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MNB Bulletin July 2009

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MNB Bulletin July 2009 MNB Bulletin JULY 2009 MNB Bulletin July 2009 The aim of the Magyar Nemzeti Bank with this publication is to inform professionals and the wider public in an easy-to- understand form about basic processes taking place in the Hungarian economy and the effect of these developments on economic players and households. This publication is recommended to members of the business community, university lecturers and students, analysts and, last but not least, to the staff of other central banks and international institutions. The articles and studies appearing in this bulletin are published following the approval by the editorial board, the members of which are Gábor P. Kiss, Róbert Szegedi, Daniella Tóth and Lóránt Varga. The views expressed are those of the authors and do not necessarily reflect the offical view of the Magyar Nemzeti Bank. Authors of the articles in this publication: Dániel Homolya, Erika Leszkó, Zsuzsa Munkácsi, Klára Pintér, György Pulai, Lóránt Varga This publication was approved by Ágnes Csermely, Péter Tabák, András Kármán. Published by: the Magyar Nemzeti Bank Publisher in charge: Nóra Hevesi H-1850 Budapest, 8-9 Szabadság tér www.mnb.hu ISSN 1788-1528 (online) Contents Summary 4 Dániel Homolya: The impact of the capital requirements for operational risk in the Hungarian banking system 6 Erika Leszkó: Rounding is not to be feared 14 Zsuzsa Munkácsi: Who exports in Hungary? Export concentration by corporate size and foreign ownership, and the effect of foreign ownership on export orientation 22 Klára Pintér and György Pulai: Measuring interest rate expectations from market yields: topical issues 34 Lóránt Varga: Hungarian sovereign credit risk premium in international comparison during the financial crisis 43 Appendix 53 MNB BULLETIN • JULY 2009 3 Summary DEAR READER, The Magyar Nemzeti Bank (MNB) is committed to making easier, a large number of fears were voiced in relation to its central bank analyses dealing with various topical economic introduction. Developments have, however, proven and financial trends of general interest available to the wider otherwise, as the fears have turned out to be completely public. With five articles, this publication is the second issue unfounded. As symmetric rounding only affects the final of the fourth volume of the MNB Bulletin. Focusing on amount to be paid, the withdrawal of 1- and 2-forint coins topical issues of the Hungarian economy and central banking, from circulation has had no inflationary effects, and neither the subjects discussed in this issue of the Bulletin ranges from has the application of the new rules of rounding caused any the capital requirement of banks’ operational risk, the difficulty. It does not come as a surprise that the use of withdrawal of 1- and 2-forint coins from circulation and the rounding did not cause any disruption in the economy, as rounding of prices to HUF 5 to the interconnection between rounding has a more than decade-long tradition in Hungary domestic exports and the size of corporations and foreign on account of the withdrawal of the filler in the 1990s. ownership, the current challenges of quantifying interest rate Presenting Hungarian and foreign practices, the article expectations from market yields and Hungary’s sovereign describes the rationale for and the economic soundness of risk. rounding rules. Hopefully, the euro will be the legal tender in Hungary in a few years, and thus it is worth studying the Dániel Homolya analyses the distinct treatment of practice of rounding in the euro area. operational risks, as one of the novel concepts of the capital adequacy regulations introduced on 1 January 2008 in the Zsuzsa Munkácsi examines the issue of Hungarian exporters. Hungarian banking system which are applied generally in EU In the USA and most European countries exports activity is member states and aligned with Basel II standards. Credit mostly pursued by a handful of corporations. The Hungarian institutions may decide to adopt a simple approach based on Tax Authority’s panel data reveal that the concentration of gross income indicators or an advanced one based on Hungary’s industrial exports according to the size of measuring actual risks. Based on the past one-year period, the corporations is significant; in addition, the concentration of capital requirement of the domestic banking sector’s exports according to foreign ownership is even higher; both operational risks is about 8% of its total capital, which is a types of concentration have risen markedly in recent years. significant proportion. Although the reported, realised losses The concentration of exports in other sectors of the national were lower compared to the capital requirement, the capital economy (e.g. agriculture, construction and services) is requirement is intended to provide protection against generally lower than that in industry. Accepting the size of extreme, unexpected situations. A review at choice of corporations and other factors (e.g. industry and region, etc.) methods by individual credit institutions reveals that mainly as a given, foreign ownership is decisive in changes in export large institutions apply more advanced methods in both destinations. Compared with corporations in sole Hungarian Hungary and abroad. This is attributable, in part, to the fact ownership, wholly or partially foreign-owned corporations that the fixed costs of introducing of a more advanced are more export-driven. However, significant uncertainty approach are higher than those of the simple one and are surrounds temporal changes in the impact of foreign more affordable for large institutions in the shorter run, and, ownership on the export destinations. in part, to the fact that large institutions can achieve greater gains by using a more advanced approach. Overall, the Klára Pintér and György Pulai present the instruments appropriate management of operational risks and the available for measuring market expectations of the key policy application of the relevant advanced approach contribute to rate and discuss whether or not it was last year’s turbulences the stability of the financial system. in the financial markets that led to biases in the information content of the various market yields. They substantiate the Erika Leszkó’s study is a reminder of the fact that nearly one fact that the government securities market in Hungary was and a half years have passed since the MNB withdrew 1- and where the largest and the most protracted disturbances in 2-forint coins from circulation and the rule on the rounding operation occurred. As the yield curve computed from of prices to HUF 5 entered into force on 1 March 2008. government securities yields reflects a risk premium that was Although from a professional point of view, it was obvious higher and more volatile than before, it is less suitable for that rounding would make the everyday management of cash measuring market participants’ expectations than it used to 4 MNB BULLETIN • JULY 2009 SUMMARY be. Recently, analysts’ expectations in various surveys have accurate information on the credit risk premium for been followed more closely by forward yields computed from Hungary’s sovereign debt can be obtained through an yield curves estimated from inter-bank returns. However, analysis of the prices of Hungarian CDS transactions and liquidity in the inter-bank market has decreased tangibly and spreads on CDS, because recently the credit risk premium for the prices of certain instruments have become biased. Since Hungary’s sovereign debt has been determined primarily in the end of 2008 BUBOR (Budapest Inter-bank Offered Rate) the CDS market. The business turnover in and the current has been unsuitable for measuring market expectations. portfolio of the market of CDS linked to the FX- Fixings have lost their former flexibility and now cling to the denominated bonds issued by the Hungarian government prevailing rather than the future base rate. One of the exceed the business turnover in and the current portfolio of consequences of the BUBOR losing its information content is the secondary market of Hungarian FX-denominated bonds. that the yield curve estimated from the returns on inter-bank The marked loss in willingness to take on risks in emerging market instruments offers a somewhat more accurate markets in the autumn of 2008 affected Hungary to a large measure of expectations if we do not use data on BUBOR extent. In October 2008, the level of the credit risk premium fixings. Nevertheless, FRAs based on BUBOR remain suitable for Hungary’s sovereign debt rose sharply and the for quantifying market participants’ expectations if, when international perception of Hungary’s sovereign debt interpreting them, in addition to credit and liquidity premia, deteriorated significantly. An increase in the base rate in we take into account the bias caused by BUBOR. Based on October 2008 and the agreement with the IMF contributed the above, in our interpretation the fixings of FRAs starting to preventing the already eroded confidence in investments in at various future dates directly reflect expectations Hungary from deteriorating further. Markedly lower spread concerning the central bank rate prevailing at the start of on CDS’s linked to Hungary’s sovereign debt is nearly wholly FRA maturities. attributable to the improving international risk appetite. Lóránt Varga presents CDS (credit default swap) deals: they Finally, we should like to mention that, consistent with the are transactions where one of the parties assumes the credit MNB’s
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