Recommendation No. 11/2026 (September 28) of the Magyar Nemzeti Bank

on the assumption, measurement, management and control of credit risk

I. Purpose and Scope of the Recommendation

The purpose of this Recommendation is to formulate the expectations of the Magyar Nemzeti Bank (hereinafter: MNB) regarding the assumption, measurement, management, and control of credit risk by financial organizations, thereby increasing the predictability of legal application and facilitating the uniform application of relevant legislation.

By publishing this Recommendation, the MNB ensures compliance with:

1. The guidelines on loan origination and monitoring issued by the European Banking Authority (hereinafter: EBA) (EBA/GL/2020/06, hereinafter: EBA Guidelines);
2. The guidelines issued by the EBA regarding exceptional cases where institutions exceed the large exposure limits under Article 395(1) of Regulation (EU) No 575/2013;
3. The guidelines issued by the EBA regarding criteria for assessing the time provided for return to compliance and the necessary measures under Article 396(3) of Regulation (EU) No 575/2013 (EBA/GL/2021/09);
4. The guidelines issued by the EBA regarding diversification methods for proportionate retail exposures under Article 123(1) of Regulation (EU) No 575/2013 (EBA/GL/2026/02).

The addressees of this Recommendation are financial organizations with headquarters in Hungary, falling under the scope of the laws specified in Section 39(1) of the Act on the Magyar Nemzeti Bank (hereinafter: MNB Act), which assume credit risk, and branches located in Hungary of financial organizations with headquarters in countries outside the European Economic Area (third-country financial organizations) (hereinafter collectively: financial organization).

The regulatory framework related to the subject matter of this Recommendation is contained particularly, but not exclusively, in sectoral legislation. When formulating principles and expectations, this Recommendation does not refer comprehensively to legislative provisions; however, the addressees of this Recommendation remain obligated to comply with the relevant legislative requirements.

Given that appropriate internal regulation and practice regarding the assumption, measurement, management, and control of credit risk are important for all financial organizations, the procedures set forth in this Recommendation may be applied by all financial organizations, taking into account sectoral rules and activity-specific characteristics.

The provisions of this Recommendation are consistent with the European framework defining the operation of financial organizations.

This Recommendation does not provide guidance on data processing or data protection matters; it contains no expectations regarding the processing of personal data, and the requirements contained herein cannot be interpreted in any way as authorization for the processing of personal data. Data processing related to the fulfillment of supervisory expectations established in this Recommendation may only be carried out in compliance with the currently applicable data protection legislation.

II. Interpretative Provisions

1. Credit risk is the risk of losses affecting profitability and capital position resulting from the partial or total failure of contractual partners to fulfill their obligations (on or off-balance sheet) in accordance with contractual terms.

2. Within the collective concept of credit risk, several risk types can be distinguished, which appear differently or play a more prominent role depending on the type of financial organization. Some of these are highlighted in points 3–6 as examples:

   a) Investment risk: The risk associated with investments in certain securities (typically representing debt or equity interests) (payments are not made in accordance with the contract); b) Settlement risk (risk related to execution or fulfillment of orders): The risk that an order transaction has been concluded and must be fulfilled towards the counterparty, but the principal does not fulfill; c) Settlement risk: The risk that a settlement conducted through a payment and settlement system and securities settlement system does not occur as expected (despite the financial organization fulfilling its contractual obligation, it does not receive the consideration). Settlement risk may include credit risk (e.g., the contractual partner does not wish to fulfill) and liquidity risk (e.g., the central counterparty cannot fulfill); d) Securitization risk: The collective risk associated with securitization transactions and exposures arising from securitization transactions; e) Dilution risk: The risk that the recoverable amount of the claim may decrease through objections and counterclaims validly asserted by the debtor; f) Lending risk: Credit risk associated with certain financial and supplementary financial services or investment services (e.g., granting loans and cash advances, financial leasing, providing guarantees and sureties, and other banking obligations, claim purchase activities); g) Credit risk mitigation (collateral) risk: Associated with transaction risk, representing the risk that the financial organization suffers a loss during the enforcement of credit risk mitigation instruments (e.g., enforcement of accepted collateral such as margin or pledged assets), including the risk of the insurer's non-payment; h) Issuer risk: Credit risk against issuers of debt securities and securities representing ownership interests, including the risk that the value of the security decreases due to the deterioration of the issuer's credit quality; i) Collective debtor risk: A subtype of country risk, representing the risk that an event affecting the entire country leads to the non-fulfillment of a large number of debtors; j) Concentration risk: The risk of loss attributable to the fact that the financial organization has exposures to a relatively small group of clients, partners, or issuers, and which arises due to a common cause (e.g., a significant portion of assets and off-balance sheet items is concentrated in one sector or geographic region, or exists in the same currency, and risk mitigation instruments for credit risk are provided by a small number of issuers or are of limited types); k) Custodian risk: The risk that the financial organization suffers a loss from the placement of assets in custody due to the bankruptcy, operation, or negligent handling of securities by the custodian or subcontractor; l) Delivery risk: The risk that the seller of the asset (goods, securities, foreign exchange,
   derivatives, etc.) delivers the asset but does not receive the consideration, or that the buyer of the asset pays but does not receive the delivery of the asset; m) Country risk: The risk of loss generated by an event occurring in the country, controllable by the country (government) but not by the lender or investor (economic, political, etc.); n) Counterparty risk: Credit risk against professional money and capital market participants (financial institutions, investment firms, insurers, investment fund managers); o) Residual risk: The risk that the recognized credit risk mitigation techniques applied by the financial organization prove less effective than expected (e.g., due to significant depreciation of collateral or limited enforceability); p) Sovereign risk: A subtype of country risk, representing the risk arising from the insolvency of a country to which the financial organization has exposure; q) Pre-settlement risk: The risk arising from the future fulfillment of sales contracts, specifically that in the event of the counterparty's non-fulfillment, the contract must be re-contracted at the current market price. Its magnitude is the sum of the positive replacement cost (representing the market value of the contract) and the potential future credit risk arising from future shifts in market prices; r) Transfer risk: A subtype of country risk, representing the risk that the contractual obligor (borrower, securities buyer, etc.) cannot meet its payment obligations in the currency specified in the contract, while possessing the necessary amount in the local currency; s) Client risk: Credit risk against clients using services provided by the financial organization; t) Asset manager risk: The risk that the financial organization suffers a loss from entrusting assets to asset management due to the bankruptcy, operation, or negligent asset management of the asset manager.

3. Credit institutions and financial enterprises assume credit risk particularly in the following cases:
   a) When providing credit-type services – including granting loans, financial leasing, providing guarantees, discounting bills, opening letters of credit, etc. – towards clients or partners (client risk, lending risk, counterparty risk); b) In the case of spot foreign exchange transactions (settlement risk); c) In securities transactions, including repo and lending transactions (issuer risk, counterparty risk, collateral risk, delivery risk, custodian risk); d) In commercial financing transactions and money market placements (counterparty risk); e) When trading derivative products (pre-settlement risk); f) When accepting collateral or guarantees (collateral risk, residual risk); g) When providing investment services [settlement risk (risk related to execution or fulfillment of orders)].

4. Investment firms assume credit risk particularly in the following cases:
   a) When providing investment services towards clients [settlement risk (risk related to execution or fulfillment of orders), settlement and delivery risk, pre-settlement risk]; b) Towards partners during money and capital market transactions, in the trading of derivative products, in spot transactions, and in part of trade financing transactions (counterparty risk, pre-settlement risk, settlement or delivery risk); c) When accepting deferred financial fulfillment or granting investment loans (collateral risk, issuer risk, client risk); d) In securities transactions (issuer risk, custodian risk); e) In repo and securities lending transactions (counterparty risk, collateral risk).

5. Insurers monitor their credit risks particularly in the following cases:
   a) When granting advances or deferred payment fulfillment (counterparty risk); b) When investing in assets used to cover insurance technical reserves (cases of non-fulfillment and downgrading, counterparty risk); c) When entrusting assets used to cover insurance technical reserves to asset management (counterparty risk); d) When concluding reinsurance contracts (counterparty risk).

6. Pension funds monitor their credit risks particularly in the following cases:
   a) When investing pension fund assets in securities (issuer risk, custodian risk); b) When managing pension fund assets towards partners (counterparty risk, pre-settlement risk, settlement risk); c) When entrusting pension fund assets to asset management (asset manager risk); d) During securities lending and concluding repo transactions (collateral risk).

7. For the purposes of this Recommendation:

   a) Sectoral legislation:
   aa) Laws specified in Section 39 of the MNB Act, ab) Act CLXII of 2009 on credit granted to consumers, ac) Regulation No. 32/2014. (IX. 10.) MNB on the regulation of income-related repayment installments and loan-to-value ratios [hereinafter: Regulation No. 32/2014. (IX. 10.) MNB], ad) Government Decree No. 78/2014. (III. 14.) on investment and borrowing rules for collective investment schemes, ae) Government Decree No. 79/2014. (III. 14.) on organizational, conflict of interest, business conduct, and risk management requirements for UCITS management companies, af) Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and amending Regulation (EU) No 648/2012 (hereinafter: CRR), ag) Regulation (EU) No 2017/1131 of the European Parliament and of the Council of 14 June 2017 on money market funds, ah) Regulation (EU) No 2019/2033 of the European Parliament and of the Council of 27 November 2019 on prudential requirements for investment firms and amending Regulations (EU) No 1093/2010, (EU) No 575/2013, (EU) No 600/2014 and (EU) No 806/2014 (hereinafter: IFR), ai) Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), aj) Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organizational requirements and operating conditions for investment firms and defined expressions for the purposes of that Directive, ak) Regulation (EU) No 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitization and creating a specific framework for simple, transparent and standardized securitization, amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EU and Regulations (EU) No 1060/2009 and (EU) No 648/2012, al) Implementing technical standards issued based on the authorizations contained in the CRR, am) Implementing technical standards issued in accordance with Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (hereinafter: Solvency II), an) Implementing technical standards issued based on the authorizations contained in the IFR;

   b) Acceptable retail exposure: Exposure meeting the requirements defined in Article 123(1)(a), (b), and (d) of the CRR; c) Collateral value: Concept defined in point 1(d) of Recommendation No. 18/2022. (XII. 1.) MNB on the management of risks related to real estate of financial organizations [hereinafter: Recommendation No. 18/2022. (XII. 1.) MNB]; d) Credit granted to consumers: Concept defined in Act CLXII of 2009 on credit granted to consumers; e) Ship financing: Financing of all activities related to the construction, acquisition, and operation of ships and facilities related to shipping, when the repayment of the loan depends primarily on the cash flow generated from the operation or sale of the aforementioned ships or facilities related to shipping, or when the collateral is built around ships or maritime facilities, shipbuilding, or various lease agreements; f) Loan collateral value: Concept defined in Article 4(1)(74) of the CRR; g) Expected credit loss: Concept defined as such in Appendix A of the IFRS 9 standard included in the Annex to Commission Regulation (EU) 2023/1803 of 13 August 2023 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council; h) Financing of income-generating real estate: Concept defined in point 12(b) of Recommendation No. 6/2026. (IV. 23.) MNB on the definition of special lending exposures [hereinafter: Recommendation No. 6/2026. (IV. 23.) MNB]; i) Liquidation (run-off, liquidation) value: Concept defined in point 1(g) of Recommendation No. 18/2022. (XII. 1.) MNB; j) Large acceptable retail exposure: Acceptable retail exposure is considered a large acceptable retail exposure if the ratio of its exposure value, or depending on the case, the aggregate value of acceptable retail exposure values towards the same client or group of connected clients to the total exposure value of acceptable retail exposures of the financial organization subject to the CRR exceeds the threshold of 0.2%; k) Market value: Concept defined in Article 4(1)(76) of the CRR; l) Project financing: Concept defined in point 12(a) of Recommendation No. 6/2026. (IV. 23.) MNB; m) Expected credit loss: Concept defined as such in Appendix A of the IFRS 9 standard included in the Annex to Commission Regulation (EU) 2023/1803 of 13 August 2023 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council; n) Financial organization applying an expected credit loss-based impairment model: A financial organization preparing its annual financial statements in accordance with International Financial Reporting Standards (IFRS) based on the provisions of Act C of 2000 on Accounting (hereinafter: Accounting Act); a financial enterprise and credit institution preparing its annual financial statements in accordance with Government Decree
   No. 250/2000. (XII. 24.) on the peculiarities of the obligation to prepare annual financial statements and keep books for credit institutions and financial enterprises; and an investment firm preparing its annual financial statements in accordance with Government Decree No. 251/2000. (XII. 24.) on the peculiarities of the obligation to prepare annual financial statements and keep books for investment firms.

