The European Banking Authority (EBA) today published an Opinion addressed to the Central Bank of Hungary following the Competent Authority's notification of its decision to introduce a partial waiver of the provision under the Capital Requirements Regulation (CRR) in relation to the eligibility conditions for covered bonds to benefit from a risk weight preferential treatment. Given the significant potential concentration problem in Hungary, the EBA is of the opinion that the application of a partial waiver is adequately justified.The EBA has assessed the evidence provided by the Central Bank of Hungary to support the measure, namely the current classification of Hungarian credit institutions in relation to the credit quality steps (CQSs) assigned, the current composition of the Hungarian covered bond market, and the type and nature of exposures to credit institutions that covered bonds regularly assume.On the basis of the evidence provided, the EBA is of the opinion that Hungary has a significant potential concentration problem stemming from the application of the minimum CQS requirement of step 2for exposures to credit institutions in the form of derivative contracts to be used as eligible collateral. This would result in no Hungarian bank being eligible to act as derivative counterparty and, therefore, the partial waiver is adequately justified.Legal basis and next stepsThe EBA's competence to deliver the Opinion is based on Article 29(1)(a) of Regulation (EU) No 1093/2010. In accordance with Article 14(5) of the Rules of Procedure of the EBA Board of Supervisors, the Opinion has been adopted.Article 129(1)(c) of the Capital Requirements Regulation (CRR) specifies that covered bonds eligible for risk weight preferential treatment can be collateralised by exposures to credit institutions that qualify for credit quality step 1 and 2 (CQS1 and CQS 2). This requirement may be partly waived by a Competent Authority, after consulting the EBA, if significant potential concentration problems in the Member States concerned can be documented. The partial waiver allows for exposures to institutions that qualify for credit quality step 3 (CQS3) in the form of derivatives to be included in the cover assets.The Central Bank of Hungary will be monitoring the situation and on the basis of information that documents the concentration problem will assess the need for the waiver to be in place. If the concentration problem is no longer significant, the measure will be repealed.
Brief
On 28/11/2024, the European Banking Authority (EBA) issued an update regarding "EBA finds Hungarian waiver for covered bonds justified". The EBA published an Opinion addressing a partial waiver of provision under the Capital Requirements Regulation (CRR) in Hungary, citing significant potential concentration problems. The Central Bank of Hungary will monitor the situation and assess the need for the waiver based on documentation of the concentration problem.
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Purpose:
The European Banking Authority (EBA) has published an Opinion addressed to the Central Bank of Hungary, providing a partial waiver of the provision under the Capital Requirements Regulation (CRR) in relation to the eligibility conditions for covered bonds to benefit from a risk weight preferential treatment. The EBA’s objective is to address the significant potential concentration problem in Hungary by allowing exposures to credit institutions that qualify for credit quality step 3 (CQS3) in the form of derivatives to be included in the cover assets.
Effects on Industry:
The application of a partial waiver in Hungary may have immediate and long-term effects on the Hungarian banking industry, specifically on the covered bond market. By allowing exposures to institutions that qualify for CQS3 in the form of derivatives, the waiver aims to alleviate potential concentration problems, which could lead to increased liquidity and stability in the market. This measure may also influence the credit quality assessment of Hungarian banks and their ability to act as derivative counterparty.
Relevant Stakeholders:
The stakeholders affected by this Opinion include:
- The Central Bank of Hungary: responsible for monitoring the situation and assessing the need for the waiver to be in place.
- Credit institutions operating in Hungary: may benefit from the partial waiver, enabling them to provide covered bonds with a risk weight preferential treatment.
- Covered bond issuers: may take advantage of the increased flexibility offered by the waiver, allowing them to include exposures to CQS3 institutions in their cover assets.
Next Steps:
To comply with or respond to this update:
- The Central Bank of Hungary will continue to monitor the situation and assess the need for the waiver to be in place.
- Credit institutions operating in Hungary should review their eligibility conditions for covered bonds and adjust their risk assessment accordingly.
- Covered bond issuers may consider revising their cover assets to include exposures to CQS3 institutions, if eligible.
Any Other Relevant Information:
The EBA’s competence to deliver the Opinion is based on Article 29(1)(a) of Regulation (EU) No 1093/2010. The waiver will be repealed if the concentration problem is no longer significant, as documented by the Central Bank of Hungary. This measure aims to promote stability and liquidity in the Hungarian banking industry, particularly in the covered bond market.
