4. Foreign exchange funding adequacy ratio and foreign exchange coverage ratio The foreign exchange funding adequacy ratio (FFAR), which entered into force in 2012 and prescribes the financing of foreign currency assets by stable foreign currency liabilities, ensured the sustainable financing of foreign currency assets in a gradually tightening manner. After the conversion of the foreign currencydenominated household mortgage loans into forint, the MNB, in its capacity as macroprudential authority, further tightened the FFAR requirement with a view to preventing risks, in order to ensure the further reduction of the systemic currency and maturity mismatch across the banking system. Simultaneously, to prevent the reoccurrence of excessive dependency on the swap market, which entails rollover and margin call risks, the MNB introduced the foreign exchange coverage ratio (FECR), limiting the on-balance sheet open foreign currency position. In the present market environment, the requirements do not represent an undue barrier to banks’ operations. Chart 10 Simplified structure of FFAR
FFAR =
Stable funding + net FX swaps with maturities of over 1 year* Required stable funding
*FX swaps are not eligible stable funding since 1 January 2016. Source: MNB.
Chart 11 Mean, distribution and required level of FFAR Per cent
Per cent
300 280 260 240 220 Conversion into HUF 200 180 1st revision 160 140 Introduction 120 100 100% 80 85% 80% 60 75% 65% 40 20 0 2nd revision
Apr. 12 Jun. 12 Aug. 12 Oct. 12 Dec. 12 Feb. 13 Apr. 13 Jun. 13 Aug. 13 Oct. 13 Dec. 13 Feb. 14 Apr. 14 Jun. 14 Aug. 14 Oct. 14 Dec. 14 Feb. 15 Apr. 15 Jun. 15 Aug. 15 Oct. 15 Dec. 15 Feb. 16 Apr. 16 Jun. 16
300 280 260 240 220 200 180 160 140 120 100 80 60 40 20 0
Note: First and third quartile values. Points denote the average. Source: MNB.
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http://www.bis.org/bcbs/basel3.htm
MACROPRUDENTIAL REPORT • october 2016
4.1. The foreign exchange funding adequacy ratio aims to address long-term excessive denomination and maturity mismatches In order to improve the currency and maturity match, the MNB applies macroprudential regulation. The FFAR limit, which entered into force on 1 July 2012, prescribes stable foreign currency liabilities for a specific percentage of the assets requiring stable foreign currency funding, thereby managing the maturity mismatch following a similar logic as the Net Stable Funding Ratio (NSFR) included in the Basel III framework8 (Chart 10). The regulation was tightened gradually, and from 1 January 2016 it prescribes the funding of foreign currency assets by stable foreign currency liabilities in 100 per cent. The conversion of household mortgage loans into forint in early 2015 necessitated a review of the FFAR regulation. Due to the removal of the household foreign currency portfolio from the indicator, the immediate risks decreased, but in order to prevent the reoccurrence of the problem, the MNB decided to maintain and tighten the FFAR regulation. As a result of the conversion into forint, the compliance of most banks improved (Chart 11), which made it possible to
