Opinion of the European Central Bank of 10 November 2022 on the dividend payments, recapitalisation and reimbursement of the Magyar Nemzeti Bank (CON/2022/37)

OPINION OF THE EUROPEAN CENTRAL BANK of 10 November 2022 on the dividend payments, recapitalisation and reimbursement of the Magyar Nemzeti Bank (CON/2022/37) Introduction and legal basis

On 7 October 2022, the European Central Bank (ECB) received a request from the Hungarian Ministry of Finance for an opinion on a draft law amending the Law on the Magyar Nemzeti Bank and Decree 221/2000, (XII.19.) of the Government on the special reporting and accounting requirements of the Magyar Nemzeti Bank (hereinafter the ‘draft law’). The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union (TFEU) and the third indent of Article 2(1) of Council Decision 98/415/EC , as the draft law concerns the Magyar Nemzeti Bank (MNB). In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the draft law

1.1. The main purpose of the draft law is to modify the provisions of the Law on the Magyar Nemzeti Bank (hereinafter the ‘Law on the MNB’) and the Decree 221/2000, (XII.19.) of the Government on the special reporting and accounting requirements of the Magyar Nemzeti Bank (hereinafter the ‘Decree on the MNB’s accounts’) that relate to the MNB’s dividend payments and the MNB’s recapitalisation and reimbursement by the State at the MNB’s initiative.

Dividend payments. 1.2. Under the current provisions of the Law on the MNB , the MNB shall pay a dividend from the portion of its retained earnings that are not used to offset any negative amount in the MNB’s revaluation reserves , supplemented by the MNB’s profits from the year under review, in accordance with a decision of the MNB’s Executive Board . 1.3. As noted in the explanatory memorandum accompanying the draft law, the draft law would

introduce a rule-based dividend payment practice, in line with common practices at Union central banks. Under the draft law the new dividend payment regime provides for automatic and discretionary dividend payments. In particular, the draft law provides that if the amount of the MNB’s equity exceeds its subscribed capital at the end of the year under review, the MNB will pay 50 % of its profit for the year under review as a dividend (automatic dividend payment). In addition, the draft law provides that the MNB will pay dividends, based on a decision of its Executive Board, from the positive amount of its retained earnings supplemented by the loss or 50 % of its profit from the year under review, up to the amount of the equity exceeding the subscribed capital (discretionary dividend payment). The dividend payment is due within 30 days of the MNB sending the notification of the report for the year under review to the shareholders.

Recapitalisation and reimbursement. 1.4. Under the current provisions of the Law on the MNB , where the amount of loss incurred in the year under review exceeds the retained earnings, the difference shall be reimbursed from the central budget directly to the retained earnings within eight days of the shareholder’s receipt of the notification of the annual financial statements for the year under review . In addition, under the current provisions of the Law on the MNB , if the balance of the revaluation reserves is negative, and this negative balance exceeds the sum of the retained earnings and the result for the year under review, a direct cash disbursement must be made from the central budget to the retained earnings up to the level of the negative balance that exceeds the sum of the retained earnings and the result of the year under review. 1.5. As noted in the explanatory memorandum accompanying the draft law, the current recapitalisation and reimbursement rule may require reimbursement from the central budget, regardless of the needs of the central bank. However, according to the explanatory memorandum, although there is sufficient net equity to allow the MNB to perform its fundamental tasks, the current rules may require a significant lumpsum reimbursement from the central budget that could lead to a sub-optimal policy mix. In a stagflationary environment, monetary policy needs to tighten conditions to bring inflation down, while fiscal policy may implement targeted programmes to support the real economy. However, immediate fiscal pressure stemming from a significant lump-sum reimbursement limits fiscal policy’s room for manoeuvre. The MNB’s room for manoeuvre may be increased by giving a longer period of time to the State to fulfil the reimbursement obligation. 1.6. Against this backdrop, the draft law proposes to replace the existing recapitalisation and reimbursement regime by a new regime. In particular, the draft law provides that where the amount of equity falls below the subscribed capital at the end of the year under review, the difference will be reimbursed from the central budget directly to the retained earnings over a period of five years, with equal instalments being paid every year, within 30 days of the shareholder’s receipt of the notification of the report for the year under review . For this purpose, the ‘equity’ consists of the following elements: (1) subscribed capital; (2) retained earnings; (3) valuation reserve; (4) revaluation reserve due to exchange rate change; (5)

revaluation reserve of foreign currency securities; and (6) the result of the financial year under review . The ‘subscribed capital’ of the MNB is ten billion forints . If the amount of the equity exceeds the subscribed capital, all outstanding repayment obligations cease. If, within the five-year period, the central budget incurs a new reimbursement obligation, the new provisions of the draft law will apply to fulfilling this obligation.

