Hungary’s banking sector is vital to the stability of the country’s economy, but the recent failures of some banks have raised concerns among international bank creditors about the risks involved. Hungary’s banking sector is primarily regulated by Act CCXXXVII of 2013 on Credit Institutions and Financial Enterprises (hereinafter “Banking Act”). This law outlines the supervisory and resolution framework for banks, including the rules applicable to bank failures. In addition to the Banking Act, Hungary is a member of the European Union, and thus, EU laws and directives also apply, such as the Bank Recovery and Resolution Directive (BRRD).
Several Hungarian banks have faced closures or exorbitant fines for wrongdoing. Notably, the National Bank of Hungary (MNB) closed two banks in 2014, Széchenyi Bank and TakarékBank, for serious regulatory violations, while Budapest Bank and OTP Bank faced massive fines for anti-money laundering (AML) breaches. The differences in penalties were primarily due to the scale and nature of the violations, as well as the banks’ overall financial health and ability to rectify the issues.
Bank failure in Hungary is defined by the Banking Act as a situation where a credit institution is unable to meet its obligations, has insufficient assets to cover its liabilities, or is at risk of insolvency or illiquidity. These conditions often result from poor risk management, inadequate capitalization, or serious operational or governance failures.
Bank failure in Hungary is determined by the MNB, which serves as the country’s central bank and banking supervisory authority. The MNB closely monitors the financial health of banks and evaluates their compliance with prudential requirements, such as capital adequacy, liquidity, and risk management standards.
The MNB has the legal mandate to conclude that a bank is failing or likely to fail. Its mandate is derived from the Banking Act, which grants the MNB supervisory and resolution powers, and the EU’s Single Resolution Mechanism (SRM), which establishes a harmonized approach to bank resolution within the European Banking Union.
After bank failure is concluded, the MNB can impose a range of measures, including the appointment of a temporary administrator, the transfer of assets and liabilities, the establishment of a bridge bank, or the initiation of liquidation proceedings. The most common reasons for bank failure in Hungary include poor governance, inadequate risk management, and breaches of regulatory requirements.
Bank supervision and resolution planning in Hungary aim to preserve the critical functions of banks and ensure their continuation during financial distress. The MNB conducts regular assessments of banks’ recovery and resolution plans, which outline the measures to be taken to restore their financial health in case of a crisis. Additionally, the MNB can require banks to implement specific measures, such as raising capital or improving governance, to enhance their resilience.
When a bank fails, the MNB, as the resolution authority, takes several steps to mitigate the impact on the financial system and protect depositors and other creditors. These steps include evaluating the bank’s financial condition, appointing a temporary administrator if necessary, and initiating the resolution process. The available options for reorganizing, recapitalizing, restructuring, or dissolving a failed bank include the sale of the business, the establishment of a bridge bank, asset separation, or initiating liquidation proceedings. These tools contribute to an efficient resolution by facilitating the transfer of assets and liabilities to healthier institutions or isolating impaired assets, thus minimizing the risk of contagion.
In Hungary, depositors and other creditors are protected by law through the Hungarian National Deposit Insurance Fund (OBA), which covers deposits up to EUR 100,000 per person, per institution. Additionally, the MNB’s resolution framework is designed to ensure that creditors’ claims are treated fairly, and that losses are borne by shareholders and other investors before tapping into the deposit guarantee schemes.
To ensure that non-viable firms exit the market in an orderly manner, the MNB can impose a range of supervisory measures, such as requiring a bank to cease certain activities, withdraw licenses, or initiate liquidation proceedings. These measures aim to prevent the disorderly collapse of non-viable banks, which could have adverse effects on the stability of the financial system.
Bank liquidation rules in Hungary are primarily governed by the Banking Act and the Act XLIX of 1991 on Bankruptcy Proceedings, Liquidation Proceedings, and Voluntary Dissolution (hereinafter “Liquidation Act”). When a bank is deemed insolvent and not suitable for resolution, the MNB initiates liquidation proceedings, which involve the appointment of a liquidator, the realization of assets, and the settlement of creditor claims.