes­and­coins 2,726 4,132 1,406

­­­­­­­­–­Advertisements,­market­research 757 505 –252

­­­­­­­­–­Other,­non­significant­services* 1,006 978 –28

­­­­Other­services 31 41 10

Personnel-related­costs 19,712 21,146 1,434

Depreciation 2,671 2,954 283

Transfer­of­costs­of­other­activities –1,086 –1,077 9

Total operating costs 32,974 35,395 2,421

Expenses­incurred­on­assets­and­inventories 60 30 –30

Expenses­incurred­on­subcontracted­services 452 223 –229

Expenses­incurred­on­invoiced­services 1,036 1,013 –23

Other­expenses 430 370 –60

Total operating expenses 1,978 1,636 –342

XVIII. Total operating costs and expenses 34,952 37,031 2,079

VIII.–XVIII. Net operating expenses –33,486 –35,694 –2,208

* Other, non-significant services contains in particular preparation of publications, travel and hotel services, services for education, translation and audit, as well as distribution of commemorative coins.

INDEPENDENT­AUDITOR’S­REPORT

ANNUAL REPORT • 2016 125

Net­operating­expenses­amounted­to­HUF­35.7­billion­in­2016,­representing­an­increase­of­HUF­2.2­billion­(6.6­per­cent)­compared­to­2015.

Operating­expenses­in­2016­were­7.3­per­cent­(HUF­2.4­billion)­higher­than­previous­year.­The­main­reason­for­this­cost­increase­was­higher­amount­of­cost­of­materials­and­personnel-related­expenses.

The­cost­of­materials­in­the­reporting­year­was­6­per­cent­(nearly­HUF­0.7­billion)­higher­than­previous­year.

The­increase­in­costs­related­to­armed­guarding­and­protection­were­mainly­observed­among­the­material­nature-related­expenses.­This­is­mostly­the­result­of­the­impact­of­outsourcing­of­guarding­activities­and­the­enforcement­of­higher­safety­requirements,­which­arose­only­from­March­2015,­while­in­2016­has­already­applied­for­the­entire­reporting­period.­In­addition,­from­1­January­2016­the­costs­of­guarding­increased.

Within­the­costs­of­materials,­consultancy­costs­and­legal­expenses­declined.­The­main­reason­was­that­the­costs­associated­with­the­Bank’s­asset­management­mainly­arose­in­2015,­and­significantly­fewer­cases­required­legal­resolutions­by­Financial­Arbitration­Board­pursuant­to­the­National­Bank­Act­in­2016­compared­to­the­number­of­cases­in­2015.

In­2016­advertising­and­market­research­costs­also­fell,­mainly­due­to­delays­in­public­procurement­procedures­related­to­communication­tasks.

Personnel-related­ costs increased­ by­ 7.3­ per­ cent­ (HUF­ 1.4­ billion)­ compared­ to­ the­ previous­ year.­ The­average­headcount­rose­4.1­per­cent,­due­to­unfilled­positions­and­supply­of­new­tasks­(e.g.­resolution­and­reorganisation­activities,­and­the­Financial­Arbitration­Board’s­activities).­The­cost­of­the­health­programme­(general­medical­screening)­in­2016­accounted­for­a­smaller­part­of­this­growth,­due­to­the­longer­duration­and­greater­number­of­employees­who­had­recourse­to­this­examination.

Depreciation­increased­by­10.6­per­cent­(by­HUF­0.3­billion)­in­2016­versus­the­previous­year,­mainly­due­to­the­investments­realised­in­2015.

The­transfer of costs­is­intended­to­ensure­that­the­total­amount­of­operating­expenses­reflects­only­the­actual­expenses­incurred­by­the­MNB.­The­absolute­value­of­transfers­in­2016­was­HUF­1.1­billion,­which­is­99.2­per­cent­of­the­total­in­2015.­On­the­one­hand­the­transferred­depreciation­of­leased­areas­of­the­Eiffel­Palace­office­building­purchased­during­the­year­appears­in­this­item,­and­on­the­other­hand­it­also­includes­the­rent­paid­by­Magyar­Pénzverő­Zrt.­to­the­MNB­for­the­partial­use­of­the­Logistic­Center­area.­The­self-developed­software­costs­also­appear­in­this­item,­as­these­costs­by­software­activation­will­be­part­of­assets.

The­revenue­of­invoiced­mediated­services­comes­primarily­from­property­rental­income.­Rents­and­re-invoiced­operating­costs­are­reported­as­revenue,­operational­and­amortization­costs­–­related­to­rental­activity­–­transferred­from­operating­activities­are­reported­as­expenditures.

MAGYAR NEMZETI BANK

ANNUAL REPORT • 2016 126

4.25 INFORMATION ON WAGES AND NUMBER OF STAFF

HUF millions

Description 2015 2016 Change (%)

Payroll­costs­incurred­on­staff 12,484 13,144 5

Other­staff­costs* 470 530 13

Payroll 12,954 13,674 6

Other payments to personnel 2,362 2,853 21

Social­contribution­tax 3,544 3,749 6

Health­contribution 588 595 1

Contribution­to­vocational­training 197 208 6

Contribution­to­rehabilitation 61 61 0

Sick-allowance 6 6 0

Taxes on personnel related payments 4,396 4,619 5

Payments to personnel 19,712 21,146 7

* Other wage costs include payments on termination and in exchange for vacation time used and amounts paid to non-staff and non-MNB workers.

Persons

Description 2015 2016 Change (%)

Average­number­of­staff 1,274 1,326 4

Remuneration and loans of executive officers

HUF millions

Bodies Compensation

Monetary­Council* 315

Supervisory­Board 156

* Includes the salaries and employer’s voluntary pension fund contributions of external members of the Monetary Council in an employment relationship with the MNB, pursuant to Article 9 (4) c) of the MNB Act.

BodiesAmount of loans Outstanding

at 31 Dec 2016 Final maturity Rate of interestHUF millions

Monetary­Council 48­ 19­ 01­Dec­2018 Floating*

Supervisory­Board – – – –

* The preferential interest rate for housing loans is the central bank base rate, the interest rate for personal loans is the central bank base rate +1 per cent.

24­April­2017,­Budapest

­ Dr­György­Matolcsy­ Governor­of­the­Magyar­Nemzeti­Bank

ANNUAL REPORT

2016 BUSINESS REPORT AND FINANCIAL STATEMENTS OF THE MAGYAR NEMZETI BANK

Print:­Prospektus–SPL­consortium

6­Tartu­u.,­veszprém­H-8200