2. General observation

2.1. The ECB would like to emphasise that, although Member States with a derogation, like Hungary, do not yet participate in the third stage of economic and monetary union, they have a legal duty to adapt the statutes of their national central banks (NCBs) to ensure compatibility with the TFEU and the Statute of the European System of Central Banks (ESCB) and of the ECB (hereinafter the ‘Statute of the ESCB’). Any legislative reform in non-participating Member States should aim to gradually achieve consistency with Eurosystem standards .

3. Specific observations

3.1. Article 130 TFEU and Article 7 of the Statute of the ESCB expressly prohibit the ECB, the NCBs, and the members of their decision-making bodies from seeking or taking instructions from Union institutions, bodies, offices or agencies, from any government of a Member State or from any other body, on the one hand, and prohibits those Union institutions, bodies, offices or agencies and any government of a Member State from seeking to influence the members of the decision-making bodies of the ECB and the NCBs in the performance of their tasks, on the other. The intention of these provisions is to shield the ESCB from all political pressure in order to enable it effectively to pursue the objectives ascribed to its tasks, through the independent exercise of the specific powers conferred on it for that purpose by primary law . National rules therefore cannot, without infringing Article 130 TFEU and Article 7 of the Statute of the ESCB, place the NCB concerned in a situation where it is potentially exposed to political pressure or which in any way undermines its ability to carry out independently a task falling within the scope of the ESCB . 3.2. In that regard, in order to ensure the independence of the ECB, the authors of the TFEU provided, inter alia, in the third sentence of Article 282(3) TFEU, that it is to be independent in the management of its finances. While it is true that neither the TFEU nor the Statute of the ESCB lay down an equivalent rule in respect of the NCBs, the fact remains that the basic tasks of the ESCB fall, through the ESCB, not only on the ECB but also on the NCBs . The ECB has consistently held that the overall independence of the NCB concerned would be jeopardised if it could not autonomously avail itself of sufficient financial resources to perform the ESCB-related tasks required of it under the Treaty and the Statute of the ESCB . In order to

have at its disposal the funds necessary to carry out its tasks within the ESCB, national rules may not place the NCB concerned in a situation where it is forced to seek the consent of those political authorities in order to obtain funding or recapitalisation . In order to participate in the implementation of the EU’s monetary policy, the establishment of reserves by the NCBs is essential . 3.3. The ECB has consistently held that, in particular, any situation should be avoided whereby for a prolonged period of time an NCB’s net equity is below the level of its statutory capital or is even negative, including where losses beyond the capital and the reserves are carried over. Therefore, the event of an NCB’s net equity becoming less than its statutory capital or even negative would require that the respective Member State provides the NCB with an appropriate amount of capital at least up to the level of the statutory capital within a reasonable period of time so as to comply with the principle of financial independence . It is unclear to what extent the draft law would ensure that the MNB’s equity would be restored up to the level of the MNB’s subscribed capital within a reasonable period of time, given that the amounts to be reimbursed from the central budget are to be reimbursed in equal instalments over a period of five years. Moreover, to the extent that the amount of the MNB’s equity falls below its subscribed capital over a period of two or more successive years, this could further exacerbate an inadequate or even negative capital position over a prolonged period of time in excess of five years. The ECB therefore suggests introducing a safeguard clause into the draft law to the effect that in the event of an inadequate or even negative capital position during a prolonged period, it should be ensured in the medium-term that the MNB's net equity capital does not remain below the subscribed capital for a prolonged period. 3.4. With regard to profit allocation, an NCB’s statutes may prescribe how its profits are to be allocated, as is proposed by the draft law. Profits may be distributed to the State budget only after any accumulated losses from previous years have been covered and financial provisions deemed necessary to safeguard 22 23 the real value of the NCB’s capital and assets have been created . As previously noted by the ECB , the NCB is best placed to assess independently what level of reserves is necessary to enable it to perform its tasks, and such a decision should not be the subject of a third party’s decision.

This opinion will be published on EUR-Lex.

Done at Frankfurt am Main, 10 November 2022. [signed]

The President of the ECB

Christine LAGARDE