Banking and finance are integral components of the global economy, facilitating transactions, investments, and resource allocation. Banks serve as intermediaries between savers and borrowers, ensuring the efficient flow of funds in the market. However, the inherent risks associated with banking operations necessitate the implementation of a robust regulatory framework to maintain financial stability and protect stakeholders, such as depositors and creditors.

The fundamental principles of banking involve accepting deposits from savers and lending to borrowers. Banks earn revenue by charging interest on loans and paying lower interest on deposits. However, this intermediary role exposes banks to various risks, including credit risk, market risk, operational risk, and liquidity risk. To mitigate these risks, banks must maintain adequate capital reserves, diversify their investments, and adhere to regulatory requirements.

Banking regulation is essential for ensuring the stability and soundness of financial institutions. It prevents systemic risk, protects consumers, and fosters economic growth. Regulations typically cover capital adequacy, liquidity requirements, risk management, corporate governance, and disclosure. By enforcing these standards, regulators aim to maintain public confidence in the banking system and reduce the likelihood of financial crises.

An Overview on Banking and Finance in Hungary

The Hungarian banking sector has evolved significantly since the early 1990s, transitioning from a state-controlled system to a market-oriented one. Foreign-owned banks now dominate the sector, accounting for about 60% of total assets. The National Bank of Hungary (NBH) serves as the country’s central bank and primary regulatory authority, overseeing the financial system and implementing monetary policy.

Despite progress, the Hungarian banking sector faces various challenges, such as high non-performing loans (NPLs), elevated foreign currency-denominated debt, and limited credit growth. Additionally, regulatory changes and economic fluctuations have put pressure on bank profitability. These weaknesses can pose risks for account holders and other creditors in the event of bank failures.

The high NPL ratio in Hungary’s banking sector raises concerns about asset quality and financial stability. If banks fail to recover these loans, they might struggle to meet their obligations to depositors and creditors. Furthermore, the prevalence of foreign currency-denominated debt exposes banks to exchange rate fluctuations, potentially eroding their capital base and increasing insolvency risks. In such scenarios, account holders and creditors might suffer financial losses.

Hungarian Banking Law

Act CCXXXVII of 2013 on Credit Institutions and Financial Enterprises (CIFE Act): The CIFE Act establishes a comprehensive framework for the licensing, supervision, and regulation of credit institutions and financial enterprises in Hungary. It aims to ensure their stability, transparency, and consumer protection.

Act CXXXIX of 2013 on the National Bank of Hungary (NBH Act): The NBH Act defines the roles and responsibilities of the central bank, including its supervisory and regulatory powers over financial institutions.

Act LIII of 2017 on the Prevention and Combating of Money Laundering and Terrorist Financing (AML Act): The AML Act sets out the obligations of financial institutions to prevent money laundering and terrorist financing, including customer due diligence, reporting, and record-keeping requirements.

Act V of 2013 on the Civil Code (Civil Code): The Civil Code governs the contractual relationships between banks and their customers, including lending, deposit-taking, and other financial services.

In Hungary, administrative sanctions and regulatory enforcement are primarily carried out by the National Bank of Hungary (NBH). The NBH has the authority to impose a wide range of sanctions on financial institutions, including fines, operating restrictions, and revocation of licenses. These measures aim to ensure compliance with regulatory requirements, protect consumers, and maintain financial stability.

On an international level, Hungarian financial institutions are subject to European Union (EU) regulations and oversight by the European Central Bank (ECB) and the European Banking Authority (EBA). These bodies can impose sanctions and enforce regulatory standards across EU member states, promoting harmonization and cooperation. Additionally, Hungarian banks may face sanctions from foreign regulatory authorities for non-compliance with their respective jurisdictions’ banking regulations.

Bank Insolvency Procedures in Hungary

The Hungarian bank insolvency framework is primarily governed by the Act CCXXXVII of 2013 on Credit Institutions and Financial Enterprises. The Act prescribes the resolution and liquidation procedures for credit institutions facing financial distress or insolvency. The resolution process aims to maintain the continuity of critical functions, protect depositors and creditors, and minimize the impact on the financial system.

In the resolution process, the NBH serves as the resolution authority and has the power to implement various resolution tools, such as bail-in, asset separation, and bridge institution. If the resolution is deemed unfeasible or not in the public interest, the NBH can initiate liquidation proceedings. The liquidation process involves the appointment of a liquidator, the sale of assets, and the distribution of proceeds to creditors in accordance with their priority ranking.

Bank Failure in Hungary

In the event of a bank failure in Hungary, international creditors can utilize the legal framework to recover their funds. During the resolution process, the NBH aims to protect creditors’ rights and ensure equal treatment. In the liquidation process, creditors have the right to submit their claims to the liquidator, and the distribution of proceeds follows a specific order of priority. Additionally, Hungary’s membership in the EU ensures that international creditors can benefit from the EU’s harmonized insolvency regulations and cross-border cooperation mechanisms.

In conclusion, the Hungarian banking sector has made considerable strides in recent years, but challenges persist. International creditors must stay informed about the country’s legal and regulatory landscape, bank insolvency procedures, and the available avenues for recovering their funds in the event of bank failures. By understanding these aspects, creditors can better navigate the risks associated with the Hungarian banking sector and safeguard their financial interests.