4.3 Potential impact of the transformation of MNB bills on payment systems liquidity

Owing to the transformation of the MNB bill into central bank deposits, banks must ensure sufficient liquidity for the execution of their transactions in the payment system by pledging securities, assuming they maintain their previous

behaviour. Based on the MNB’s decision, as of 1 August 2014 the MNB bill will be eliminated and transformed into a central bank deposit. As opposed to the MNB bill, however, the new instrument will not be eligible as collateral accepted by the MNB. Since the two-week MNB bill constituted the bulk (nearly 40 per cent) of the securities pledged by banks as collateral, the new regulation requires adjustments both at the level of the payment system and on an individual bank basis.

According to the MNB’s calculations, in order to ensure the execution of payment transactions in payment systems on an individual bank basis, the banking sector must pledge other collateral worth around HUF 500 billion to replace the

mnB bill. If the stock of pledged collateral is insufficient on an individual bank basis once MNB bills have been removed from providing cover for the largest negative account balance, the new regulation requires adjustment by the banks. Bank-side adjustment can take place according to four scenarios:

1) Banks can ensure additional liquidity by pledging additional eligible securities, if available.

2) If they do not have sufficient eligible securities, they can purchase government securities to create additional coverage for pledging.

3) If their available reserve ratio is below the maximum 5 per cent, they can increase it, taking advantage of the liquidity flexibility offered by the reserve ratio. If they wish to manage the situation using higher excess liquidity than the liquidity provided by their reserve ratio, this could cause the increase of the stock of overnight deposits.

4) If they do not have sufficient eligible securities, banks can adjust by changing the timing of their outgoing transactions, thus shifting the initiation of their transactions later or holding transactions waiting for incoming payments.

The MNB’s preliminary study has revealed that the exclusion of MNB bills from eligible collateral will require 20 banks to

adjust in terms of payments. Based on historical data,43 the MNB examined the turnover of specific banks in the payment systems if the entire stock of MNB bills were removed from both pledged and eligible stock. Approximately 59 per cent of VIBER participants are not expected to require any adjustment, as they have enough liquidity for executing payments even without MNB bills. The other roughly 41 per cent of banks, however, do need to adjust to the new situation as the MNB bills were necessary for executing their payments in the past. Sixteen per cent of VIBER participants held other eligible securities on their balance sheets to substitute the MNB bills, while 25 per cent did not. These VIBER members would not have had sufficient liquidity to execute their payments, substantially increasing the clearing and settlement risk in the payment systems. The MNB examined historical turnover data and daily liquidity ceteris paribus in the context of its calculations. The system’s liquidity requirements can only be higher due to the aforementioned impact of the FGS, as utilisation of the entire FGS volume would substantially impact the excess liquidity available for payments.

43 The study covers the period between 1 January 2013 and 31 March 2014.