Risk developments on the retail mortgage loan market

In this study, using three commercial banks’ retail mortgage loan portfolios (consisting of approximately 200,000 clients with housing and home equity loans), we analyse the risk characteristics of the portfolio, identify customer-specific and product-specific factors, and market and macroeconomic factors that influence portfolio quality, and finally calculate the loan loss on the retail mortgage portfolio of the banking sector in an extreme macro-risk scenario (10 per cent decline in GDP; exchange rate of EUR/HUF 340). Our findings suggest that the loans’ denomination structure, the initial loan-to-value (LTV) ratio and the debtor’s level of education can be considered as the main customer-specific and product-specific drivers of default risk, while the unemployment rate, domestic and foreign interest rates as well as the exchange rate constitute the major macro-risk factors impacting defaults. Based on our calculations, in the macro-risk scenario the total loss on the retail mortgage loan portfolio of the banking sector would amount to HUF 372 billion, which is approximately 6 per cent of the end-2008 mortgage loan portfolio.credit risk, stress test.

Household indebtedness and financial stability: Reasons to be afraid?

The dynamic increase in household indebtedness seen in Hungary in recent years has raised a number of questions relating to the risks of this growth and the long-term sustainability of banking portfolio quality. The continuous monitoring of risks is a task of the MNB, which stems from its supervisory role over financial stability. In order to explore the extent and structure of household indebtedness, the central bank conducted a questionnaire-based survey among indebted households in January 2007. In this article, we present the structural distribution and riskiness of indebted households as well as the effect of various unfavourable macroeconomic developments on banks’ portfolio quality and capital adequacy, based on the findings of the survey. Our findings suggest that the shock absorbing capacity of the banking sector is sufficient (i.e. the capital adequacy ratio of the banking system would not fall below the current regulatory minimum of 8 per cent) even if the most extreme stress scenarios were to occur.Financial margin, financial Stability, stress test.

Assessing household credit risk: evidence from a household survey

This paper investigates the main individual driving forces of Hungarian household credit risk and measures the shockabsorbing capacity of the banking system in relation to adverse macroeconomic events. The analysis relies on survey evidence gathered by the Magyar Nemzeti Bank (MNB) in January 2007. Our study presents three alternative ways of modelling household credit risk, namely the financial margin, the logit and the neural network approaches, and uses these methods for stress testing. Our results suggest that the main individual factors affecting household credit risk are disposable income, the income share of monthly debt servicing costs, the number of dependants and the employment status of the head of the household. The findings also indicate that the current state of indebtedness is unfavourable from a financial stability point of view, as a relatively high proportion of debt is concentrated in the group of risky households. However, risks are somewhat mitigated by the fact that a substantial part of risky debt is comprised of mortgage loans, which are able to provide considerable security for banks in the case of default. Finally, our findings reveal that the shock-absorbing capacity of the banking sector, as well as individual banks, is sufficient under the given loss rate (LGD) assumptions (i.e. the capital adequacy ratio would not fall below the current regulatory minimum of 8 per cent) even if the most extreme stress scenarios were to occur.financing stability, financial margin, logit model, neural network, stress test.

Bank Efficiency in the Enlarged European Union

This paper aims to estimate bank efficiency differences across member states of the European Union and tries to explain their causes. We show on an empirical basis that the level and spread of bank efficiency in the EU and their changes are significantly determined by characteristics of operational environment and the “conscious” behaviour of management.In the long term, through the integration of financial markets and institutions, as well as the establishment of the Single European Banking Market, the impact of advantages and disadvantages underlying the operational environment is reduced or eliminated; therefore only managerial ability is of any relevance. Our findings suggest that there is a costefficiency gap and convergence between the old and new member states, irrespective of the specifications of the model. With respect to profit efficiency, however, differences in efficiency between the two regions are only established after controlling for some major characteristics of the varying operational environments. Our study also investigates the relevance of and the correlation between accounting-based and statistics-based efficiency indicators. We conclude that the accounting based efficiency indicators are inadequate for managing heterogeneity arising from institutional and operational environments. Hence such indicators only allow limited cross-sectional comparison through time.parametric approach, X- and alternative profit-efficiency, Fourier-flexible functional form, banking system.

Analysis of banking system efficiency in the European Union

In addition to aspects related to financial stability, the cost efficiency gap observed between the banking systems of the old and the new EU member states is also unfavourable from a welfare point of view. In the majority of new member states, banks are likely to price the relatively high rate of cost efficiency losses and the oligopolistic factor linked to insufficient competition in the interest rates. The high loan and low deposit interest rates may prevent, through the volume effect, an upturn in savings and investment propensity, and thereby the implementation of a higher path of economic growth. In the course of our research, we measured variations in efficiency in the member states of the European Union and attempted to explain the reasons for such differences. We evidenced on an empirical basis that the degree of differences between member states and their change through time is significantly determined by the characteristics of the operational environment and the conscious behaviour of management. The conscious behaviour of management is of exclusive relevance in the long term, for the impact of advantages and disadvantages underlying the operational environment is reduced or eliminated through the integration of financial markets and institutions and the establishment of the Single European Market.parametric approach, X- and alternative profit-efficiency, Fourier-flexible functional form, banking system.