III. General Expectations

8. The financial organization applies the supervisory expectations set forth in this Recommendation in accordance with the nature of the business model used, as well as the characteristics of the services provided by the financial organization or group – including characteristics resulting from the organizational form – its extent and complexity, its risk profile, and the magnitude of its credit risk exposure. While credit risk arises in all financial organizations, following the provisions of this Recommendation in a proportional manner is relevant for all financial organizations; however, the broadest application is expected from financial organizations that assume credit risk as a business activity (credit institutions, financial enterprises equivalent to credit institutions under prudential regulation, financial enterprises, investment firms engaged in proprietary trading).

9. It is expected that the financial organization manages its credit risk in accordance with the nature of the business model used, as well as the characteristics of the services provided by the financial organization or group – including characteristics resulting from the organizational form – its extent and complexity, its risk profile, and the magnitude of its credit risk exposure, within the framework of the general principles established in Recommendation No. 12/2022. (VIII. 11.) MNB on the establishment and operation of internal defense lines and the governance and control functions of financial organizations [hereinafter: Recommendation No. 12/2022. (VIII. 11.) MNB], regarding risk management and risk control.

The broadest application of this Recommendation is expected regarding credit and cash lending to the business sector, which does not exclude the possibility that the financial organization follows different practices regarding other credit risk exposures (e.g., retail lending).

10. Risk assumption is a characteristic of the participants in the financial intermediary system. Based on this – similar to other risk types – the purpose of legislative requirements and this Recommendation is not to encourage the elimination of credit risk, but to keep it within appropriate frameworks, and to appropriately identify, measure, and manage the credit risk exposure of the financial organization. While capital requirement calculations and large exposure limits establish a quantitative regulatory framework, this Recommendation contains qualitative expectations regarding the management of credit risk.

11. The MNB expects financial organizations subject to consolidated supervision to take into account group-level risk management requirements regarding credit risk management activities, within the general risk management requirements established by legislation.

12. Regarding the level of application and the scope of consolidation, the MNB expects the follow-up of the provisions of this Recommendation according to sectoral legislation. Accordingly, it is necessary to ensure the individual and group-level assumption, measurement, management, and control of credit risk.

13. In this Recommendation, regarding expected credit loss-based impairment accounting, the MNB expresses expectations concerning its connection to credit risk management.

4 Recommendation No. 12/2022. (VIII. 11.) MNB, Section IV. 10.
5 Recommendation No. 12/2022. (VIII. 11.) MNB, Section V. 4.

considering the expectations formulated only relevant for financial institutions applying the expected credit loss-based impairment model, within the framework of the relevant accounting regulations.

14. Although the specificities of credit risk justify its separate management within general risk management activities for certain types of financial institutions (e.g., credit institutions), due to interconnections with other risk types, it is necessary in their case to interpret the expectations regarding credit risk management within the general risk management requirements established by laws and supervisory guidelines. This applies, among others, to the applicable principles, risk management processes, and organizational solutions.

15. If a financial institution manages its credit risk or certain elements thereof within the framework of managing other risk types, the MNB expects this to be documented in writing and traceable in other relevant internal regulations.

16. The MNB expects that if a financial institution implements any element of credit risk assumption, measurement, management, or control with the involvement of an external service provider, it should also consider the general expectations regarding outsourcing set out in points 180–186 of MNB Recommendation No. 12/2022. (VIII. 11.). For financial institutions falling within the addressee scope of MNB Recommendation No. 7/2020. (VI. 3.) [hereinafter: MNB Recommendation No. 7/2020. (VI. 3.)] regarding the use of external service providers, it is further expected that they follow the expectations detailed in MNB Recommendation No. 7/2020. (VI. 3.) concerning the use of external service providers.

17. It is expected that financial institutions handle the representatives ensuring compliance with regulations on the prevention and combating of money laundering and terrorist financing, their tasks and responsibilities, and the related internal procedures and control mechanisms in accordance with MNB Recommendation No. 1/2026. (II. 24.) [at the time of issuance of this recommendation].

18. It is expected that financial institutions act in accordance with MNB Recommendation No. 2/2026. (III. 6.) [hereinafter: MNB Recommendation No. 2/2026. (III. 6.)] on the management of environmental, social, and governance risks and the implementation of environmental sustainability considerations in credit institution activities, as well as MNB Recommendation No. 7/2025. (VI. 23.) on the application of a minimum questionnaire for assessing environmental, social, and corporate governance information, at the time of issuance of this recommendation.

IV. The Role of the Governing Body with Governing Powers and the Executive Management

19. It is expected that the governing body with governing powers of the financial institution (generally the board of directors)
    a) fosters a strong credit risk culture throughout the financial institution, b) always understands the credit risk exposure of the entire organization, c) approves the credit risk tolerance level (risk appetite), credit risk strategy, policy, and internal regulations of the financial institution, as well as their amendments, d) is responsible for ensuring that the executive management of the financial institution takes the necessary steps for the practical implementation of strategies and policies regarding credit risk, the development of risk monitoring and control, and the alignment of credit risk management activities with the expected credit loss-based impairment model, e) ensures the independence of the area performing the risk control function in accordance with point V.2 of MNB Recommendation No. 12/2022. (VIII. 11.), f) exercises effective supervision over the credit risk management of the financial institution in accordance with relevant legal requirements, within the framework of which it regularly reviews reports, statements, internal auditor, and auditor observations regarding the implementation of the credit risk strategy and policy, the development of the financial institution's credit risk exposure, credit risk mitigation instruments, the execution of executive management's credit risk management tasks, the adequacy of the credit risk measurement system – including, if relevant, alignment with the application of the expected credit loss-based impairment model – the development of recognized impairment and provisions made, and stress test results – the MNB considers at least semi-annual frequency good practice in this regard –, g) initiates, if necessary, the amendment of the credit risk policy and internal regulations, procedures and methods related to the assumption, measurement, management, and control of credit risk, and credit risk plans.

20. The task of executive management regarding credit risk is the practical implementation of the credit risk strategy and policy, and the provision of personnel, material, and operational conditions for implementation. To this end, it is recommended that executive management establish and operate a credit risk management and control system appropriate to the specificities of the financial institution, covering all activities and all types and aspects of credit risk, conduct management and control activities, and regularly and comprehensively report to the governing body with governing powers and the supervisory body with supervisory powers on the realization of the credit risk strategy and policy 6.

21. In the case of financial groups, the tasks defined in points 19 and 20 are generally performed by the governing body with governing powers and the executive management of the financial institution subject to consolidated supervision. In case of matrix management, different solutions may be implemented. However, it is expected that a high level of understanding of group-level credit risk exposures and group-level credit risk management be ensured, taking into account market and regulatory requirements.

V. Credit Risk Culture

22. It is expected that the credit risk culture of the financial institution fits into the risk culture covering the entire financial institution/group and all its risks.

23. The primary tools for creating a strong credit risk culture are internal policies, regulations, guidelines, communication, and training for employees regarding their role and responsibility in risk assumption, risk management, and risk control, affecting the activities of the financial institution/group, applicable regulatory requirements, the credit risk strategy and policy of the financial institution/group, and related procedures and processes.

24. Based on the MNB's expectations, the financial institution applies the strong credit risk culture equally in the assumption and management of credit risk, as well as in the identification, assessment, measurement, continuous monitoring, and control of credit risk. In this context, the financial institution ensures, among others,
    a) that credit risk exposure is assumed only towards clients, partners, or issuers that, according to the financial institution's best knowledge at the time of the decision to assume credit risk, are expected to be able to fulfill the contractual terms, b) that appropriate credit risk mitigation techniques are applied regarding the exposure, c) that the impact of the exposure on the financial institution's capital position and income is considered in the decision to assume credit risk, d) money laundering and terrorist financing risks, as well as environmental, social, and governance risks (ESG risks), are handled in accordance with points 17 and 18.

25. It is expected that employees involved in the assumption, management, and control of credit risk know the credit risk culture of the financial institution, are accountable for following it, and that appropriate procedures and processes are available to check the proper functioning of the credit risk culture and to take necessary measures to eliminate any identified deficiencies.

VI. Principles of Credit Risk Policy and Internal Regulations

26. It is expected that the financial institution/group determines its credit risk appetite and strategy in line with its general business strategy and overall risk management objectives.

27. The MNB expects that the financial institution/group has a written credit risk policy consistent with its strategic objectives, overall risk management, and policies regarding other risks (operational risk, market risks, etc.). It is expected that the financial institution ensures the integration of ESG risks into the credit risk policy and procedures in accordance with point VI.2.5 of MNB Recommendation No. 2/2026. (III. 6.), and as a result, ensures that the credit policy reflecting ESG risks is also effective at lower levels.

28. It is expected that the credit risk policy of the financial institution/group is consistent with the magnitude of the financial institution/group's credit risk exposure, the risk appetite, risk-taking propensity, risk profile, and business model of the entire financial institution/group, including the credit risk appetite and strategy, and provides a suitable basis for the application of the expected credit loss-based impairment model and the calculation of capital requirements.

29. The MNB expects that the financial institution/group reviews its credit risk policy at regular intervals – at least annually – and immediately after significant changes occur.

30. The credit risk policy of the financial institution/group may also be formulated as part of its strategic documents or general risk management policy, or other related internal regulations (e.g., in the case of pension funds, investment policy or asset management and valuation regulations).

31. The MNB recommends that, considering the proportionality expectations defined in point 8, the credit risk policy covers at least the following:
    a) the objectives and reasons for credit risk assumption, b) the quantitative and qualitative objectives of credit risk exposure – determined in line with the financial institution's business model and the complexity of its activities – broken down with appropriate depth into various aspects of credit risk appetite (e.g., customer segments, currencies), and into organizational units and business areas involved in credit risk assumption by the financial institution, c) the identification of activities, transactions, operations, and products that pose credit risk, d) the determination of segments, clients, partners, and issuers towards whom the financial institution assumes credit risk, e) the conditions for credit risk assumption in the breakdown according to points c) and d) (e.g., maximum maturity, maximum exposure value, acceptable collateral, etc.), f) the determination of clients and activities towards which credit risk assumption is limited (e.g., risk assumption towards related parties) or requires special or increased attention and handling (e.g., project finance), g) the determination of policy for products where credit risk assumption is primarily based on credit risk mitigation instruments (e.g., loans secured by securities, credit insurance), h) the quantitative and qualitative objectives for concentration risks (e.g., country risk, sector risks, risks towards a single client, risks related to a single collateral, aggregate large exposures), and procedures to be followed in case of exceeding limits regarding concentration risks, taking into account point k) of point 52 and expectations set out in points 241–245, i) the main requirements for the introduction of new products carrying credit risk, j) principles and methods for handling non-performing exposures and restructured claims, k) the interconnections of credit risk with other risks of the financial institution (operational risk, market risk, etc.), their management, and the application of the expected credit loss-based impairment model.

32. The MNB expects that the financial institution's credit risk strategy and policy are determined taking into account general economic and market conditions, the dangers and challenges arising from them, as well as the level of customers' financial culture. Furthermore, it is expected that the financial institution's credit risk strategy and policy encourage a proactive approach to the continuous monitoring of credit quality development, early identification of credit quality deterioration, and comprehensive, portfolio-level management of credit quality and related risks.

33. The MNB considers it good practice if, when applying point 31 e), the financial institution determines the conditions for credit risk assumption regarding loans to consumers, corporate loans, financing of income-generating real estate, and ship financing, taking into account the criteria defined in Annex 1 of the EBA guidelines, using the indicators given as examples in Annex 3 of the EBA guidelines.

