"The National Bank of Hungary (NBH) has on Thursday published the details of its mortgage bond purchase programme announced on 8 February 2010. The objective of the programme is to contribute to the development of the domestic mortgage bond market, and ultimately to reduce further the interest differential between forint and foreign currency loans and to boost forint lending by banks.At its meeting on 8 February, the Monetary Council of the central bank announced a programme to support the development of the domestic forint mortgage lending and mortgage bond markets.
"The overall objective of the programme is to remove obstacles to the autonomous development of the mortgage bond market, and thereby to enhance financial stability and the efficiency of the interest rate transmission mechanism. This may facilitate forint mortgage lending through a reduction in the interest differential against foreign currency loans," the bank said in a statement.
Under the scheme, the NBH will start making primary and secondary market purchases of domestically issued mortgage bonds listed as eligible collateral up to a total notional value of HUF 100 billion.
All domestic credit institutions subject to reserve requirements will be eligible to participate in the programme, provided that they satisfy the relevant technical requirements.
In the interests of the long-term development of the domestic mortgage bond market, purchases by the Bank will be subject to meeting certain criteria, with the aim of enhancing the liquidity and transparency of the market.
* The Bank will stand ready to make primary market purchases of certain quantities of any forint-denominated mortgage bonds issued after 8 February, provided that the following conditions are met:
* The bond issued must be of at least three years’ original maturity;
* The issuer announces publicly that the amount of bonds to be issued under the series to investors outside the issuer’s banking group will reach at least HUF 50 billion within the year following the inaugural issue. Subscriptions within the same banking group will not count towards that amount except purchases by pension funds and mutual funds managed by the same group as well as by insurance companies within the group. Issuers may also sell a series of bonds of at least HUF 50 billion in parts, i.e. across multiple bond issues, to be completed within one year following the inaugural issue;
* The issuer announces publicly that it has agreed with at least three market makers belonging to different banking groups to provide continuous and firm two-way prices in the given mortgage bond as market makers for an amount of at least HUF 100 million, on the condition that the bid-ask spread does not exceed 75 basis points up to a nominal outstanding amount for each series of HUF 25 billion and 50 basis points above that amount. In order to encourage credit institutions to undertake to provide regular prices in newly issued mortgage bonds and support their risk management frameworks, the Bank offers a mortgage bond lending facility, by applying a pre-set lending limit for each market maker and mortgage bond series.
If the above conditions are met, the NBH will purchase up to 20% of bonds issued outside the issuer’s banking group as part of an issue, at the average yield on the amount in issue subscribed by investors outside the group.
The issuer of the bond series meeting the above requirements may invite the Bank to purchase a specific bond by sending to the Bank the documents giving the particulars of the issue and subscription prices evidencing that the above conditions have been met.
The Bank will, at its discretion, make secondary market purchases of mortgage bonds listed as eligible collateral issued prior to 8 February, via variable rate, competitive auctions held on an ad hoc basis. The first auction will take place on 10 March. The terms of that auction will be announced in a press release on the Bank’s website today. The mortgage bond purchase programme is expected to be completed on 31 December 2010 at the earliest.
At the tender the NBH will buy from ten mortgage bond series expiring between 2011 and 2013 of OTP, UniCredit (or its legal predecessor HVB) and FHB.
Portfolio.hu viewpoint:
The NBH decision is not out of the blue for banks, as it is an entirely Europe-conform set of measures. The European Central Bank (ECB) also has a similar programme in place to the tune of over EUR 60 bn. Purchases already exceed half of what was set out in the programme. Via the NBH decision, OTP and Land Credit and Mortgage Bank (FHB) will have easier access to forint funds that - indirectly - could be a stabilising factor for their respective bond markets, as well.
Although Dec data provided by the NBH show that the ratio of forint loans increased within total new lending, the amount remains extremely small. The central bank’s initiative to boost lending is definitely a welcome step. We could only guess what other measures the c.bank has in store, but the whole notion is highly commendable.
As the NBH pointed out it requires the banks to provide continuous and firm two-way prices in the given mortgage bond that is hoped to enhance the liquidity and transparency of the market."
Source: Portfolio Online Financial Journal
26.02.2010