A system-wide financial stress indicator for the Hungarian financial system

In this study, a system-wide financial stress index (SWFSI) for the Hungarian financial system is developed. The indicator measures the joint stress level of the Hungarian financial systems main segments: the spot foreign exchange market, the foreign exchange swap market, the secondary market of government bonds, the interbank unsecured money market, the equity market and the banking segment. Stress indices of the six financial system segments are aggregated on the basis of weights which reflect their time-varying cross-correlation structure. As a result, the system-wide financial stress indicator puts greater emphasis on periods in which stress presents permanently in several market segments at the same time. Our results indicate that after February 2005 the default of Lehman Brothers and its global consequences unambiguously acted as a lasting stress event with systemic risk importance from the perspective of the stability of the Hungarian financial system. Finally, the results suggest that the Hungarian financial system's stress level in the period under review (February 1, 2005 - September 16, 2011) was driven mainly by disorders in the banking and the foreign exchange swap market segments

Assessing household credit risk: Evidence from a household survey

This paper investigates the main individual driving forces of Hungarian household credit risk and measures the shockabsorbing capacity of the banking system in relation to adverse macroeconomic events. The analysis relies on survey evidence gathered by the Magyar Nemzeti Bank (MNB) in January 2007. Our study presents three alternative ways of modelling household credit risk, namely the financial margin, the logit and the neural network approaches, and uses these methods for stress testing. Our results suggest that the main individual factors affecting household credit risk are disposable income, the income share of monthly debt servicing costs, the number of dependants and the employment status of the head of the household. The findings also indicate that the current state of indebtedness is unfavourable from a financial stability point of view, as a relatively high proportion of debt is concentrated in the group of risky households. However, risks are somewhat mitigated by the fact that a substantial part of risky debt is comprised of mortgage loans, which are able to provide considerable security for banks in the case of default. Finally, our findings reveal that the shock-absorbing capacity of the banking sector, as well as individual banks, is sufficient under the given loss rate (LGD) assumptions (i.e. the capital adequacy ratio would not fall below the current regulatory minimum of 8 per cent) even if the most extreme stress scenarios were to occur

Self-assembly of like-charged nanoparticles into Voronoi diagrams

The self-assembly of nanoscopic building blocks into higher order macroscopic patterns is one possible approach for the bottom-up fabrication of complex functional systems. Macroscopic pattern formation, in general, is determined by the reaction and diffusion of ions and molecules. In some cases macroscopic patterns emerge from diffusion and interactions existing between nanoscopic or microscopic building blocks. In systems where the distribution of the interaction-determining species is influenced by the presence of a diffusion barrier, the evolving macroscopic patterns will be determined by the spatiotemporal evolution of the building blocks. Here we show that a macroscopic pattern can be generated by the spatiotemporally controlled aggregation of like-charged carboxyl-terminated gold nanoparticles in a hydrogel, where clustering is induced by the screening effect of the sodium ions that diffuse in a hydrogel. Diffusion fronts of the sodium ions and the induced nanoparticle aggregation generate Voronoi diagrams, where the Voronoi cells consist of aggregated nanoparticles and their edges are aggregation-free and nanoparticle-free zones. We also developed a simple aggregation-diffusion model to adequately describe the evolution of the experimentally observed Voronoi patterns

Effect of the Polarity of Solvents on Periodic Precipitation: Formation of Hierarchical Revert Liesegang Patterns

Liesegang pattern (LP) is one example of self-organized periodic precipitation patterns in nonequilibrium systems. Several studies have demonstrated that the LP morphology can track physicochemical environmental conditions (e.g., temperature); however, the polarity effect has not been explored to date. In this study, a copper chromate system is used to reveal the impact of solvent polarity on the evolving LP structure using water/organic solvent mixtures. In the typical case of using water/dimethyl sulfoxide (DMSO) mixtures, two drastic changes in LP morphology with increasing DMSO contents were found: (i) increasing frequency of the original structure and (ii) formation of a hierarchical pattern with the appearance of another, lower-frequency structure. Furthermore, the simulation model operating with a bimodal size distribution, allowing both homogeneous and heterogeneous precipitations showed good agreement with the experimental results. Therefore, this study demonstrated that LP can be tailored by solvent polarity and can be used for designing hierarchical precipitation patterns in a straightforward manner