MNB short-term climate stress test finds banks resilient

A short-term climate stress test for Hungarian banks has found that financial institutions would be resilient in the event of a carbon price shock, the Magyar Nemzeti Bank (MNB) has said in its green finance report.

The test was based on a 100% increase in oil prices in June 2022 along with a significant downturn and used three different types of stress models: macroeconomic, sectoral and credit risk. The test showed no liquidity or solvency problems at the institutions reviewed.

“Regularly updated credit institution carbon risk indicators show that banks’ corporate portfolios are facing a relatively stagnant transition risk, while the overall corporate portfolio is growing, leading to an increase in the exposed stock,” the report stated.

The MNB also conducted its first domestic insurance climate stress test and questionnaire. In a climate risk survey, 60% of respondents identified climate risk and 41% take climate risk into account when taking risks. Based on these results, “the MNB plans to take further steps to support insurance companies in the green transition”, the central bank stated.

Meanwhile, the number of green loans increased significantly in 2022, and the volume of loans participating in MNB’s green preferential capital requirements programme skyrocketed by 88% to €1.1bn in just one year. The program allows credit institutions to receive a capital requirement deduction on loans for energy-efficient home purposes.

The renewable energy sector remains one of the biggest green investment sectors in Hungary, despite efforts to diversify financing targets in this sector.

While progress has been made towards curbing climate change on the regulation and technological side, more needs to be done, Hungary’s central bank said.

“If the necessary transformation does not take place in time, we can expect consequences that dwarf the current risks,” the report stated.

More sustainable finance measures expected from the MNB

The MNB also plans to issue more guidance in 2023 around sustainable finance “in order to clarify the domestic sustainable financial framework and support the green transition of institutions”.

It will extend its guide on climate-related and environmental risks to non-bank sectors and plans to review its ongoing green programmes, with the possibility of extending its green corporate capital requirements programme.

The central bank will also set a minimum standard on ESG questionnaires in lending, as having various approaches to assessing ESG can “impose a significant administrative burden on companies that fill in the questionnaire, which could be greatly reduced by supervisory guidance on the minimum content of the questionnaire”.

In addition, the MNB plans to publish national green finance data on a quarterly basis starting later this year, in a bid to reduce information gaps on sustainable finance. It has already published a green financial product finder to help increase transparency and accurate information for investors.

The MNB has worked towards offering more climate objectives in its monetary policy since 2021. According to its latest climate-related financial disclosure report, the central bank has also worked on being a carbon-neutral operation. The MNB has reduced its operation carbon footprint by 30% in the last three years, fully offset its carbon emission in 2020, and intends to offset its remaining emission by financing restoration projects.