Profit or Loss? Assessing the Hungarian National Bank
The Hungarian National Bank (MNB) has reported negative equity of HUF 3,200 billion. This figure has appeared in several news reports and is significant in its own right. Yet the central bank rarely features in our everyday concerns, even though its operations affect many areas of our lives directly.
We have written before about the tendency to use a single economic indicator to support a particular claim, even when that indicator alone cannot provide a complete picture of the process being examined. Understanding economic phenomena generally requires interpreting several interconnected indicators.
This is why it is worth asking a few fundamental questions when assessing the position of the central bank.
Should a central bank operate as a profit-oriented institution? Which indicators can reveal whether it is performing successfully or failing? How independent should it be from political influence, and how can its decisions be made subject to scrutiny?
Hungary restored its two-tier banking system in 1987. Before that, the Hungarian National Bank performed commercial banking activities in addition to its central banking functions. The National Savings Bank (OTP) and savings cooperatives played important roles in retail banking, while a significant part of corporate and state financing operated within the earlier banking structure.
The transformation gradually led to the development of a banking system aligned with European structures. Alongside commercial banks, other financial service providers emerged, including brokerage firms engaged in stock market trading and various investment service providers.
Supervising the security and lawful operation of the financial system is a public responsibility. This task was previously carried out by the Hungarian Financial Supervisory Authority. In 2013, its supervisory functions were integrated into the Hungarian National Bank.
The central bank is therefore responsible not only for monetary policy but also for supervising the financial intermediary system. These two roles are related, but they are not identical. The effectiveness of monetary policy, the central bank’s financial management and the performance of financial supervision must be assessed using different criteria.
The MNB’s primary objective is to achieve and maintain price stability, not to maximise profits. This does not mean, however, that its financial management and decisions should be exempt from scrutiny.
Negative equity is an important indicator, but on its own it does not tell us how effectively the central bank has fulfilled its statutory responsibilities. To assess this, we must also examine the processes that led to the current situation, including the role of monetary policy decisions, interest expenses, exchange rate movements and other financial transactions.
Negative equity of HUF 3,200 billion is not the same as a loss incurred during a single year. The distinction is important, and the figure reported in the news must be interpreted in its proper context.
The question, therefore, is not simply whether the central bank is profitable or loss-making. The more important questions are how its financial position developed, which decisions contributed to it, and to what extent those decisions served the bank’s statutory objectives.
It is not always easy for outsiders to assess how effectively the central bank performs its core functions. The results of monetary policy are influenced not only by the bank’s own decisions but also by international economic developments, energy prices, exchange rate movements and domestic economic policy.
Financial supervision, however, can also be examined from a different perspective. The public’s direct experience raises the question of whether the state’s supervisory system has always fulfilled its responsibilities adequately.
Various pyramid schemes and unauthorised financial arrangements, as well as scandals involving certain brokerage firms, have caused significant losses, particularly for private individuals. These cases warrant an examination of when the authorities became aware of the risks, what powers were available to them, and when they could have intervened or at least warned those affected.
It would be unreasonable to claim that every instance of financial misconduct could have been prevented. Nevertheless, the effectiveness of supervision should not be measured solely by the number of inspections carried out or licences issued. It is equally important to determine whether the system can identify emerging risks and address them in time.
One of the most serious financial problems, whose consequences are still being felt, is the foreign currency lending crisis. A substantial number of households took out loans whose instalments and outstanding balances expressed in forints were affected by exchange rate movements.
Many borrowers were unable to assess the risks adequately. Faced with initially attractive repayments, few fully anticipated how sharply their financial burden could increase if exchange rates moved significantly against them.
The supervisory system failed to prevent foreign currency lending from becoming widespread. This does not, by itself, prove that the authorities had the legal powers necessary to prohibit these products in every case. It is nevertheless reasonable to examine why regulation and supervisory practice did not limit the risks imposed on households more effectively at an earlier stage.
Responsibility cannot be attributed to a single institution. The banks’ product policies and disclosure practices, the regulations in force at the time, supervisory decisions and the wider economic policy environment must all be examined.
The full extent of the losses suffered by households cannot be expressed in a single figure either. Beyond direct financial losses, an assessment would need to consider home repossessions, forced property sales, the long-term consequences of indebtedness and the changes these events brought to families’ lives.
Assessing the central bank requires us to examine several interconnected but distinct areas. Monetary policy effectiveness, financial management, supervisory activity and institutional independence each address different questions.
Negative equity is not an insignificant figure, but neither can it replace a detailed investigation. Similarly, assessing past failures in financial supervision requires more than knowing the scale of the losses incurred. We must also establish who made decisions, when they made them, what information they had and what powers they could exercise.
Central bank independence matters because decisions should not be dictated by short-term political interests. Independence, however, must not mean a lack of accountability. Transparency, sound professional reasoning and the ability to establish responsibility are essential complements to institutional independence.
Negative equity of HUF 3,200 billion is therefore not a final verdict in itself. It is an indicator that raises further questions. The objective should not be to pass judgment on the basis of a single figure, but to understand the processes and decisions that led to the current situation.
Ultimately, the question is not whether the central bank makes a profit, but how effectively it fulfils its statutory responsibilities, how it manages the resources entrusted to it, and how well it protects the public interest in a secure financial system.
By: Viktor Szentkiralyi
English translation: Galatea – an LLM-based digital assistant.