34. The drive for market expansion or profitability (including the search for higher yields in a low-interest-rate environment) must not result in ignoring the restrictive elements of legal requirements (prudential purposes and responsible lending activities). The financial institution's credit risk policy encourages responsible lending activities and minimizes the risk of internal and external fraud associated with credit risk assumption.

35. It is undesirable to define a credit risk policy under which the financial institution consciously relaxes lending conditions (e.g., waiving the request for certain documents, determining lower collateral requirements) to gain a competitive market advantage.

36. In the case of a financial group, it is expected that a group-level credit risk strategy and policy are also developed.

37. It is expected that the financial institution specifies the following in appropriate management-approved and regularly reviewed internal regulations – the MNB considers at least annual frequency evaluation good practice – for all its credit risk exposures:
    a) processes, procedures, tasks, organizational systems, responsibilities, decision-making, and control authorities related to credit risk assumption and management, b) internal systems, processes, procedures, and methods used for the identification, assessment, measurement, continuous monitoring, and control of credit risk (including early warning systems enabling the identification of potentially non-performing exposures and claim rating), including provisions for their regular review, c) the tasks of organizational units regarding the identification, assessment, measurement, continuous monitoring of credit risk, the operation of the risk control function, and the accounting of expected credit losses, d) the framework for cooperation between organizational units and functions regarding the identification, assessment, measurement, continuous monitoring of credit risk, the operation of the risk control function, and the accounting of expected credit losses, e) principles regarding the use of external service providers for the identification, assessment, measurement, continuous monitoring of credit risk, and the operation of the risk control function, f) principles regarding relationships with other partners involved in credit risk assumption and management (e.g., reinsurers, asset managers), g) professional and qualification requirements, conflict of interest, and remuneration regulations for personnel performing credit risk assumption and management, credit risk monitoring activities, and control tasks, h) instruments for maintaining and reducing the expected level of credit risk, and the procedure for determining and approving these instruments, i) if the financial institution uses models in the assumption, management, and control of credit risk, the determination of expected credit losses, and internal capital allocation, the system of conditions for model usage, model description, assumptions, methods and conditions selected for (stress) testing, and applied scenarios, j) record-keeping and documentation requirements related to credit risk assumption, management, and control, k) the reporting system related to credit risk assumption, management, and control activities (who prepares the reports, how frequently, formal and content requirements, reporting paths, etc.), l) the interconnections between credit risk management and the accounting of expected credit losses (inputs, deviations, etc.), m) the disclosure practice related to credit risk assumption (the purpose, depth, manner, and frequency of disclosure), n) internal audit tasks, procedures, and systems related to credit risk assumption, management, and risk control (process-embedded, management control, and internal audit).

VII. Organizational Frameworks

38. There are numerous accepted practices for the organizational solution of credit risk assumption and management, as well as the identification, assessment, measurement, continuous monitoring, and control of credit risk, taking into account the specificities of the financial institution. However, it is expected that the applied organizational frameworks are reviewed at regular intervals – the MNB considers at least annual frequency evaluation good practice.

39. It is further expected that it is clear the tasks, authorities, and responsibilities of persons, organizational units, and bodies participating in various elements of the credit risk management process – determination and implementation of credit risk appetite, strategy, and policy, risk assumption, measurement, reporting, risk monitoring, and control – as well as their cooperation framework, taking into account their interconnections with credit risk management, the calculation of capital requirements, and the requirements imposed by the expected credit loss-based impairment model.

40. The independence of credit risk measurement, continuous monitoring, control, and control functions from the risk-bearing areas must be ensured.

41. The MNB expects that financial institutions establish and operate appropriate systems, procedures, and processes for coordination between organizational units and personnel performing tasks related to credit risk assumption, measurement, and risk control, and those performing tasks related to information-using accounting, and ensure an overview of all risks affecting the financial institution's credit risk exposure, with appropriate documentation.

42. The MNB expects that financial institutions have adequate personnel and material resources – including IT systems – for the operation of credit risk assumption, management, measurement, and credit risk control functions, the calculation of capital requirements, and the fulfillment of requirements imposed by accounting regulations and the accounting area regarding credit risk management.

43. It is expected that employees involved in the assumption and management of credit risk, as well as the identification, assessment, measurement, continuous monitoring, and control of credit risk, possess appropriate expertise, skills, abilities, and competencies. It is further expected that financial institutions ensure the continuous availability of expertise, skills, abilities, and competencies through regular training, so that employees know the activities of the financial institution/group, applicable regulatory requirements, the credit risk policy of the financial institution, and related procedures and processes.

44. It is expected that financial institutions also consider the expectations set out in point V.2 of MNB Recommendation No. 12/2022. (VIII. 11.) regarding the management and control of credit risk.

45. It is recommended that the risk control function perform the tasks specified in point 124 of MNB Recommendation No. 12/2022. (VIII. 11.) regarding credit risk.

46. In the case of a financial group, it is expected that credit risk is managed, measured, and controlled at the group level, for which various organizational solutions and division of labor are also accepted.

47. In the case of a financial institution with a network, the tasks of the center and network units regarding credit risk management tasks differ. In this regard, the basic supervisory expectation is that the financial institution actively manages the operation of the network, has appropriate information about the network's operation, and ensures consistency between various network units and the center in a manner that complies with the credit risk management strategy and policy.

48. The MNB draws attention to the fact that in connection with the assumption and management of credit risk, as well as the identification, assessment, measurement, continuous monitoring, and control of credit risk, particular importance must be attached to compliance with relevant legal requirements and the

6 Regarding general expectations concerning communication with the governing body with governing powers and the supervisory body with supervisory powers, see MNB Recommendation No. 12/2022. (VIII. 11.), particularly point IV.4.

7. Appropriate remuneration practices established in the MNB's remuneration recommendations, ensuring that the remuneration policy aligns with the financial institution's credit risk appetite, strategy, and policy, its credit risk culture and values, the long-term interests of the financial institution, and measures taken to avoid conflicts of interest. It is expected that variable remuneration components for employees involved in credit risk assumption take credit quality criteria into account. It is necessary to emphasize the principle that if performance-based remuneration is applied to personnel in control functions, their remuneration structure must not jeopardize their independence or create conflicts with their supervisory and advisory roles.

VIII. Tools for Maintaining Credit Risk at the Expected Level

49. The MNB expects that financial institutions apply an appropriate system of tools to maintain their credit risk at the expected level defined in their credit risk policy.

50. The most important tools for reducing credit risk are the establishment and operation of an appropriate limit system and the application of credit risk mitigation techniques.

VIII.1. Limit System

51. In accordance with the MNB's expectations, financial institutions develop their limit systems within the frameworks defined by legal regulations, taking into account their specific characteristics (volume of activities, nature, risk appetite, willingness to assume risk, credit risk policy, risk profile).

52. The credit risk limit system established, approved, adequately documented, and regularly reviewed by the financial institution (where the MNB considers annual evaluation at least as good practice) extends to:
    a) the main principles concerning the determination of limits, b) the types of limits and the methods for determining, approving, and reviewing them, c) limit types matching the types and sizes of credit risks assumed by the financial institution (product, country, sector, counterparty, and customer limits), d) threshold values for each limit, e) the level of approval for each limit, the division of powers, and the responsibility system, f) procedures and processes related to the utilization of each limit, g) the conditions for limit management if multiple organizational units can conclude transactions against limits, h) possibilities for reallocating limits and sub-limits, and related documentation requirements, i) the recording of limits, j) the procedure and process for monitoring limits, including the division of powers and responsibility system, k) procedures and sanctions to be followed in case of limit breaches, l) the connection points of the limit system to the financial institution's recovery plan.

53. It is expected that financial institutions establish and operate a limit system that defines limits lower than or at most equal to the possibilities provided by legal regulations, and which in all circumstances (e.g., due to exchange rate movements changing the basis for limit amount ratios) ensures compliance with legal requirements.

54. In the case of a financial group, it is expected that group-level credit risk limits are also established. It is advisable if the limit systems applied individually by financial institutions belonging to the group are consistent with group-level limits; one element of this expectation is that limits applied individually by group members are determined through a predefined allocation mechanism. It is important that group members understand the structure of the entire group's limit system.

55. In establishing the limit system applied by the financial institution and determining threshold values, both objective and subjective considerations may be taken into account. However, it is advisable to strive for the predominance of the former.

56. It is expected that customer and counterparty limits within credit risk limits are organically linked to the financial institution's customer and counterparty rating system.

57. Better customer and counterparty ratings generally allow for proportionally higher limits. However, the mechanical application of this principle should be avoided, as the size of limits may be influenced by other objective and subjective factors (e.g., customer type, type and size of available collateral).

58. It is recommended that customer and counterparty limits be divided into time periods, expressing the financial institution's different willingness to assume risk over different time horizons.

59. It is suggested that when determining the threshold value of customer and counterparty limits, taking into account relevant legal regulations, information available from the Central Credit Information System (hereinafter: KHR) (financing provided by other financial institutions, defaults, etc.) should also be taken into account.

60. Since certain limits defined by the financial institution fix the rationally assumable risk value, aiming to keep risk assumption within predefined limits, striving for their maximum utilization cannot be their sole objective.

VIII.2. Credit Risk Mitigation Techniques

61. The MNB expects that financial institutions prudently apply various credit risk mitigation techniques (collateral, securitization, insurance, etc.) taking into account their specific characteristics (volume of activities, nature, risk appetite, willingness to assume risk, credit risk policy, risk profile), as well as the magnitude, nature, and complexity of assumed risks and the various credit risk mitigation techniques.

62. It is expected that financial institutions define the credit risk mitigation techniques they may apply and the acceptable types of collateral within internal regulations approved by the governing body with management authority, reviewed at least annually, and consistent with the financial institution's credit risk policy.

VIII.2.1. General Expectations Related to Collateral Valuation

63. Legal-level requirements regarding collateral valuation are established in the MNB Regulation No. 40/2016. (X. 11.) on Customer and Counterparty Rating and Prudential Requirements for Collateral Valuation [hereinafter: MNB Regulation No. 40/2016. (X. 11.)], in which compliance with defined requirements (particularly regarding internal regulation requirements for collateral valuation) is considered good practice by the MNB for all financial institutions assuming credit risk not falling under its scope, taking into account the proportionality expectation defined in point 8.

64. The MNB draws attention to the fact that collateral (movable and immovable property, financial instruments), as well as legal provisions and contracts, considered as collateral during risk assumption must comply with CRR requirements only if the financial institution intends to use them as a capital requirement reduction item. Collateral may also be required during risk assumption that does not meet the CRR requirements for credit risk collateral, as it may have a risk-reducing effect even if its application does not reduce capital requirements.

65. The MNB further draws attention to the fact that the application of credit risk mitigation techniques may create new credit risks and new risk types (e.g., legal risk, operational risk), which must be taken into account when considering the risk-reducing effect of credit risk. Thus, specific examination is required, for example, of the currency alignment between the expected cash inflow from collateral enforcement and the credit risk assumption amount, the market liquidity of provided collateral, and the alignment between securities pledged as margin and the yield conditions of the credit risk assumption.

66. Real estate collateral has specific characteristics within collateral; regarding their management, within the general expectations of points VIII.2.2.–VIII.2.4., the MNB expects compliance with the provisions of MNB Recommendation No. 18/2022. (XII. 1.).

VIII.2.2. Expectations Regarding Valuations and Valuers

67. Regarding collateral valuation, the MNB expects financial institutions to ensure independence and high professional standards.

68. In relation to independence, it is expected that financial institutions take appropriate steps to ensure that:
    a) the valuer or their close relative does not participate in the risk assumption process affecting the collateral (decision preparation, decision on risk assumption, administration), b) all cases endangering the objectivity of the valuation are filtered out and excluded (the valuer or close relative is interested in the customer or counterparty rating result, the owner, seller, or buyer of the valued collateral, has an economic interest in it, etc.).

69. The MNB expects that financial institutions exercise due diligence in selecting persons entrusted with collateral valuation (internal employees of the financial institution or external persons with a contractual relationship with the financial institution) and ensures that valuations performed by persons who:
    a) have appropriate qualifications and professional credentials to perform the task of valuing the specific collateral type at a high professional standard, b) meet the prescribed legal requirements and the expected valuation standards for the specific collateral type, c) possess appropriate expertise, experience, skills, and judgment during the valuation, acting professionally and impartially, free from unauthorized influence, bias, or conflict of interest, are accepted during credit risk assumption, management, monitoring, and control.

