Hungary: National Deposit Insurance Fund

In October 2008, the European Union (EU)’s Economic and Financial Council (ECOFIN) advised member states to increase their deposit-insurance coverage to EUR 50,000. Hungarian officials followed that guidance, increasing the maximum amount of deposit-insurance coverage to HUF 13 million, then equivalent to roughly EUR 50,000 (Government of Hungary 2008).

However, several countries adopted unlimited deposit guarantees, including Germany, Austria, Slovenia, and Slovakia (AFP 2008; Sydney Morning Herald 2008; Bajuk and Kranjec 2008). Given pressures from countries that had announced unlimited guarantees, Hungarian officials announced that the Hungarian government would also provide a temporary unlimited deposit guarantee. The unlimited guarantee was political, meaning it was not implemented through official legislation.

By mid-October 2008, Hungarian officials began discussions with the International Monetary Fund (IMF) on a Stand-By Arrangement (SBA) in response to capital flight and the rapid depreciation of the forint. In late October, the IMF, EU, and World Bank (WB) agreed to a USD 25.1 billion package, mostly to restore the central bank’s currency reserves (IMF 2008a; IMF 2011). Hungary also allocated USD 2.7 billion evenly between a recapitalization program^FNFor more information on Hungary’s 2008 Recapitalization Scheme, see Buchholtz 2021. Hungary also implemented a recapitalization scheme alongside a loan consolidation program in response to a recession in 1992; for more information, see Dreyer 2021. to bolster capital ratios at Hungarian banks and a voluntary program to guarantee^FNFor more information on Hungary’s 2008 Guarantee Scheme, see Buchholtz 2020. interbank loans issued by Hungarian banks and wholesale debt contracts with foreign counterparties (Gárdos 2008; IMF 2011; Buchholtz 2020; Buchholtz 2021). Both programs came into effect on December 23, 2008 (Petrovic and Tutsch 2009). Both were undersubscribed by eligible banks: only one bank requested capital, and none applied for the guarantee.

As a result of minimal participation in these two programs and lingering liquidity pressures, Hungary in 2009 allocated the IMF-EU funds to a new liquidity program (IMF 2011). The program, which was introduced on March 11, 2009, provided eligible institutions with loans (Petrovic and Tutsch 2009). The program would provide up to HUF 1.1 trillion (USD 4.9 billion) in foreign-exchange liquidity to domestic credit institutions and subsidiaries of foreign banks (Kroes 2010). By January 2010, the liquidity scheme had lent HUF 690 billion (USD 3 billion) to three domestic banks. For more, see Mott and Buchholtz 2022.

Articles 97 to 130 of Act CXII 1996 set out the Hungarian deposit-insurance system (Government of Hungary 2010a, Articles 97-130). Prior to October 15, 2008, Hungarian law protected depositors fully up to HUF 1 million, with partial coverage up to HUF 6 million (OECD 2008). Due to financial turbulence associated with the GFC, on October 8, 2008, Hungarian officials announced that they would increase the maximum amount insured by the guarantee and abolish the partial coverage of deposits (NDIF 2008a). On October 14, 2008, the Hungarian national assembly adopted an amendment, which increased the deposit-insurance coverage to HUF 13 million with no coinsurance (NDIF 2008b; Government of Hungary 2008). The amendment came into effect the following day.

On October 8, 2008, Hungary’s finance minister announced that all bank deposits in Hungary would receive full protection (NDIF 2008a). The finance minister said that the unlimited political guarantee would come into effect immediately and that the guarantee was not subject to parliamentary approval.

On March 11, 2009, EU authorities required EU member states to first increase their deposit-insurance coverage to EUR 50,000, and then to EUR 100,000 by December 31, 2010 (EP/EC 2009). To comply with this directive, Hungarian officials adopted an amendment to Act CXII of 1996, raising the deposit-insurance limit to the HUF equivalent of roughly EUR 50,000 (Government of Hungary 2009, Article 1). The change came into effect on June 30, 2009 (Government of Hungary 2009, Article 13). Later, to meet the EU’s requirements, Hungarian authorities raised the deposit-insurance coverage to the HUF equivalent of EUR 100,000, beginning on January 1, 2011 (Government of Hungary 2011, Article 101; NDIF 2012). To do so, the government adopted another amendment to Act CXII of 1996.

