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Identifying imbalances in the Hungarian banking system (‘early warning’ system)

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  • Dániel Holló

    (Magyar Nemzeti Bank (central bank of Hungary))

Abstract

The new Hungarian Central Bank Act passed at the end of 2011 delegated macroprudential regulatory powers to the MNB. The essential elements of an effective macro-prudential policy are analytical tools which make it possible to quantify the effects arriving via different systemic risk channels and regulatory instruments which can help in the management of systemic risks. Among the four analytical tools tuned to identify and measure systemic risk (‘early warning’ system, stress tests, contagion models and a system-wide financial stress indicator) two are already in regular use at the MNB (stress tests and the system-wide financial stress indicator), a contagion model is currently under development and the ‘early warning’ system is about to be introduced. This article presents one of the four tools discussed above: the ‘early warning’ system. The ‘early warning’ system may help in the identification of periods characterised by excessive credit growth and the accumulation of critical imbalances on the banking sector’s assets and liabilities side as a result of excessive bank lending (excessive credit growth channel of systemic risk), and may serve as a point of reference for the timing of the introduction of measures named in the new MNB Act to reduce systemic risk (e.g. anti-cyclical capital buffer and other regulatory instruments designed to prevent excessive credit growth). Our results show that excessive imbalances on the asset and liability sides of the Hungarian banking system started to emerge in 2005 Q4; the current problems facing Hungarian banks stem from the large imbalances on the assets and liabilities side (excessive credit growth and significant increase in the share of non-core or secondary liabilities within total liabilities), which characterised the period between 2005 Q4 and 2008 Q4.

Suggested Citation

  • Dániel Holló, 2012. "Identifying imbalances in the Hungarian banking system (‘early warning’ system)," MNB Bulletin (discontinued), Magyar Nemzeti Bank (Central Bank of Hungary), vol. 7(3), pages 38-45, October.
    • Handle: RePEc:mnb:bullet:v:7:y:2012:i:3:p:38-45
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    References listed on IDEAS

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    1. Detken, Carsten & Alessi, Lucia, 2009. "'Real time'early warning indicators for costly asset price boom/bust cycles: a role for global liquidity," Working Paper Series 1039, European Central Bank.
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    4. Mr. Fabian Valencia & Mr. Luc Laeven, 2008. "Systemic Banking Crises: A New Database," IMF Working Papers 2008/224, International Monetary Fund.
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    Keywords

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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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