70. The financial institution may also entrust external valuers with collateral valuation (determining the value of collateral and examining its enforceability).

71. The MNB considers it good practice if the financial institution has a pre-compiled and continuously updated list, approved at the decision-making level according to internal regulations, of persons eligible for valuing specific collateral types.

72. The MNB expects that financial institutions pay attention to the concentration of valuations and the potential risks arising from it, and apply appropriate tools (e.g., rotation of valuers, limitation of consecutive valuations by the same valuer for the same collateral) to reduce concentration related to collateral valuation.

73. In the MNB's opinion, the remuneration of the person performing collateral valuation and the value determined during the valuation must not be linked in a way that results in a conflict of interest.

74. The MNB expects financial institutions to regularly evaluate (where annual frequency is considered good practice) their relationships with external valuers and the activities of valuers, report the results of the evaluation to the governing body with management authority, appropriately communicate its general and individual experiences to the relevant organizational units, and take them into account in further cooperation with valuers.

75. It is expected that objective, clear, and comprehensible valuation opinions, appraisals, and valuation reports are prepared, containing at least the following:
    a) the client ordering the valuation, b) the name, status, qualification, and rating of the person performing and checking the valuation, c) special experts involved in the valuation, d) the subject of the valuation (data serving to identify the collateral), e) the valuation date, f) the validity period of the valuation, g) the method of using the valuation (credit risk assumption decision, contract extension, monitoring activities, justification for applying extraordinary measures), h) the purpose of preparing the valuation (determining value, examining the enforceability of collateral), i) documents and sources used during the valuation, methodology applied, assumptions, j) clauses and provisions, k) the findings of the valuation.

76. In the MNB's opinion, although the valuer is responsible for the content of the valuation (including the accuracy of the value determined using various valuation methods), the responsibility of the risk-assuming financial institution is to ensure the prudent and high professional standard execution of valuations and the appropriate consideration of valuation results during the risk assumption and management process. To ensure this, it is expected that the purpose of the valuation is precisely defined during the engagement of the valuer, particularly regarding the derivation of various value forms (collateral value, loan security value, liquidation value) from market value under what assumptions the financial institution requests, and that the valuation is always subjected to additional internal examination before its use (extending to the value itself and the applied methodology, including methods, assumptions, and information relevant to the value), and corrected if necessary.

VIII.2.3. Application of Statistical-Based Valuation

77. It is expected that during statistical-based valuation of collateral, financial institutions take into account the general conditions defined in point XII regarding the application of models.

78. If the results obtained during statistical-based valuation raise doubts, it is expected that the valuer also values the collateral using another method and informs the user of the valuation.

VIII.2.4. Subsequent Valuation of Collateral

79. The MNB considers it good practice to conduct regular subsequent valuation of collateral (quarterly for commercial real estate, at least annually for residential real estate), as well as extraordinary valuation reviews before applying restructuring measures, declaring the claim as a non-performing exposure, or in case of significant changes in the value or enforceability of collateral. The review of collateral value can be performed using the original valuation (updating the valuation) or can be a completely new valuation (full-scale appraisal) performed by the same or another valuer employed by or external to the financial institution, achievable through on-site (external, from public areas, or full-scale) inspection or without on-site inspection (desk-top), and in certain cases (e.g., residential real estate) also by statistical methods. If necessary, a valuation review can also be prepared, which means a rating of the previous valuation by another expert, extending to the justification, professional standard, acceptability of conclusions, and acceptability of the determined value of the previous valuation.

80. Regardless of regular subsequent valuation, the MNB expects the conduct of a completely new, individual-based extraordinary valuation extending to the examination of both the value and enforceability of collateral:
    a) before applying restructuring measures applicable to non-performing exposures and restructured claims according to MNB Regulation No. 39/2016. (X. 11.) on Prudential Requirements for Non-Performing Exposures and Restructured Claims, regardless of whether the financial institution is obligated to apply MNB Regulation No. 39/2016. (X. 11.), b) if, according to MNB Regulation No. 39/2016. (X. 11.), it becomes necessary to record the claim as a non-performing exposure, or if organizations not falling under the scope of MNB Regulation No. 39/2016. (X. 11.) determine that any of the conditions defined in Section 5 (1) of MNB Regulation No. 39/2016. (X. 11.) exist, c) before taking steps to enforce collateral, excluding the initiation of enforcement proceedings. In accordance with the MNB's expectations, the review of collateral value in the above cases is performed through a full-scale appraisal, except:
    a) if, in the case of retail claims, a valid revaluation compliant with the financial institution's internal regulations is available, otherwise a full-scale appraisal not older than 6 months, whose relevance cannot be questioned regardless of any existing circumstances, or b) if, following the restructuring measure described in point a) of the previous paragraph, the affected exposure continues to be classified as performing. If on-site inspection cannot be provided during a full-scale appraisal, the appraisal can also be realized based on external inspection.

81. It is expected that the findings of extraordinary collateral evaluations are taken into account in the decision-preparation process preceding restructuring measures (whether the financial institution continues to consider the collateral, under what conditions and value, whether new collateral is required, etc.), and that they serve as the basis for individual decisions on the management of non-performing exposures and the enforcement of collateral.

IX. The Process of Credit Risk Assumption and Management

82. The MNB expects that financial institutions have internal systems, procedures, and methods consistent with their size, risk appetite, willingness to assume risk, risk profile, as well as the magnitude, nature, and complexity of assumed risks, regarding their credit risk assumption and management processes, extending to:
    a) initiation and preparation, including preliminary assessment of credit risk (creditworthiness, operation examination, determination of transaction risk, risk-reducing instruments, their evaluation and acceptance), b) decision-making (determination of limits, pricing, transaction decisions), c) execution, including monitoring transaction fulfillment, regular review of assets and off-balance sheet items, and the value of credit risk-reducing instruments (monitoring, evaluation), d) increase in credit risk, modification of transactions, including management of non-performing transactions (restructuring, claim management), e) tasks related to the management of extraordinary situations.

IX.1. Decision Preparation

83. The MNB expects that during decision preparation, financial institutions examine whether the planned risk assumption aligns with the financial institution's credit risk policy, and that they collect and synthesize all essential external (market, public, regulatory, etc.) and internal (e.g., data already available about the customer at the financial institution, previous experiences) information necessary for the decision on credit risk assumption and for pricing.

84. During decision preparation, it is advisable to reveal the following information particularly for the specified activity types:
    a) when granting loans and cash loans:
    aa) the current creditworthiness and solvency of the customer, counterparty, or issuer, factors influencing creditworthiness and solvency, the expected future development of the creditworthiness and solvency of the customer, counterparty, or issuer, ab) all previous and existing relationships of the financial institution or group with the customer, counterparty, issuer, or their owners, existing or potential conflicts of interest related to the relationship, ac) evaluation of applicable credit risk-reducing instruments (value and

enforceability, and factors influencing its change), ad) the currency alignment between the expected proceeds from the enforcement of the collateral and the amount of the credit risk assumption, and the method of covering the currency risk, ae) the purpose of the credit and the source of repayment, af) the legal capacity of the customer, counterparty, or issuer to incur obligations, ag) if relevant, the business model, strategy, and corporate governance practices of the customer, counterparty, or issuer, including an assessment of whether the customer, counterparty, or issuer possesses the appropriate expertise, experience, and capacity to manage the activities, assets, and investments that constitute the source of repayment for the credit, as well as the soundness and feasibility of the business plan (supplier, subcontractor, and other partner relationships, existence or obtainability of necessary permits and certificates), and factors potentially hindering feasibility (e.g., concentration of business partners, suppliers, risks arising from the customer's, counterparty's, or issuer's dependence on specific suppliers, subcontractors, and other partners), ah) past cash flows, as well as future cash flows under various scenarios; b) in the case of assuming guarantees and sureties, as well as other banking obligations:
ba) the items specified in points aa), ab), ae)–ah), bb) the probability of payout; c) in the case of purchasing claims:
ca) the credit risk characteristics of the claims intended to be purchased, cb) the ranking of claims in the event of bankruptcy or liquidation proceedings; d) in the case of entering into derivative transactions:
da) the credit risk characteristics of the underlying asset, db) the legal enforceability of the claim; e) in the case of providing investment credit:
ea) the items specified in points aa), ab), af), and ah), eb) the purpose of the credit, ec) the liquidity of the financial instrument, ed) the alignment between the return conditions of the financial instrument and the credit risk assumption, ee) the ranking of the claim in the event of bankruptcy or liquidation proceedings; f) in the case of providing subscription guarantees:
fa) the circumstances of the issuance, fb) the outlook regarding the marketability and liquidity of the financial instrument.

85. The MNB expects that when applying point 83, the financial institution takes into account the specific characteristics of various customer, counterparty, or issuer, as well as transaction types. To this end,
    a) it should assess creditworthiness and solvency based on different criteria for retail and corporate customers, including micro and small enterprises, as well as medium and large enterprises; b) it should follow different assessment practices depending on whether the assumed risk is secured or unsecured, taking into account the type (residential property, commercial property, other movable collateral) and characteristics of the provided collateral; c) it should develop specific assessment practices for certain special transaction types (e.g., financing of income-generating real estate, real estate development financing, ship financing, project financing).

86. The MNB considers it good practice if, regarding loans to consumers, corporate loans, financing of income-generating real estate, real estate development financing, ship financing, and project financing, the financial institution examines the data and information detailed in Annex 2 of the EBA Guidelines, and uses the indicators suggested in Annex 3 of the EBA Guidelines, when analyzing the current and expected creditworthiness and solvency of the customer, counterparty, or issuer.

87. Regarding the expected creditworthiness and solvency of the customer, counterparty, or issuer, sensitivity analysis is also warranted to assess the impact of the occurrence of certain adverse circumstances, based on different criteria for various customer, counterparty, or issuer types. In this context, the financial institution examines on the one hand potential negative effects affecting the customer, counterparty, or issuer (e.g., sudden, significant decrease in revenues or profits for corporate customers, serious management issues or operational loss events, bankruptcy of significant partners, customers, or suppliers, significant outflow of liquidity, etc.), and on the other hand adverse market events (significant economic recession, decline in performance of certain economic sectors, emergence of significant political, regulatory, or geographical risks, significant increase in financing costs, etc.).

88. The MNB expects that, as part of the decision preparation process, the financial institution also identifies the effects of factors related to its business model and the expected development of macroeconomic conditions on the specific risk assumption decision, including among others:
    a) market competition, legal and regulatory requirements; b) trends characterizing the development of the financial institution's credit risk volume; c) the financial institution's credit risk profile and its expected changes; d) credit risk concentrations (by customer or transaction type, in certain segments, geographically, etc.); e) expectations regarding collection, write-off, and recovery practices; f) the characteristics of the financial institution's credit risk control function; g) other factors influencing expected lending losses and their interrelations, including expectations regarding unemployment rates, GDP, reference interest rates, inflation, liquidity conditions, or technologies.

89. The MNB draws attention to the fact that although the decision preparer is responsible for the truthfulness of the content of the preparatory material, the responsibility of the decision preparer does not replace the decision-maker's responsibility regarding the professional appropriateness of the decision.

90. The MNB considers standardized procedures for certain transactions (e.g., retail products) and simplified procedures for decisions aimed at risk assumption within already approved customer, counterparty, or issuer limits to be acceptable.

IX.1.1. Customer and Counterparty Rating

91. Regardless of statutory obligations, it is considered a basic expectation that – with the exception of certain specific credit risk assumption structures (e.g., Lombard loans) – the source of repayment for claims should be the income of the customer or counterparty, and not the provided collateral.

92. As one element of implementing the principle stated in point 91, it is expected that the financial institution operates a customer and counterparty rating system consistent with its size, risk appetite, willingness to assume risk, and risk profile, which assists in:
    a) determining the customer's or counterparty's solvency and creditworthiness before assuming risk; b) estimating changes in the customer's or counterparty's solvency and creditworthiness, and determining future solvency; c) determining the probability of default of the customer or counterparty, and quantifying the probability of default; d) categorizing customers and partners into groups reflecting similar risks and probabilities of default.