Pursuant to Act CXII of 1996, the NDIF was established to administer Hungary’s deposit-insurance system (Government of Hungary 2010a, Articles 97-8). The NDIF was a legal, state-owned public entity (Government of Hungary 2010a, Article 108). The NDIF also administered guarantees on deposits (Government of Hungary 2010a, Article 103; NDIF 2021).^FNThe state had guaranteed all deposits in full prior to 1993, when banks were government-owned under the Communist system. As such, the NDIF administered the increased deposit-insurance coverage as an extension of its statutory authority.

A managing director carried out the NDIF’s day-to-day operations and implemented the decisions of the NDIF’s board of directors (Government of Hungary 2010a, Article 113). The board of directors appointed and could dismiss the managing director (Government of Hungary 2010a, Article 112).

The NDIF cooperated with the Hungarian supervisor and the Hungarian central bank to collect data about credit institutions (Government of Hungary 2010a, Article 115). The NDIF could also request data from specific credit institutions in order to carry out its statutory functions.

The NDIF cooperated with the ministry of finance to implement the government’s unlimited political guarantee. The NDIF paid depositors in full and received reimbursement from the government (Government of Hungary 2010b; NDIF 2011).

Hungarian law also permitted a voluntary deposit-insurance system, subject to various restrictions (Government of Hungary 2010a, Articles 128-30). From the relevant documentation, it appears that there was no voluntary deposit-insurance system in Hungary.

A board of directors was responsible for governing the NDIF (Government of Hungary 2010a, Article 110). The board was composed of public and private individuals. Board members included the ministry of finance’s administrative undersecretary, the vice president of the Hungarian central bank, the chairman of the Hungarian financial supervisor, two representatives from credit institutions, and the managing director (NDIF 2009). A chairman and a vice president would be selected from these members, though the managing director was barred from holding either post. The board’s powers included the ability to decide the budget, determine the arrangements of payouts, and establish the NDIF’s fee policy, among others (Government of Hungary 2010a, Article 111). To fulfill these tasks, the NDIF could utilize the Hungarian supervisor’s services.

The NDIF was also subject to audits by the State Audit Office (Government of Hungary 2010a, Article 109).

On October 8, 2008, when Hungarian officials announced both changes to the deposit-insurance system and the temporary unlimited political guarantee, they stressed that the changes were adopted to further depositor trust and to compete with guarantees adopted in other countries (NDIF 2008a; Sydney Morning Herald 2008). The governor of Hungary’s central bank, who was present at this announcement, said that there was neither demand nor need for central-bank action. The preamble to the amendment increasing depositor coverage in 2008 further stated that such a change was meant to secure deposits and further trust in the banking system (Government of Hungary 2008).

By October 13, Hungarian officials were in negotiations with the IMF for an SBA. When they signed the SBA in November, they suggested that the government had taken supererogatory action by increasing depositor coverage and providing an unlimited deposit guarantee (IMF 2008b). Nevertheless, they said that they remained ready to take further action if necessary.

Following changes to EU law, Hungarian officials increased the maximum amount that the NDIF insured (Government of Hungary 2009, Article 1). This change, Hungarian officials noted, was a direct response to the 2009 EU directive on deposit insurance (Government of Hungary 2009, Article 14).

The NDIF later said that it had effectively communicated these program changes through printed and electronic materials and provided assistance to banks with respect to the changes (NDIF 2009; NDIF 2010).

Prior to the GFC, the NDIF insured HUF 1 million in full, and 90% of amounts above HUF 1 million, up to HUF 6 million (total of HUF 5.5 million) per depositor per institution (OECD 2008). Following the changes in October 2008, the NDIF guaranteed HUF 13 million per depositor per institution, eliminating the 10% co-insurance provision (Government of Hungary 2008, Article 1).

Directive 2009/14/EC required all EU member states to insure at least EUR 50,000 immediately, and to further increase their respective coverage to EUR 100,000 by December 31, 2010 (EP/EC 2009). To comply with this directive, Hungarian officials increased coverage to the HUF equivalent of EUR 50,000, starting on June 30, 2009 (Government of Hungary 2009, Article 1). Hungarian officials later increased depositor coverage to EUR 100,000 beginning January 1, 2011, to comply with the EU’s directive (Government of Hungary 2011, Article 101; NDIF 2012).

In addition to these legislative changes, the government also adopted a temporary unlimited political guarantee, beginning on October 8, 2008 (NDIF 2008a). In an International Association of Deposit Insurers (IADI) survey, Hungarian officials said that they had ended their unlimited deposit guarantee in an immediate fashion (IADI 2012). It is unclear when this occurred and whether it coincided with the changes to increase depositor coverage to EUR 100,000 on January 1, 2011.  

