Experiences of Debt Cap Regulations in Hungarian Retail Lending

Abstract

The 2008 financial crisis underlined that, on the one hand, the operation of the banking sector is highly procyclical and, on the other hand, household borrowers are unable to assess their long-term ability to repay realistically. The resultant excessive risk-taking and inadequate risk assessment by banks brought, in Hungary as well, substantial losses for banks and a high rate of distressed customers. Through the enforcement of debt cap rules, the MNB as a macroprudential authority has been limiting the recurrence of excessive household indebtedness in a preventive manner since 2015. Focusing on international practices and the results of Hungarian regulations in the first two and a half years, we reviewed the Hungarian experiences with regard to the debt cap rules. Although we can only draw preliminary conclusions due to the shortness of the period elapsed since the introduction of the debt cap rules, our analysis demonstrates that, in line with their calibration, Hungarian debt cap rules currently do not restrict sustainable lending processes, and contribute significantly to promoting a healthy lending structure by restraining excessively risky loans.

Calibration of Borrower-based Macroprudential Measures for Mortgage Exposures: Rigorous Approach and Its Application to the Czech Republic

“…In such cases, the proportionate caps reflect the fact that in some circumstances lending with higher LTVs or LTIs might be appropriate, while leaving the responsibility for the individual exemptions with the banks (Cassidy and Hallissey, 2016). The limits may also be differentiated depending for example on the type of borrower (Cassidy and Hallissey, 2016), currency of the loan or the level of disposable income of the loan applicants (Fáykiss et al, 2018). However, careful design which limits the space for circumvention is key to the effectiveness of these measures (Dell´Ariccia et al, 2011).…”

Post-crisis trends in household credit market behavior: evidence from Hungary (Literature review)

“…However, the individual countries identifiably differ in the regulatory enactments they apply (Seregdi et al, 2015;Fáykiss et al, 2018). In Hungary, the relevant regulations have a broad institutional scope, as in addition to credit institutions, they also apply to non-bank lenders, and this reduces the opportunity to circumvent the regulations.…”