93. The MNB expects the financial institution to operate a customer and counterparty rating system that:
    a) is independent of business considerations and is based on the consideration of objective criteria to the greatest possible extent; b) ensures appropriate alignment between quantifiable data derived from the customer's financial data, objective criteria, and the examination of non-quantifiable, subjectively assessed information, as well as other circumstances; c) applies a conservative, cautious approach; d) ensures the implementation of expectations regarding responsible lending activities and minimizes the risk of internal and external fraud related to credit risk assumption; e) validates the "know your customer" mindset; f) ensures the implementation of the "four eyes" principle; g) is applied consistently in all risk assumptions towards the same customer, counterparty, or issuer; h) ensures the identification of risks at the customer group level for customers or partners belonging to a group; i) ensures continuous monitoring of rating changes; j) is subject to regular back-testing regarding its reliability and operation.

94. The statutory requirements related to customer and counterparty rating are specified in MNB Regulation No. 40/2016. (X. 11.), and the MNB considers it good practice for all financial institutions assuming credit risk, which are not subject to its scope, to follow the determinations therein, taking into account the proportionality expectation defined in point 8.

95. The MNB expects that the financial institution's customer and counterparty rating system allows the consideration of external ratings only after the financial institution has reviewed the rating, taking into also previous experience with the external rating agency and its ratings, or in the case of a financial group, through another member of the group.

96. The financial institution may also use models for customer and counterparty rating, taking into account the provisions of Point XII.

97. According to the MNB's expectations, the simplified customer and counterparty rating procedure used for customers qualifying as consumers, or other cases, or the application of rating principles differing from the general ones for newly established customers or customers not subject to the Accounting Act, does not mean that the rating system does not apply at all to certain activities or transaction types, or to certain customers or partners.

98. If the customer and counterparty rating system of the financial institution's parent company does not fully comply with Hungarian laws, the MNB considers it acceptable practice to apply it with appropriate modifications and additions.

99. The MNB recommends that members of financial institutions within a group subject to consolidated supervision follow the same rating principles during customer and counterparty rating.

100. It is expected that, in the course of customer and counterparty rating, the financial institution takes all expected steps to determine the customer's or counterparty's solvency and creditworthiness, in order to establish the customer's or counterparty's current income and financial situation, as well as its stability and possible changes.

101. To establish the customer's or counterparty's current income and financial situation, as well as its stability and possible changes, the financial institution – while keeping relevant data protection regulations in mind – should appropriately consider:
     a) documents provided by the customer or counterparty, and data supplied; b) information already available at the financial institution regarding the customer or counterparty (e.g., information already available in connection with other risk assumptions or obtainable through previous business relationships); c) information available at members of the group subject to consolidated supervision, which is the same as the financial institution, regarding the customer or counterparty; d) information available in the KHR (Credit Information Bureau); e) information available from corporate law databases; and f) public market information.

102. It is expected that, taking into account relevant data protection regulations, the financial institution ensures the adequacy and reliability of the data and information provided by the customer or counterparty.

103. It is expected that, when evaluating the customer's or counterparty's income and financial situation, the financial institution takes into account all significant risk factors (e.g., charged interest, exchange rate, size of capital requirements, payment delay, the customer's or counterparty's other obligations, level of indebtedness, the volume of unencumbered assets, which may provide additional financing if necessary, foreseeable changes in living conditions for retail customers, changes in market conditions for other customers or partners), which may affect the customer's or counterparty's future solvency and financial situation.

104. The MNB does not consider it good practice if the determination of the customer's or counterparty's solvency and creditworthiness is based on positive expectations regarding future incomes, unless supported by appropriate documentation.

105. In the case of foreign customers or counterparties, or financing of cross-border activities, it is advisable to incorporate the examination of country risk and the relevant legal environment into the credit risk assumption and management process, already within the customer and counterparty rating.

106. Compliance with MNB Regulation No. 40/2016. (X. 11.) and point 94 is also recommended if the financial institution has credit risk exposure towards an issuer.

IX.1.2. Collateral

107. As part of the decision preparation process, including the case of incurring further obligations with the same collateral, the financial institution addresses the assessment of the collateral – value and enforceability, and factors influencing its change – as well as the examination of the fulfillment of statutory requirements applicable to the specific collateral (e.g., loan-to-value ratio, if relevant, requirements regarding consideration in capital requirement calculations) and requirements resulting from the financial institution's internal regulations (e.g., collateral coverage ratio, security level).

108. If the same collateral is involved in multiple transactions, it is expected that the total collateral values considered for various risk assumptions do not exceed the actual collateral value of the specific collateral (proportional allocation). In the case of obligations assumed under co-financing (consortium and syndicated lending), proportional consideration of collateral among participating members in the financing is also appropriate.

109. The determination of the collateral's value to support the credit risk assumption decision can be made based on individual assessment and the use of statistical methods.

110. The MNB draws attention to the fact that, in the case of real estate collateral, the use of statistical methods for determining the collateral value of real estate that is not agricultural land is possible in cases specified in MNB Regulation No. 25/1997. (VIII. 1.) PM on methodological principles regarding the determination of collateral values for real estate other than agricultural land.

111. Regarding the legal enforceability of collateral, it is recommended to pay particular attention to the following factors valid in the legal framework regarding the collateral contract:
     a) bankruptcy and liquidation rules, the enforceability of the collateral, and regulations limiting enforceability in the event of bankruptcy or liquidation; b) special rights of authorities regarding collateral (e.g., tax authority's execution rights); c) the current and future encumbrability of the collateral; d) the proper registration in the public register in the case of establishing a mortgage.

112. To reduce risks related to the legal enforceability of collateral, it is recommended to develop standard contract templates for frequently used collateral.

IX.2. Pricing

113. The MNB expects that the financial institution has a written, approved by the competent governing body, and regularly reviewed (the MNB considers annual review at least as good practice) pricing policy consistent with the financial institution's/group's business model, credit risk appetite, and strategy, as well as its general business strategy – including risk management and profitability objectives.

114. The financial institution's pricing policy specifies:
     a) the pricing principles followed for various customers, counterparties, or issuers, as well as for various transaction types; b) the factors considered in pricing, broken down according to point a) – including especially the expected quality of exposures, the nature and magnitude of risks, costs, competitive factors, and existing market conditions – and the models used; c) requirements regarding the pricing of new products and services, taking into account the expectations defined in point VII.2 of MNB Recommendation No. 12/2022. (VIII. 11.) in connection with the introduction of new products and services; d) specific requirements regarding the pricing of promotional transactions; e) specific requirements regarding the pricing of transactions within the group.

115. The MNB considers it good practice if the financial institution applies different pricing approaches for various customer and transaction types, for example, primarily product-based approach for retail risk assumptions, and transaction-specific approach for corporate customers.

116. It is expected that pricing takes into account all relevant costs actually incurred and allocated to the specific exposure until the next repricing date or maturity, including among others:
     a) capital cost; b) financing cost determined based on the characteristics of the exposure (maturity, prepayment options, etc.); c) operational and administrative costs; d) credit risk cost calculated based on historical loss data for various homogeneous risk groups or the expected lending loss perspective; e) other costs arising in connection with the exposure (e.g., taxes).

117. Regarding the pricing of transactions within the group, the MNB expects consideration of the fact that assuming exposures may result in lower costs in some cases, while the appearance of other types of incurred risks (e.g., concentration of collateral) in pricing may become justified.

118. It is expected that the financial institution establishes appropriate processes and procedures to ensure that the price determined within the credit risk assumption decision reflects the risks and costs of the exposure. According to the MNB's expectations, the financial institution also conducts control and monitoring activities that filter out exposures whose actual costs exceed the expected return, and provides appropriate feedback to the risk management and business units.

IX.3. Credit Risk Assumption Decision

119. The MNB expects that the financial institution assigns credit risk assumption decision levels to each of the service or transaction types it provides, and records in internal regulations:
     a) the criteria for determining various decision levels; b) the persons, organizational units, or bodies participating in decisions at various decision levels; c) the decision-making procedures applied at various decision levels (e.g., simplified, complex); d) the authorities and limitations belonging to various decision levels; e) the possibility and procedure for decision-making deviating from the predetermined decision level during various risk assumptions (including, for example, the conditions, magnitude, and temporal limitations of delegating decision-making authority); f) the processes and procedures related to risk decisions not supported by the risk management unit; g) the recording and documentation requirements for the credit risk assumption decision.

120. It is expected that the determination of decision levels reflects the financial institution's business model and is consistent with its risk appetite and policy. It is advisable if the determination of various decision levels – keeping in mind the implementation of the "four eyes" principle – is made under objective conditions, taking into account the specific characteristics of various customer and transaction types, and if decisions on riskier or larger-volume transactions are made at higher managerial or committee levels.

121. The MNB expects that if a risk decision is not supported by the risk management unit, it should be rejected, or a decision should be made by one level higher, preferably at the committee level, regarding the assumption of risk. In accordance with point 120, for riskier or larger-volume transactions, regardless of customer or transaction type, it is always expected that the decision is made at least at the committee level.

122. The MNB considers it good practice if, in the course of the credit risk assumption decision, the financial institution deviates from the general procedures defined in internal regulations only in very exceptional cases, based on appropriate reasons, documented – specifying the reasons for the deviation and the

decision-makers, allowing for subsequent identification – and deviates in a controlled manner.

123. The MNB expects that the individuals, organizational units, and bodies participating in the credit risk assumption decision act objectively and impartially. To ensure this, it is particularly expected that, taking into account the incompatibility requirements of sectoral legislation and the expectations set out in point IV.9 of MNB Recommendation 12/2022. (VIII. 11.), no person who:

a) has a personal (e.g., familial) or professional relationship with the client or partner, b) has direct or indirect economic or other actual financial or non-financial influence or interest in the client or partner, c) is under the political influence of the client or partner or has political ties with them,

may participate in the credit risk assumption decision.

124. It is expected that financial organizations have appropriate internal regulations, processes, procedures, and control systems – taking into account the expectations formulated in point IV.9 of MNB Recommendation 12/2022. (VIII. 11.) regarding the handling of conflicts of interest – to ensure the objectivity and independence from influence of the credit decision-making process.

125. The MNB considers it justified to conduct a new risk assumption decision-making process in any case where, based on the risk assumption decision, the contract with the client or partner was not concluded within the time frame defined in the financial organization's internal regulations.

IX.4. Pre-credit risk assumption administration

126. The MNB recommends that the financial organization verify the fulfillment and formal validity of all conditions of the approved transaction before the assumption of risk (e.g., loan disbursement or commencement of trading with the client). It is advisable to establish a separate organizational unit for this, but, in light of the proportionality principle defined in point 8 of this Recommendation, another organizational unit may also be entrusted with the task.

127. Before the assumption of credit risk, the following should be examined:

a) whether the risk assumption was approved regularly and at the appropriate level, b) whether the contract to be concluded corresponds to the decision, c) whether the conditions set for the risk assumption during the credit risk assumption decision are fulfilled, d) if relevant, whether the contract contains conditions regarding the client’s, partner’s, or issuer’s obligation to provide data related to the transaction, e) whether the documents necessary for the risk assumption are available (e.g., whether the collateral is actually available, whether the contract was signed regularly, whether the contract is valid), f) the length of time elapsed since the approval of the risk assumption, whether any factor potentially hindering the credit risk assumption has occurred during the period since the risk assumption decision (e.g., loss of legal capacity of the client), and whether any new circumstances requiring a new credit risk decision have arisen (e.g., commencement of enforcement proceedings).

IX.5. Client, partner, and issuer documentation

128. The MNB expects that the financial organization documents its decisions resulting in credit risk exposure. Additionally, a record should be kept of rejected credit risk decisions, specifying the reason for the rejection of each application.

129. In accordance with the MNB’s expectations and taking into account relevant legal provisions, the financial organization maintains a file for the client, partner, or issuer. The file contains all information necessary for assessing the financial situation of the client, partner, or issuer and for recording and documenting all events related to the credit risk assumption.