The NDIF covered 48% of bank deposits and 83% of deposits in credit and other cooperatives at the end of 2009, based on the HUF 13 million deposit-insurance cap (NDIF 2010).

Articles 118 to 122 set out the funding sources available to the NDIF (Government of Hungary 2010a, Articles 118-22). The NDIF was allowed to collect one-time membership fees, worth 0.5% of the institution’s capital base, along with annual fees. The NDIF’s annual fees were uniform. Annual fees, however, were capped at 0.2% of an institution’s insured deposits. The NDIF could also collect additional fees if institutions engaged in risky behavior, which could not exceed 0.3% of covered deposits. Hungarian law allowed the NDIF to invest its funds in government securities or to deposit its funds with the Hungarian central bank. The NDIF also received 80% of fines collected by the Hungarian supervisor.

The NDIF could borrow from the central bank or credit institutions in order to make depositor payouts. To repay these loans, the NDIF could impose extraordinary fees on member institutions, which could not exceed 0.2%. In the case of payouts, the NDIF received the right to the liquidated assets (Government of Hungary 2010a, Article 107).

At the beginning of 2008, the NDIF’s deposit insurance covered HUF 5.8 trillion in deposits (NDIF 2009). That rose 24% to HUF 7.2 trillion at the beginning of 2009 with the higher insurance limit (NDIF 2010). Figure 1 illustrates this growth in the NDIF’s insured deposits.

The NDIF had HUF 69 billion in liquid assets at the beginning of 2008 available to pay depositors in the event of a bankruptcy. That resulted in a fund coverage ratio of 1.2%, as the NDIF calculated it. The ratio remained above 1% from 2008 to 2010 (Figure 1).

Source: NDIF 2011.

All Hungarian-registered institutions were required to join the NDIF (Government of Hungary 2010a, Article 97). To apply for a banking license in Hungary, applicants needed to include a copy of their declaration of accession to the NDIF (Government of Hungary 2010a, Article 18). Foreign branches of Hungarian institutions were required to join the NDIF, though they could receive coverage from their host country as well. Foreign banks operating in Hungary but domiciled in the EU were not required to join the NDIF, as EU law required such banks to be covered in their home country. Foreign banks operating in Hungary but based outside of the EU could receive coverage from the NDIF unless prohibited by their home country. If a foreign-bank branch did not join the NDIF, the institution was required to inform customers about any depositor protections, undertakings by the parent company to compensate depositors, or agreements to ensure depositor compensation.

By year-end 2008, the NDIF insured 178 institutions (NDIF 2009). That number fell to 174 by year-end 2009 due to mergers (NDIF 2010). The NDIF insured 172 institutions at year-end 2010 after one failure and one merger (NDIF 2011). Figure 2 illustrates this trend over time. While most of the insured institutions by number were cooperatives, banks accounted for more than 80% of insured deposits because of their larger average size.

Source: NDIF 2011.

The NDIF covered all deposit accounts that were not excluded by Article 100 of Act CXII of 1996 (Government of Hungary 2010a, Article 99). Excluded deposits included those deposited by state-owned companies, financial institutions, and the central bank (Government of Hungary 2010a, Article 100). The NDIF covered foreign-currency deposits denominated in euros, in the legal tender of EU member states, or the legal tender of Organization for Economic Cooperation and Development (OECD) states.

When Hungary’s finance minister announced the unlimited political guarantee on October 8, 2008, he stated that the range of guaranteed deposits would not change, giving the appearance that the government planned to fully insure all NDIF-insured deposit types (NDIF 2008a).

Article 119 of Act CXII of 1996 permitted the NDIF to collect fees from member institutions (Government of Hungary 2010a, Article 119). The NDIF was allowed to charge institutions a one-time fee, calculated as 0.5% of the institution’s capital base (Government of Hungary 2010a, Article 120). The NDIF also levied annual uniform fees on member institutions, which considered an institution’s standing with respect to NDIF regulations and whether the institution was subject to other insurance arrangements (Government of Hungary 2010a, Article 121). The NDIF could also use credit ratings to determine fees. Fees were paid quarterly, and Hungarian law stipulated that fees could not exceed 0.2% on covered deposits.

If an institution engaged in risky activities, the NDIF could levy additional fees (Government of Hungary 2010a, Article 121). This additional fee could not exceed 0.3% of covered deposits. In such a case, the NDIF could request opinions from the Hungarian central bank and supervisor, and the credit institution could comment.

The premium rate was 0.009% at the beginning of 2008. At the end of 2008, the NDIF’s board more than doubled the premium rate to 0.02%, effective at the beginning of 2009. After doubling the compensation limit to EUR 100,000, the NDIF set the premium rate at 0.06% in 2011 (NDIF 2009; NDIF 2012).

