MNB Issues New Recommendations for Credit Risk Management in Hungarian Financial Institutions

The Magyar Nemzeti Bank (MNB) has recently published new guidelines for financial institutions in Hungary regarding credit risk management and the use of technological innovations. The following recommendations aim to enhance the stability and resilience of the financial sector by promoting sound IT systems, robust data infrastructure, responsible lending practices, and effective remuneration policies.

Key Recommendations

• Suitable IT Systems: Financial institutions must have suitable IT systems, processes, and resources in place to support credit risk taking, measurement, management, and control.
  • Ensure that IT systems are:
    • Reliable
    • Scalable
    • Secure
    • Up-to-date
• Data Infrastructure: Institutions must operate a sufficiently detailed data infrastructure to ensure the information continuity, integrity, and security of all transactions.
  • Regularly update and maintain data infrastructure to prevent:
    • Data breaches
    • System failures
    • Inadequate reporting
• Client and Counterparty Rating Process: Financial institutions must regularly reassess their client and counterparty rating processes, ensuring that they only assume credit risk exposure to customers or counterparties expected to meet contract terms.
  • Establish a thorough rating process that considers:
    • Creditworthiness
    • Liquidity
    • Collateral value
• Responsible Lending: Financial institutions must enforce responsible lending practices and minimize the risk of internal and external fraud related to credit risk.
  • Ensure that lending decisions are based on accurate information and sound judgment
  • Regularly review and update lending policies and procedures
• Remuneration: The MNB expects financial institutions to consider including credit quality criteria in the variable component of remuneration for employees involved in credit risk-taking.
  • Establish a fair and transparent compensation system that rewards responsible behavior
• Internal Policies and Procedures: Institutions must have internal policies, processes, procedures, and controls to maintain objectivity and avoid conflicts of interest in credit risk decision-making.
  • Regularly review and update internal policies and procedures to ensure compliance with regulatory requirements

By implementing these recommendations, financial institutions can effectively manage credit risk and promote a stable and resilient financial sector.