HVG: Hungary central bank failed to act in time to prevent collapse of Széchenyi Bank

December 17, 2014

szechenyi

On Friday, December 5, Minister for National Economy Mihály Varga held an extraordinary press conference at parliament.

Its purpose was not to announce that the National Bank of Hungary (MNB) had revoked the permit of the Széchenyi Bank to operate.  That would have been bad news, considering some 1600 depositors stood to lose HUF 7.5 billion in uninsured deposits, and reimbursing insured depositors was going to cost taxpayers billions and possibly tens of billions of forints.  Also bad news was the fact that the 100 percent Hungarian-owned bank was 51 percent owned by State Debt Management Company CEO István Töröcskei and 49 percent owned by the government of Hungary, the latter having paid HUF 3 billion in June 2013 to acquire a minority interest.  And there was certainly no way of telling how the press would react to the National Bank of Hungary, in its capacity of financial regulator, failing to take timely action to prevent the collapse of a commercial bank it had known for some time was in deep trouble.

No, had Mihály Varga told the press that under his watch the government had squandered tens of billions of forints of taxpayer money on an ill-conceived and badly executed venture into commercial banking, it might have caused the Hungarian people (and international investors) to question the wisdom of Prime Minister Viktor Orbán and Company being in the business of owning and operating banks.

Instead Varga did the smart thing and announced that the government had signed a pre-contract to buy the Budapest Bank from GE Capital for an unspecified amount, taking care to list every conceivable way that this was good for the bank’s customers and for the  banking industry in general, although at the time we were confused by Varga’s announcement that the government intended to reprivitise the bank in two years’ time.   After all, if nationalizing major commercial banks is such a good thing, then why the rush to reprivatise?

News of the collapse of the Széchenyi Bank broke three days later, followed by that of Töröcskei tendering his resignation as CEO of ÁKK.  Initial news accounts were light on facts but heavily laden with official statements clarifying for the record that the government had not done anything wrong.  According to a spokesman for the Ministry for National Economy, Töröcskei failed to disclose relevant information prior to the government acquiring its 49 percent stake in the bank.  The same deputy state secretary pointed out that the closure of the Széchenyi Bank did not automatically mean Töröcskei was no longer qualified to manage Hungary’s national debt, and that for this reason it remained to be seen whether Minister Varga would accept his resignation.

However, according to a 100-page report obtained by hvg.hu, it seems Varga had very good reason to hide the collapse of the Széchenyi Bank from public view just long enough for the government spin doctors to get ahead of the story.  It seems the National Bank of Hungary had known for nearly a year that the Szechenyi Bank was in serious trouble, having ordered an investigation of the bank in January 2014, and yet failed to act in a timely manner.

According to the report, the bank’s board of directors, on which either Töröcskei or his wife sat at all times, had approved several loans to companies in which Töröcskei or his wife were directors and/or had an ownership interest.  The report did not disclose the amount of the loans, or whether they were ever repaid. In light of Töröcskei’s subsequent comments to hvg.hu, one suspects not.

Töröcskei claims that two of the companies, Platinium Zrt. and Florénus Zrt., had been established to run the bank’s debt collection and leasing operations, respectively.  Töröcskei says the bank had to scuttle these plans as a result of losses arising from changes to the law, citing the Savings and Loan Integration Act (which prepared the way for the nationalization of the Takarékbank). Töröcskei assures hvg.hu a third company was credit worthy, but neglects to mention whether any of the companies in question ever got around to repaying the loans before the bank failed.

Töröcskei also tells hvg.hu that he did not know about the existence of the report or what its findings were.  He further claims to have been on “good terms with the bank examiners” and for this reason is at a loss to explain why they failed to call his attention to problems at the bank.

(In light of Töröcskei’s comments, it is indeed reassuring to know that the management of Hungary’s national debt was entrusted to such a competent and trustworthy individual-ed).

The report identified a number of highly unorthodox practices, including the same employee both approving the loan contract and signing it on behalf of the bank, i.e. fulfilling both a risk management and a business function.  The report found that the bank did not meet standards of data security and storage, with certain information stored in write-protected Excel tables without appropriate back-up.  In some cases information had been incorrectly entered.  Nothing important, mind you., just the date the loan in question came due!

According to Töröcskei, back in 2010 someone higher than then-minister for national economy György Matolcsy (Viktor Orbán perhaps?) verbally promised to lend the Széchenyi Bank an unspecified amount with which to increase the bank’s capital if Töröcskei agreed to head the State Debt Management Agency.  Töröcskei claims the individual in question went back on his promise, and instead offered to acquire 49 percent of the bank with a capital injection of HUF 3 billion.

Hvg.hu reports that the agreement was signed in 2012 but only executed in June 2013, 14 months after Ernst & Young completed its audit of the bank conducted between March 21 and April 11 of 2012.   In the meantime, Viktor Orbán appointed György Matolcsy governor of the National Bank of Hungary (MNB).  Matolcsy, in turn, was succeeded by Varga as Minister for National Economy in March 2013.

What is not clear is why government auditors responsible for conducting due diligence would have failed to detect the same irregularities mentioned in the MNB report.   Nor is it clear why MNB failed to act in a timely manner to assume control of the bank, thereby minimizing loss to depositors and taxpayers alike.

One reason may be that a state secretary at the Ministry for National Economy responsible for managing Hungary’s debt, the fact that Töröcskei was a government official may have unduly influenced government examiners in the performance of due diligence (assuming any due diligence took place after the Ernst & Young audit).  For the same reason financial regulatory authorities at the National Bank of Hungary may have been reluctant to step in and take over the bank, especially as it was central bank governor Matolcsy himself who authorized the purchase of the state’s shares in the bank in his previous capacity as minister for national economy.

According to the MNB, by the time the central bank interceded, it was too late to prevent the bank from going under.  All of which begs the following question:  why did the central bank, in its capacity as financial regulator, wait until it was too late to intercede?  Are there other 100 percent Hungarian-owned banks on the verge of collapse that should have been taken over or shut down a long time ago we don’t know about?  Should the government of Hungary really be in the business of owning and operating banks?

Reference:

http://m.hvg.hu/gazdasag/20141216_Sulyos_problemak_Szechenyi_MNB