130. It is also expected to maintain a credit file containing information regarding the transaction. The credit file may be part of the file maintained for the client, partner, or issuer.

131. The credit file should preferably contain the following:

a) data on the borrower or borrower group: the borrower’s name, registered office, residence, or place of business, business form, scope of activity, and the name of the corporate group to which the client belongs, information on the corporate group, b) data suitable for identifying co-borrowers and guarantors, c) definition of the history of the transaction (e.g., the client’s other loan with the financial organization), evaluation of the borrower’s previous relationship with the financial organization, information requested from the KHR (Credit Information Bureau), d) designation of the purpose of the transaction (e.g., loan purpose), e) definition of the sources serving the repayment of the risk assumption (e.g., loan repayment), f) determination of the transaction’s conditions: maturity, interest rates, other costs (e.g., management fee), g) documents of the collateral (e.g., contract regarding this, title deed, valuation, documents of encumbrance), h) continuously generated information related to the existence of contracts associated with the credit transaction (insurance, home savings), i) documents of security provided by a third party (e.g., guarantee), j) information supporting the valuation of the collateral, especially demonstrating compliance with the provisions of the collateral valuation regulation, official valuation in case of involvement of an external expert, k) income, financial data, annual reports, annual statements, and subjective information evaluated during the client and partner qualification procedure, supporting the assessment of the transaction, l) information regularly requested from and made available by the client, partner, or issuer during the term of the claim, m) the qualification of the client or partner and its changes, n) the qualification of the guarantor or joint and several guarantor and its changes, o) documents of the risk assumption decision and all its modifications, including the opinion of the risk manager/risk management area, if required by internal regulations (e.g., above certain amount thresholds), p) the contract related to the transaction, the contract recorded in a notarial deed, q) facts, data, and information that come to the knowledge of the financial organization during the continuous monitoring of the borrower and the transaction (e.g., loan), monitoring reports prepared, r) documents regarding the subsequent valuation of the collaterals, s) the qualification of the claim and its changes, t) original copies of contract modifications, including restructuring measures, in a clearly identifiable manner, showing which conditions of the original contract were modified, u) impairment calculated in connection with the risk assumption, provisions made.

132. The MNB expects that the financial organization defines the content of the client, partner, issuer, and credit files in such a way as to ensure the prudent assessment of the information provided by the client, partner, issuer, or any intermediary involved, to help avoid the possibility of inappropriate interpretation of the provided information, and to ensure that, upon request by the MNB, the justification of the risk assumption decisions can be verified in a retrievable manner within the framework of legal provisions on document retention.

133. The maintenance of client, partner, issuer, and credit files may also be done in electronic form, taking into account the expectations in point XXI, but in accordance with the MNB’s expectations, the completeness of the client, partner, issuer, and credit files must be ensured in all cases, as well as their maintenance at least until the end of the term of the credit risk assumption in case of continuous problem-free placement. In the case of non-performing exposures, these must be fulfilled until the settlement, write-off, or sale of the claim.

X. Continuous monitoring of credit risk

X.1. General expectations regarding credit risk monitoring activities

134. The MNB expects that the financial organization has reliable and efficient internal systems, procedures, and methods consistent with the magnitude of its credit risk exposure, risk appetite, willingness to assume risk, and risk profile, for the identification, measurement, continuous monitoring, and control of its credit risk exposure, and in light of its connection with credit risk management, to meet the requirements supported by the expected credit loss-based impairment model.

135. The preservation of credit risk assumption documents is an important part of the credit risk management process, as the financial organization can only manage and handle risks of which it is aware.

136. The financial organization assuming credit risk – taking into account the proportionality expectation fixed in point 8 – continuously monitors and documents at least quarterly during the validity period of the credit risk limit or the term of the assumed credit risk:

a) the development of positions representing credit risk assumption (monitoring the utilization of limits), b) the fulfillment of the transaction representing credit risk, compliance with the contract (fulfillment of cash flows, conditions, and provisions, financial covenants contained in the contract), c) changes that have occurred or are expected in the creditworthiness or solvency of the client, partner, or issuer, – evaluating the impact of the development of macroeconomic and other economic or external conditions, taking into account the sensitivity of the client, partner, or issuer to these, d) changes that have occurred or are expected in the applied credit risk mitigation techniques, including changes in the value and enforceability of collaterals – including, among others, the fulfillment of the existence of collaterals, conditions stipulated in connection with collaterals (e.g., existence of insurance), as well as monitoring the creditworthiness and solvency of the person providing the guarantee or assuming joint and several liability.

137. For certain transactions or clients (e.g., due to the size of the client, partner, or issuer, the complexity or special nature of their activity, the magnitude or peculiarity of the assumed exposure), it may be justified for the financial organization to define more frequent documentation obligations in its internal regulations than those fixed in point 136.

138. The purpose of credit risk monitoring activities is:

a) to check compliance with legal provisions and internal regulations, b) to monitor the implementation of credit risk policy (including compliance with limits, the development of concentrations, and the quality development of exposures, portfolios, and sub-portfolios), c) to provide input data for the review of client and partner qualifications and collateral valuation, d) to provide input data for the qualification and categorization of exposures, e) to provide input data for the early warning system, f) to provide input data for the review of credit risk appetite and credit risk policy.

139. In accordance with the MNB’s expectations, credit risk monitoring activities are based on comprehensive process regulation, and tools built into the process and used for managerial control may also be used to promote their efficiency.

140. The MNB recommends that credit risk monitoring be based on objective information available from external sources (e.g., from the KHR) using the data at the disposal of the financial organization, respecting relevant data protection regulations, as well as information provided by the client or partner. It is advisable to stipulate the client’s related data provision obligation in the contract regarding the risk assumption, as well as the sanctions and legal consequences applicable in case of failure to do so.

141. The MNB expects that if the financial organization detects negative changes in the creditworthiness or solvency of the client, partner, or issuer, it should request additional data and information to support that the client is able to meet its payment obligations.

142. The MNB recommends that credit risk monitoring activities begin with the incorporation of decision conditions into the contract and the verification of the fulfillment of risk assumption conditions fixed in external and internal regulations, and cover the entire life cycle of the exposure.

143. It is incorrect practice to completely omit monitoring activities for certain types of collaterals (e.g., joint and several guarantee, guarantee) or with regard to the person providing the collateral (e.g., the Hungarian State) by citing low risk.

144. Particularly close (e.g., receiving greater managerial attention and support than usual) monitoring activities are recommended for the following:

a) credit risk exposures that were approved outside the general procedure, within an extraordinary procedure (this includes, for example, cases where an individual exemption was granted by an appropriate decision-making level from one or more provisions of the internal regulation) or arose extraordinarily, in an unregulated manner, b) refinanced transactions, with the exception of technical extensions, including any new risk assumption provided by the financial organization for the same exposure – which does not necessarily constitute restructuring – or, if the financial organization is aware of it, risk assumption by another financial organization, c) exposures according to point XVII.1, d) foreign currency loans, e) borrowers or transactions jointly financed by multiple financial organizations (consortium loans).

145. The MNB considers it justified in case of co-financing that each affected financial organization conducts its own credit risk monitoring activity extending to the provisions of point 136. To promote the independent credit risk monitoring activity of the affected financial organizations, it is expected that the consortium leader provides all available information to the consortium members in a timely manner. Co-financing alone cannot be treated as a risk-reducing factor.

X.2. Early warning system

146. The MNB expects that the financial organization – taking into account the proportionality expectation fixed in point 8 – develops and operates an early warning system suitable for the timely detection of the increase in credit risk – at the level of individual transactions, clients, sub-portfolios, portfolios, or certain segments – as part of its monitoring system, consistent with its specificities, the nature, and magnitude of its credit risk exposure.

147. In connection with the early warning system, the financial organization defines in its internal regulations:

a) the indicators and other criteria used to signal the increase in credit risk for each transaction and client, partner, or issuer type, b) the frequency of evaluation of the indicators and other criteria, c) the levels of credit risk increase at which special procedures are followed, d) rules related to the application of special procedures (applicable tools, organizational frameworks, e.g., handling by another organizational unit, decision-making powers, deadlines for taking measures, preparation of special reports, etc.).

148. The MNB expects closer monitoring activities (e.g., more frequent evaluation of the transaction or client, preparation of more detailed monitoring reports) if the financial organization, based on the early warning system, experiences a larger-than-predefined increase in credit risk for a certain client, partner, issuer, transaction, or portfolio.

XI. Identification and measurement of credit risk

149. Expectations regarding the financial organization’s credit risk identification and measurement systems:

a) they are consistent with the specificities of the financial organization, the nature, and magnitude of its credit risk exposure, b) they cover all exposures carrying credit risk, c) they are capable of taking into account all significant risk factors, d) they ensure the measurement of the credit risk of the entire financial organization, e) they ensure the measurement of credit risk at the portfolio, transaction, client, client group level, and other required levels of detail (e.g., by business line, product level, industry, or geographical breakdown), f) they enable the initial and subsequent identification and measurement of credit risk (including the early identification of exposures that may become non-performing), g) they ensure the determination of factors influencing the change in credit risk and the estimation of expected credit loss (including credit risk indicators), and the assessment of the impact of new products and activities, h) they enable the evaluation of compliance with legal provisions, as well as other external and internal regulatory instruments, policies, and regulations, i) they serve internal (early warning system, risk control, managerial information system, capital allocation, accounting, especially expected credit loss-based impairment calculation, etc.) and external (supervisory reporting, etc.) data requirements, j) they are adequately documented (parameters, prerequisites), k) all significant data and inputs necessary for the measurement and management of credit risk are specified appropriately (with sufficient speed, minimal manual intervention, preferably automatically), in line with the nature and magnitude of the financial organization’s activities, and can be accurately generated from the financial organization’s records, l) the system of conditions and procedures for the use of external data is precisely defined.

150. It is expected that the financial organization fully understands the limitations of all quantitative tools and models used by it for the identification and measurement of credit risk, the possibilities of their application in accounting and capital requirement calculations, their potential risks, and takes them into account in the process serving credit risk management.

151. The MNB expects that the financial organization has appropriate procedures for the determination and regular or ad hoc review of inputs, data, and assumptions relevant to the identification and measurement of credit risk and the assessment of expected credit loss (whether the given input remains relevant, whether new data needs to be incorporated).

152. The MNB expects that in the identification and measurement of credit risk, and in the application of the expected credit loss-based impairment model in connection with it, forward-looking information including past and macroeconomic factors affecting the borrower and the development of credit risk, which are reasonably and justifiably available without disproportionately high cost or effort, is taken into consideration (e.g., probability of default, loss given default, exposure at default, past and expected changes in the value of collateral).

153. It is expected that the financial organization appropriately documents the following regarding the macroeconomic estimates used:

a) in which cases it uses its own or external estimates, b) the process and procedure for the preparation, approval, review, and use of its own estimates, c) the conditions, processes, and procedures for the use of external estimates, including, among others, the recording of which market participants’ or service providers’ estimates are accepted and under what conditions, how they are used by the financial organization, and the frequency and order of their review.

154. In accordance with the MNB’s expectations, in the identification and measurement of credit risk and the determination of expected credit loss, the financial organization takes into account past loss data, currently existing conditions, and forward-looking information including reasonable and justifiable macroeconomic factors, based on appropriately documented credit evaluation based on past experiences.

155. Past information (trends, correlations) may be considered a good starting point for the identification and measurement of credit risk and the determination of expected credit loss, but the expected future development of events and conditions affecting the development of credit risk must also be considered.

156. The MNB expects the determination of expected credit loss with relevant scenario assumptions. Taking into account the proportionality expectation defined in point 8, the MNB suggests considering the application of multiple or multi-factor scenarios.

157. The MNB expects that the financial organization develops and operates appropriate procedures for the determination of scenarios to be used in the determination of expected credit loss.

