Former central bank governor warns “bad bank” is a bad idea

November 28, 2014


Ákos Péter Bod, former Central Bank governor and professor of economics at Corvinus university, thinks plans to organize a state-owned “bad bank” could potentially trigger catastrophic consequences, reported on Thursday.  Bod was reacting to a new plan by the National Bank of Hungary (MNB) to set up a “bad bank” to take over non-performing forex loans from the Hungarian private banking system. The plan calculates with a maximum of HUF 300 billion (around USD 1.2 billion) of state bank funds to be poured into a non-profit loan adoption scheme to handle FX loan debt over the course of the next ten years.

Bod offered criticism of the plan, saying that even if this would make sense on a macroeconomic level, MNB does not have the necessary expertise and experience to carry out such a plan in a responsible way. He said the institutional framework of a state asset management fund is planned to handle these issues.  However, Hungary already has a national assets management company (Nemzeti Eszközkezelő Zrt., or NEZ), and the duplication of such an institution would not make sense in terms of efficiency. Bod added that NEZ already seems slow and  “ineffective enough in handling the cases of indebted people.”

“Evaluating and pricing mortgaged real estate is a very complex and difficult process. It is a grave problem in itself if a country’s regulatory body intervenes in mortgage handling on such a level,” Bod told the online economic newspaper, adding that MNB’s international reputation as a national bank could be further damaged by showing lack of professionalism in handling the mortgage market.

“In effect,” Bod concluded, “the fact that the issue of FX loans and mortgages is being dealt with is not a bad thing. But it has many important prerequisites to fulfill. The National Bank of Hungary has to generate an overall sense of comfort for foreign investment banks to raise the level of their activity. […] If the experiences of the past few years are any indication, it is hard to interpret those measures as something that would help their exposure.”

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