In 2008, the NDIF collected HUF 1.0 billion in annual fees; it collected no one-time fees or risk-taking fees in that year (NDIF 2009). In 2009, the NDIF collected HUF 2.3 billion in annual fees and HUF 10 million in one-time admissions fees (NDIF 2010). In 2010, the NDIF collected HUF 2.4 billion in annual fees and HUF 228,000 from two members for risk-taking (NDIF 2011).

Article 119 of Act CXII of 1996 allowed the NDIF to borrow from either the central bank or credit institutions. To repay these loans, the NDIF could levy additional, special fees on NDIF-insured institutions (Government of Hungary 2010a, Article 121). Article 121 of Act CXII required that these fees be uniform, and that the extent and timing of the fees be in accordance with the loan-repayment conditions. The same article prohibited these fees from exceeding 0.2% of insured deposits.

Articles 105 and 106 of Act CXII of 1996 set out the NDIF’s exercise process. The NDIF could be triggered by the freezing of deposits, supervisory action, or the initiation of liquidation proceedings. The NDIF was required to publish news of the guarantee’s exercise, and the payout procedure, in two national dailies. Following Hungary’s 2009 amendment to the deposit-insurance system, the NDIF also had to post this information on its website (Government of Hungary 2009, Article 4). The NDIF would reach an agreement with the failed institution as to how to perform the tasks associated with payouts. The NDIF would then pay depositors up to the insured limit, with the NDIF gaining the right to reimbursement in liquidation (Government of Hungary 2010a, Articles 105, 107). Payments would be made via transfer to another credit institution, check, or direct payment. The NDIF would not pay compensation of HUF 500 or less.

Under the Hungarian government’s unlimited political guarantee, the ministry of finance entered into an agreement with the NDIF, according to which the NDIF would cover balances above the deposit-insurance limit, which would be reimbursed from the central budget (NDIF 2011; Government of Hungary 2010b).

Following Directive 2009/14/EC, the EU required all member states to reduce their payout times to 20 working days (EP/EC 2009). In line with this directive, in 2009, Hungarian authorities passed Act XLI of 2009, which reduced the payout time to a maximum of 20 working days, with the possibility of a 10-day extension (Government of Hungary 2009, Article 4). To meet this new timetable, Hungarian authorities required both the NDIF and credit institutions to maintain up-to-date information systems and to test their payout capacity (Government of Hungary 2009, Article 6). The NDIF reported that, to meet this requirement, it implemented a new high-capacity server and purchased new data software (NDIF 2010).

In 2010, AKH failed, and the NDIF was activated (NDIF 2011). The NDIF insured HUF 3.3 billion in deposits, which were owed to 1,190 depositors. The government’s political guarantee provided for compensation above the threshold (Government of Hungary 2010b). In 2011, JST failed, and the NDIF was again activated (NDIF 2012). In the case of JST, depositors were reimbursed the HUF equivalent of EUR 100,000, totaling HUF 9.1 billion owed to 5,329 depositors.

Following changes to the deposit-insurance system in light of Directive 2009/14/EC, the NDIF was required to regularly test its payout capacity, so as to ensure a maximum payout time of 20 days (Government of Hungary 2009, Articles 3, 6). This provision came into effect on January 1, 2010 (Government of Hungary 2009, Article 13).

According to Act XLI of 2009, which increased Hungary’s deposit insurance to the HUF equivalent of EUR 50,000, the Hungarian supervisor was allowed to monitor institutions’ compliance with deposit-insurance regulations, particularly with respect to data (Government of Hungary 2009, Article 6). Notably, institutions were required to maintain data to allow for the potential payout of deposits.

When the government legislated to increase the Hungarian deposit-insurance limit, the changes were adopted as permanent, first to HUF 13 million, and then to EUR 50,000 and EUR 100,000 (Government of Hungary 2008; Government of Hungary 2009, Article 1; Government of Hungary 2011, Article 101).

On October 8, 2008, when the Hungarian finance minister announced an unlimited deposit guarantee for deposits in Hungary, he did not say when that political guarantee would expire (NDIF 2008a). Even after the initial announcement, it was unclear when the unlimited guarantee would be removed (FSB 2010; IADI 2011). In an IADI survey, Hungarian officials said that they had ended their unlimited deposit guarantee in an immediate fashion. It is unclear when this occurred and whether it coincided with the changes to increase depositor coverage to EUR 100,000 on January 1, 2011.