158. In connection with the scenarios to be used in the determination of expected credit loss, the MNB draws attention to the following.

a) It is expected that the financial organization appropriately documents the scenarios used and the impact of changes in the scenarios on the expected credit loss. b) It is expected that the time horizon of the scenarios is also included as a documented procedure.

determination. c) Internal and external scenarios may also be applied. In the former case, the involvement of multiple experts with different competencies should be highlighted, and in the case of purchased scenarios, the importance of adapting them to the specific characteristics of the financial institution should be emphasized. d) Back-testing must be applied to assess the relevance of the economic factors included. e) Available market indicators can serve as a good benchmark for the financial institution's assessments.

159. In the identification and measurement of credit risk, as well as in determining expected credit losses, one cannot refrain from incorporating forward-looking information solely by citing high costs or referring to scenario uncertainty. Based on the expectations of the MNB, the financial institution may refrain from seeking information that is costly and has operational consequences only if it does not hinder the application of the expected credit loss-based impairment model.

160. In the identification and measurement of credit risk, as well as in determining expected credit losses, it is appropriate to consider forward-looking information that actually affects credit risk. If the assessment – regardless of whether it is individual or collective – for some reason does not include the influencing information, the temporary incorporation of individual corrections may become necessary.

161. It is expected that the financial institution applies inputs, data, and assumptions relevant to the identification and measurement of credit risk and the assessment of expected credit losses in a timely and consistent manner; in certain cases, individual overrides may deviate from this practice, provided they are supported by adequate justification and documented.

162. It is also expected that the financial institution consistently incorporates forward-looking information, including macroeconomic factors, into the identification and measurement of credit risk, as well as into strategies and business plans based on them, internal and external reports, the determination of expected credit losses, and the calculation of capital requirements; however, in certain cases, individual deviations may also be justified in this regard.

163. In connection with the identification and measurement of expected credit losses, the MNB expects the following to be documented:
     a) the expected loss measurement methods applied for each exposure and portfolio – loss rate method, PD/LGD method, or others – and the considerations regarding their application, b) the software, inputs, data, and assumptions used in the measurement (time horizon of loss data used, consideration of collateral), c) individual adjustments applied regarding the measurement methods (e.g., no loss event occurred in the past, but it is not excluded based on forward-looking information), d) the results of the regular review of the applied measurement methods, as well as the inputs, data, and assumptions to be considered in the measurement, e) the factors and events justifying extraordinary modifications to the applied measurement methods, as well as the inputs, data, and assumptions to be considered in the measurement, f) modifications affecting the applied measurement methods, as well as the inputs, data, and assumptions to be considered in the measurement, the justification for the changes, and the presentation of their impact, g) the method for determining the lifetime of the exposure or portfolio (prepayment, handling of default), h) the data cleaning practice applied in modeling and estimation.

164. In order to ensure the proper determination of expected credit losses, the MNB expects special diligence in the following cases, which may require the application of specific criteria and practices:
     a) customers with high income-to-payment ratios and claims with high loan-to-value ratios 11, b) exposures where it was subsequently established that the original risk-taking decision was not fully justified, c) exposures where the risk-taking decision was taken deviating from the general procedural rules, d) exposures taken on by the financial institution under conditions different from the usual ones, e) exposures where the risk-taking contract contains special conditions (e.g., deferred repayment option), f) exposures as defined in point XVII.1, g) restructured claims as defined in Regulation No. 39/2016. (X. 11.) of the MNB, as well as renegotiated, modified-condition claims that do not qualify as restructured claims (e.g., if the assignment was granted to a debtor who has no financial difficulties in fulfilling their financial obligations and is not expected to have any), h) purchased claims that do not qualify as restructured claims, but the financial institution is aware that the seller previously carried out restructuring measures in connection with the claim, or that the seller kept the purchased claim as a restructured claim, i) non-performing exposures as defined in Regulation No. 39/2016. (X. 11.) of the MNB, and exposures that are not yet considered non-performing but already show signs of trouble (e.g., those with delays within 90 days), j) purchased claims that do not qualify as non-performing exposures, but the financial institution is aware that the seller previously classified the claim as a non-performing exposure, k) purchased claims that were acquired with an explicitly uncertain recovery rating, l) a growth in lending activity exceeding the pre-planned level, m) an unexpected growth in the portfolio of renegotiated, modified-condition claims, as well as restructured claims, n) an unexpected growth in the portfolio of exposures that are not yet considered non-performing but already show signs of trouble, as well as non-performing exposures.

165. In connection with the measurement of expected credit losses regarding restructured claims, the MNB draws attention to the following.
     a) It is expected that the expected recovery in connection with the claim continues to be reflected in the measurement of expected credit losses, regardless of the accounting treatment of the transaction (i.e., the transaction may be derecognized and a new transaction may be recognized). b) Renegotiation or modification of terms must not be accompanied by an automatic determination of a decrease in credit risk; this must be adequately supported, and its recognition may only occur after an appropriate period has elapsed. In determining the decrease in credit risk, it is considered good practice to apply the reclassification conditions of Regulation No. 39/2016. (X. 11.) of the MNB. c) If the modified terms only specify interest payments, their timely fulfillment does not automatically indicate a decrease in credit risk; due diligence is required when recognizing such a decrease.

11 The maximum extent of these is established by Regulation No. 32/2014. (IX. 10.) of the MNB.

XII. Technology-based innovations and credit risk models

166. It is expected that the financial institution appropriately manages risks associated with technology-based innovations used in the taking on, management, measurement, and control of credit risk, in line with its business model, credit risk exposure, the complexity of methods used, and the extent of the use of technology-based innovations.

167. It is expected that the governing body with management authority adequately knows and understands the use of technology-based innovations, their limitations, and their impact on the financial institution's credit risk-taking, management, measurement, and control processes.

168. When applying models, the MNB expects that the financial institution develops and operates appropriate processes and procedures to ensure that the inputs used for customer and counterparty rating, statistical assessment of collateral, identification and measurement of credit risk, and expected credit loss-based impairment calculations are based on sufficiently fresh, high-quality, large-volume, and representative data, are relevant, accurate, reliable, and complete, and are consistent with the data and assumptions used in business planning, measurement of expected credit risk losses, and capital requirement calculations.

169. When applying models, the MNB also recommends that the financial institution pay special attention to data integrity and determine the main methods, parameters, and prerequisites with due diligence.

170. If adapted to the specific characteristics of the financial institution, the financial institution may also use external models.

171. It is expected that the financial institution fully knows and understands the usage method, methodology, input data, assumptions, limitations, output data, and risks of application of the models used, and ensures the adequate integration of the models into the financial institution's risk-taking and comprehensive risk management systems and processes, within the framework of which measures are taken to ensure the traceability, auditability, reliability, and resilience of input and output data.

172. The MNB expects appropriate documentation of the models used, within which the financial institution records the following:
     a) the model's methodology, input data, assumptions, limitations, output data, b) measures to ensure the proper functioning of the model, avoidance of biases, and quality of input data, c) the use of the model's output data, and in this context, the possibility and conditions for individual override of the model's output data (e.g., limits), the description of related processes and procedures, d) the methodology for monitoring decisions using the model's data.

173. It is expected that the financial institution has appropriate IT systems, processes, and resources for operating the models used.

174. It is expected that both internal and external models undergo initial and subsequent regular – at least every three years 12 – or post-significant modification validation.

175. Based on the expectations of the MNB, the financial institution has written procedures regarding the responsibility and reporting system for validation procedures that certify the suitability and consistency of the models for their intended purpose.

176. Regarding the validation of models, the MNB particularly expects the following requirements to be implemented.
     a) Validation should be conducted by persons with appropriate qualifications and experience, independent of the model developer and user. The roles and responsibilities of participants in model validation should be clearly defined. b) An effective validation methodology should be applied, covering the assessment of the model's inputs, design, outputs, limitations, and performance. c) The validation framework (applied validation methods and tools) and process (results, proposed modifications) should be adequately documented. d) The effectiveness and independence of the validation process should be evaluated by persons not participating in the validation, and the financial institution's governing or supervisory body should be informed. e) In case of deficiencies detected in the model's operation, the financial institution should take the necessary measures.

XIII. Classification of exposures and grouping into risk categories

177. It is expected that the financial institution, keeping in mind the proportionality requirement defined in point 8, develops and operates an exposure classification system consistent with the magnitude of its credit risk exposure, risk appetite, risk-taking willingness, and risk profile, as part of its credit risk measurement system. The basis for the classification of exposures is the credit risk monitoring activity.

178. The MNB expects that the financial institution establishes in its internal regulations the following in connection with the classification of exposures:
     a) the purpose of the development and operation of the system for classifying exposures, b) the method for determining, approving, and reviewing the exposure classification system, c) the procedures for classifying exposures (standard procedure, simplified procedure), d) the processes for classifying exposures, including among others the determination of the frequency of exposure classification – for which the MNB considers good practice at least quarterly 13, as well as ad hoc assessment linked to extraordinary events – the responsibility and authority system, including the assignment of tasks to control functions regarding exposure classification, e) the rules for regular data reporting by the customer, counterparty, or issuer related to the classification of exposures, f) the principles of individual and collective assessment (for which exposures individual assessment is mandatory, and which exposures can be subject to collective assessment), g) the classification categories and assessment groups applied, h) the criteria to be considered when classifying exposures into classification categories or assessment groups, i) the method of using findings obtained during classification procedures, j) the record-keeping and documentation requirements for exposure classification.

179. Keeping in mind compliance with the provisions of Regulation No. 39/2016. (X. 11.) of the MNB, financial institutions and investment firms apply at least the categories of performing exposure and non-performing exposure, distinguishing within each category restructured claims. The MNB draws attention, however, to the fact that the classification under Regulation No. 39/2016. (X. 11.) of the MNB is not sufficient for the application of the expected credit loss-based impairment model; the measurement of changes in credit risk and their impact on expected credit losses necessitates a more detailed or different breakdown of exposures, providing for the application of accounting rules.

180. The MNB considers it justified that regular classification of exposures takes place for all credit risk exposures of the financial institution. It is not recommended to refrain from this even for transactions classified as low risk (e.g., loans granted with state joint and several liability guarantees).

181. Small-value claims may be subject to collective assessment by the financial institution. In this context, the MNB expects that the financial institution establishes in its internal regulations what amount is considered small and how it is determined.

182. A simplified classification procedure may also be applied for claims arising from consumer credit, mortgage credit, and small-value claims vis-à-vis retail customers – in both individual and collective assessment cases (a limited number of criteria are considered during the classification of the item, or an examination according to a specific criterion does not need to be performed according to the generally described full set of requirements).

183. The MNB recommends that the classification of exposures into classification categories 14 be based on the joint consideration of at least the following criteria:
     a) the rating of the customer, counterparty, or issuer, b) compliance with the repayment schedule, the development of principal and interest payment delays, c) risks associated with the customer and changes that have occurred or are expected in them, d) risks not attributable to the customer and changes that have occurred or are expected in them, e) future payment obligations constituting a loss arising from the exposure.

184. Exposures arising from transactions involving different risk-taking vis-à-vis a single customer may be classified into different classification categories by weighing the classification criteria applicable to them, taking into account the provisions defined in point 276.

185. If, as a result of a given contract, multiple related exposures of different types involving risk-taking are linked to a customer in such a way that the termination of one exposure leads to the creation of another, the MNB expects consistent procedures in classifying such exposures into classification categories. Classifying such exposures into different classification categories is only justified under special circumstances, supported by specific criteria.

186. The "four eyes" principle is also expected to be applied in the classification of exposures.

187. The MNB expects that the financial institution regularly reviews the operation of its exposure classification system and informs the governing body with management authority of the results, and takes the necessary measures to eliminate deficiencies.

188. The MNB expects that if a financial institution applying the expected credit loss-based impairment model assesses certain exposures on a collective basis, the groups of collectively assessed exposures should be established in such a way as to ensure the identification of exposures with different risk characteristics and the taking of necessary measures, as well as the timely detection of changes affecting the nature and magnitude of credit risk for the purpose of applying the expected credit loss-based impairment model.

189. The financial institution meets the requirement formulated in point 188 by establishing an appropriate number of groups into which exposures are classified, the credit risk of which depends on the development of common factors – including forward-looking information encompassing macroeconomic factors – while the increase in credit risk affecting individual elements of the sub-portfolio does not disturb the assessment of the credit risk of the entire group.

