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Prudential regulation
i Relationship with the prudential regulatorThe National Bank of Hungary (NBH) is responsible for both monetary policy and the regulation of financial institutions, investment and insurance service providers.
The Banking Act also implements corresponding EU legislation on prudential regulation: consequently, a market participant familiar with the reporting requirements and types of inspections and monitoring a regulator in other EU jurisdictions expects and conducts will not be surprised by the Hungarian rules, which broadly correspond with the EU laws.
ii Management of banksThe primary objectives of the management regulation in the Banking Act are to:
- ensure a transparent corporate structure;
- prevent conflicts of interest;
- facilitate the application of the procedures by which risks could be effectively identified, measured, monitored and mitigated;
- oblige banks to follow a remuneration policy linked to the effectiveness of risk management; and
- generally maintain the undisturbed and effective operation of financial institutions and the trust vested in the sector.
The NBH issued a guideline (recommendation) regarding the application of remuneration policies implementing the guideline of the European Banking Authority regarding the principles of remuneration in 2017.
The core principle that forms the basis of the detailed provisions regulating requirements with regard to shareholders and members of management is the good business reputation. The NBH has wide discretion in determining (on a case-by-case basis) what it considers to be evidence of this, but it has published a good business reputation form on its website, which must be completed in respect of the management and owners during the licensing process.
Members of boards and supervisory boards (or, in the case of a branch, all managers) are responsible for compliance with the prudential rules. Financial institutions must always be represented by at least two persons with joint signatory rights.
Conflict of interest principles are based on reporting obligations as well as on certain prohibitions. Other requirements aim to ensure that decisions are made in a financial institution's interests, and there is no room for undue influence by third parties. Financial institutions are also obliged to set up and operate an internal monitoring system and department.
Remuneration rules follow the principles set out in the relevant EU laws. Remuneration of management and employees must be proportionate to the size and risks of the business, and the remuneration policy should not motivate employees to expose themselves to improper levels of risk. The policy is prepared and enforced by the supervisory board, while the board of directors monitors this in tandem with the internal monitoring department. Any institution with a market share of at least 5 per cent must set up a remuneration committee, which is responsible for setting the remuneration of employees who are in charge of managing risks and ensuring compliance with laws.
Remuneration may consist of a base element and a performance-based element, but the latter may not exceed 100 per cent of the base salary. There is, however, an exception where the cap is 200 per cent, which may be applied if the general meeting of shareholders authorises it after detailed discussions of the reasons for applying the higher cap, and the institution notifies the regulator of the proposal and the shareholders' resolution prior to its application (in this case, the financial institution has to certify to the regulator that applying a higher cap does not infringe the prudential rules or EU laws).
When determining the performance-based element of the remuneration, a financial institution has to evaluate not only the performance of the employee concerned, but the performance of the entire department and the financial institution as well. No undertaking may be assumed by the institution in respect of the performance-based element of salaries, and the relevant amounts may be paid only if the financial position of the institution is sustainable and the actual performance provides adequate grounds for the bonus. The elements of the performance-based salary (e.g., a percentage of shares and other instruments) must also be elaborated in detail. A bonus may not be paid in full at once, but has to be deferred for a period of between three and five years.
Branches of EEA institutions may apply the remuneration policy applicable in the Member States in which such institutions are registered.
iii Regulatory capital and liquidityThe Banking Act reflects the provisions of the Capital Adequacy Directive and does not contain provisions that are regulated by the directly applicable Capital Adequacy Regulation.
iv Recovery and resolutionThe framework for the resolution of failed banks rests on three pillars. The first is an extraordinary loan available from the NBH. The principle is that, if circumstances arise due to which the operation of a financial institution endangers the stability of the financial system, the NBH may grant a loan, provided that the restrictions related to monetary financing are complied with.
The second pillar is the power of the state to increase the capital of a bank for the purposes of preserving and ensuring the stability of the financial system. This action may be implemented on the basis of a proposal of the NBH, either with the consent and further to the request of the financial institution, or ex officio, provided in the latter case that the government adopts a decree in respect of the particular financial institution, the insolvency of which would result in serious damage to the Hungarian financial system. The trigger for adopting such a decree is the point in time when the financial institution does not meet certain capital adequacy requirements. The shares to be acquired by the state upon a capital increase will be preference shares (either in respect of distribution or voting rights). Rules otherwise regulating the acquisition of controlling interests in financial institutions are not applicable in the event of such a capital increase.
Hungary has implemented Directive 2014/59/EU on establishing a framework for the recovery and resolution of credit institutions and investment firms. The resolution regime made available under the Directive may be applied by the NBH to reach the objectives of the implementing act. The main objectives are the following:
- ensuring continuity of critical functions;
- avoiding adverse effects on the financial system;
- protecting public funds by minimising reliance on extraordinary public financial support;
- protecting depositor interests; and
- protecting client funds and client assets.
The types of tools available to achieve these objectives and the form of the resolution process follow what is stipulated in the framework Directive. The tools applied or to be applied in a given resolution process are set out in the resolution plan prepared by the NBH. The particular resolution document is not public.
The third pillar consists of the administrative measures of the regulator (i.e., the NBH). The NBH has the power to apply a wide range of administrative steps in cases where a financial institution breaches the provisions of the Hungarian Banking Act, particularly if prudential obligations are not complied with. These measures include the power to:
- instruct the institution to adopt a mitigation plan;
- appoint a monitoring officer;
- prohibit the payment of dividends and other distributions, the granting of loans to shareholders, or the assumption of guarantees and similar obligations;
- order the institution to comply with additional capital requirements;
- order the institution to dispose of assets not required for the banking operation; and
- convene a shareholders' meeting or suspend the voting rights of certain shareholders who, on the basis of the facts available, endanger the prudent operation of the institution or the financial market.