Government Takeovers: A Closer Look at EU Regulation

In an effort to strengthen public trust in the financial system and help EU-level supervision, internal and external control measures have been implemented to detect fraud, ensure data quality, and prevent money laundering and terrorist financing. In this article, we’ll examine the circumstances under which banks may be taken over by government or regulatory authorities.

Resolution Act

The Hungarian parliament has passed the Resolution Act, which aims to maintain financial stability and ensure the continuous availability of critical financial sector functions. The Act allows the MNB (Magyar Nemzeti Bank) to notify the minister in charge of monetary regulation if a systemic crisis occurs, and the minister may then decide whether to apply state financial stabilization instruments.

State Financial Stabilization Instruments

These instruments can take the form of:

• Capital increases
• Temporary nationalization of shareholdings
  • If nationalized, shares will be transferred to the state or a solely state-owned enterprise.
  • The institution must continue operating on a commercial basis, with the state’s role as owner eventually taken over by market players through public auction.

Supervisory Commissioner

In cases where the dissolution procedure begins after resolution, the MNB may appoint a supervisory commissioner to ensure that all payments are stopped until the opening of the dissolution procedure. Shareholders bear losses first, and no shareholder will incur greater losses than they would have in liquidation.

Bank Failures

If a bank failure occurs due to reasons outlined in the Banking Act, the MNB may pass a resolution appointing a supervisory commissioner. During this period:

• Board members cannot perform their duties or exercise signatory rights
• The supervisory commissioner exercises these rights instead

Manager Liability

Board and supervisory board members are personally liable for any damages caused by breaching rules or regulations. Managers who fail to fulfill provisions or breach laws may face penalties, including fines.

Resolution Planning Exercises

Credit institutions must have written policies and procedures for:

• Identifying, measuring, managing, and monitoring liquidity risk over an appropriate period
• Distinguishing between pledged and unencumbered assets available during emergency situations

Capital Requirements

Banks must maintain a minimum subscribed capital of 2 billion forints. The requirement of prudent operation means that banks must manage funds and resources to:

• Maintain liquidity and solvency at all times
• Cover at least the minimum capital requirement defined in Regulation (EU) No. 575/2013

In conclusion, government takeovers are a last resort in cases of systemic crisis or bank failure. Regulatory bodies like the MNB play a crucial role in ensuring financial stability by monitoring banks’ operations and implementing measures to prevent fraud, money laundering, and terrorist financing. By understanding these regulations, we can build trust in the financial system and promote economic growth.