190. The following are also expected to be implemented regarding risk groups:
     a) the process for determining, approving, and reviewing risk groups is adequately documented, b) the risk groups applied by the financial institution are predefined and approved by the governing body with management authority of the financial institution, c) the initial classification of exposures is regularly reviewed, and d) the financial institution reclassifies if it becomes aware of new information that changes its expectations regarding credit risk and justifies the reclassification of certain exposures into a new risk group.

191. If ressegmentation is not possible for some reason, the financial institution may use a temporary solution – in a documented manner, while upholding expected corporate governance standards – by making a temporary adjustment to impairment. However, this should only occur in extremely justified cases (e.g., there is no sufficient time available to decide how new information should be taken into account in classification into a risk group, or exposures do not react to certain factors or events in the originally expected manner). However, if the justification for the adjustment persists, it may be justified to review the applied risk groups to incorporate the given risk indicator.

XIV. Credit risk stress tests

192. The concept of stress testing encompasses all quantitative and qualitative analytical techniques and risk management methods that enable the financial institution to obtain a comprehensive picture of the risk exposures and vulnerabilities of the entire financial institution or certain sub-portfolios in exceptional but realistic situations that may arise as a result of rare and severe external risk events. Due to the recent financial and economic crisis situation, the MNB attaches special importance to regular stress tests, including credit risk stress tests.

193. Regarding credit risk stress tests, the MNB expects 15 that
     a) they are developed and applied in a proportional manner, consistent with the magnitude of the financial institution's credit risk exposure, risk appetite, risk-taking willingness, and risk profile, b) they are incorporated into the financial institution's comprehensive stress testing practice and

15 The general expectations regarding stress tests of financial institutions subject to the CRR are contained in the guide titled "Internal Capital Adequacy Assessment Process (ICAAP), Internal Liquidity Adequacy Assessment Process (ILAAP) and their supervisory review, as well as Business Model Analysis (BMA)" (hereinafter: ICAAP, ILAAP, BMA guide). ICAAP–ILAAP-BMA – Supervisory Reviews (mnb.hu)

12 Other provisions make model validation more frequent than every three years necessary for institutions subject to the CRR.

13 This is also a statutory requirement for financial institutions and investment firms based on Regulation No. 39/2016. (X. 11.) of the MNB.

14 Institutions subject to the CRR apply customer- or transaction-level ratings taking into account Article 178(1) of the CRR.

programs, c) potential determining conditions shall be taken into account in the financial institution's comprehensive reverse stress testing program, d) they shall take into account the interconnections of credit risk with other risk types and account for secondary effects (e.g., risk contagion across risk types and financial institutions, risk avoidance possibilities), e) they shall take into account the results of stress tests for other risk types, thereby contributing to an overview of the financial institution's overall risk situation, f) they shall evaluate the effects on impairment accounting, the financial institution's profitability, and economic capital.

194. The MNB deems it necessary that credit risk stress tests
     a) apply various types of stress scenarios (individual, institution-specific changes, changes in relevant external macroeconomic and market factors, and combined testing of these), b) handle stress situations of varying severity, c) apply to different time horizons, d) take into account that assumptions for different credit risk classes may differ, e) define conditions for collateral that take into account factors affecting the enforceability of collateral (e.g., deterioration of guarantor creditworthiness, market liquidity), f) their results shall be taken into account during the financial institution's internal capital adequacy assessment process (ICAAP).

195. It is expected that the financial institution regularly reviews the assumptions and validity of the scenarios underlying credit risk stress tests at least once a year, and in justified cases (e.g., money market turbulence) more frequently.

196. According to the MNB's expectation, comprehensive credit risk stress tests cover all credit risk exposures of the financial institution.

197. The MNB recommends that when assessing risks against central counterparties and shadow banking entities, financial institutions pay special attention to risk concentrations and not overlook the fact that access to collateral may be impaired in stress situations, or the need for additional collateral may arise.

198. The MNB expects that the financial institution adequately documents the applied stress tests and establishes the procedure for modifying stress tests in its internal regulations.

199. The MNB recommends that the results of credit risk stress tests be taken into account in the credit risk strategy and credit risk policy (including risk appetite), the limit system, and – if relevant – the parameters and assumptions of credit risk models, the determination and review of contingency scenarios, and – taking into account corrections due to specific usage purposes – the preparation of financial statements. Furthermore, credit risk stress test results must be incorporated into the regular review of recovery plans.

200. It is expected that the financial institution's governing body and management regularly review the internal system of credit risk stress tests, evaluate the results obtained, and take necessary steps. The scope of possible steps may include, among others, strengthening credit risk control functions, reducing credit risk exposures, increasing the financial institution's capital, or applying any combination of these instruments.

XV. Impairment Accounting

201. The financial institution accounts for impairment and forms provisions in accordance with applicable accounting rules.

202. For financial institutions applying the expected credit loss-based impairment model, the MNB expects that they develop and operate a credit risk management methodology that provides an adequate basis for fulfilling accounting requirements. Conversely, it is also expected that the expected loss-based impairment accounting implemented within the framework of accounting regulations builds upon the methodology for credit risk assessment and measurement.

203. To enforce the provisions of point 202, it is expected that financial institutions applying the expected credit loss-based impairment model align their credit risk assumption, monitoring, and impairment accounting processes, systems, procedures, and data to the greatest possible extent.

204. The financial institution records and reviews concepts related to expected credit loss measurement [loss and migration rates, loss event, default] in the manner required by accounting regulations. If the financial institution uses different concepts, information, or assumptions for credit risk management, capital requirement calculation, and financial reporting purposes, the MNB expects that the financial institution's governing body approves such differences and that the background considerations for the differences are adequately documented.

205. Financial institutions applying the expected credit loss-based impairment model, in accordance with point 153, consider reasonable and justifiable factors and expectations affecting the collectability of the cash-flow amounts due during the remaining maturity of individual exposures or portfolios when determining the amount of impairment.

206. It is advisable if the applied – individual or collective – assessment method within the framework of expected credit loss-based impairment accounting is consistent with the practice used during credit risk measurement (i.e., the financial institution assesses the same exposures individually during credit risk management as during the preparation of financial statements). For both assessment methods, it is expected that the expected credit loss is determined in a timely manner, which for financial institutions and investment firms subject to Regulation No. 39/2016. (X. 11.) MNB also means aligning the frequency of impairment accounting review with the minimum quarterly review required during the classification of exposures.

207. When applying individual assessment, the MNB considers it good practice to classify certain exposures into the same risk group if the factors influencing credit risk do not manifest individually, but the effect on the development of credit risk is evident when evaluating multiple exposures collectively (e.g., the effect of changes in housing prices on real estate exposures) 16.

208. The MNB expects that financial institutions follow prudent impairment accounting and provision formation practices within the framework of IFRS.

209. In connection with impairment accounting, regarding the application of the IFRS 9 standard from 2018, the MNB expects, in addition to the provisions of this recommendation, the adherence to Recommendation No. 12/2017. (XI. 6.) MNB on issues related to the application of IFRS 9 impairment requirements, issued at the time of this recommendation.

XVI. Capital Requirement Calculation and Supervisory Review

210. Financial institutions subject to the CRR comply with capital requirement regulations in connection with their credit risk exposures. The framework for this is defined by sectoral laws and subordinate legal regulations.

211. For financial institutions subject to the CRR, the determination of capital requirements for credit risk exposures is one of the basic elements during the internal capital adequacy assessment process, which the MNB also checks during ICAAP reviews. In this regard, the guidelines contained in the ICAAP, ILAAP, and BMA guidelines serve as guidance.

212. Regulation (EU) 2019/630 of the European Parliament and of the Council 17 supplemented the existing prudential requirements related to own funds in the CRR regarding the minimum loss coverage for non-performing exposures, prescribing deductions from own funds in cases where non-performing exposures are not adequately covered by formed impairments, provisions, or other adjustments. In this context, the MNB expects that the financial institution records in its relevant procedures provisions regarding minimum loss coverage requirements, monitoring their fulfillment, possible instruments for fulfilling loss coverage requirements (impairment, provisions, deductions from capital, etc.), handling necessary deductions from own funds, and fulfilling relevant data reporting obligations.

213. The MNB draws attention to the fact that if, based on documents and data reporting provided by the financial institution during continuous supervisory or inspection activities, it determines that – considering the financial institution's portfolio quality, risk-bearing capacity, and procedures for handling non-performing exposures – the financial institution's applied requirements for minimum loss coverage are insufficient to ensure adequate coverage, the MNB may individually determine a loss coverage requirement exceeding the minimum specified in the CRR.

214. Furthermore, the MNB may, by issuing supervisory regulatory instruments (recommendations, circular letters), propose minimum loss coverage requirements applicable to certain sub-portfolios of financial institutions – considering the characteristics of the risk assumptions forming those sub-portfolios – and instruments for fulfilling loss coverage requirements for a broader group of supervised financial institutions.

XVII. Specific Issues in the Management of Credit Risk

XVII.1. Specialized Lending Exposures

215. For specialized lending exposures, considering their specific characteristics, the MNB expects special diligence and awareness of the nature and risk characteristics of the transactions from the financial institution.

216. The MNB expects that for specialized lending exposures, the financial institution develops and operates a specific credit risk assumption and management system taking into account the characteristics of the affected transactions.

217. According to the expectation, financial institutions conducting such activities develop and apply risk measurement models that enable the financial institution to adequately identify risks occurring in portfolio operations and that ensure adequate calculation of expected loss, potential unexpected losses arising during collection, and required capital requirements.

218. Regarding the management of specialized lending exposures, the MNB has issued several recommendations in recent periods 18, and expects the adherence to the requirements established therein, keeping in mind the general requirements fixed in this recommendation regarding the assumption, management, measurement, and control of credit risk.

XVII.1.1. Income-Producing Real Estate Financing

219. In the case of income-producing real estate financing, when applying point 83, the MNB expects that the financial institution examines the income-producing capability of the real estate and refinancing prospects.

220. In the case of income-producing real estate financing, when evaluating the customer's creditworthiness and solvency, the following assessments are expected:
     a) the sustainability of cash-flow, b) the quality of tenants, the impact of changes in income from current rent on the amortization schedule, lease conditions, maturities, and terms, and – if available – the tenant's previous payment behavior, c) the prospects for re-leasing, the cash-flow necessary for loan repayment according to the loan agreement in case re-leasing is needed, the performance of the asset during an economic recession, and the fluctuation of rental yields over time to evaluate excessive yield reduction, d) the required capital expenditures for the real estate during the loan term.

221. In the case of income-producing real estate financing, when applying point 86, the MNB expects the following assessments:
     a) the risk of re-leasing, including demand for similar properties, changes in rent, the length of the lease relative to loan repayment, the increase in the proportion of vacant area, maintenance and renovation costs, rent-free periods, and incentives for leasing, b) risks and delays related to refinancing, c) risks related to capital expenditures.

XVII.1.2. Project Financing

222. The MNB expects that when assuming credit risk for project loans, the financial institution takes into account that for this type of transaction, the primary source of repayment of claims is the income generated by the implemented project.

223. The MNB expects that for project loans, the customer must demonstrably have actual own funds (equity) before the first disbursement of the loan. Own funds may include physical and financial assets and costs serving the project's purposes, which are financially settled or deemed financially fulfilled in the project budget before the first disbursement, for which internal regulations must determine the proportion and value at which these assets are accepted.

224. It is recommended that unused financial instruments accepted as own funds be placed in a blocked escrow account, which serves to secure project costs certified by an expert determined by the financial institution depending on the project nature, and other payments to be financed from own funds arising later (including bank interest and costs).

225. It is further expected that accessible additional sources for covering potential cost overruns be available throughout the entire financing term, in forms acceptable to the financial institution (ready-made guarantees, corporate guarantees, bank guarantees, bank loans, escrow, etc.). If this is not provided, the actual equity ratio should be increased to an appropriate extent. The equity ratio must also be increased if the calculated exit price for the project (price reserve necessary for secure loan repayment) does not reach the minimally expected level.

226. The MNB expects that the financial institution assumes risk only for projects where the project sponsors or their corporate groups and the main contractor have professional experience, references, and secure financial backing appropriate to the project's size, complexity, and risks for the implementation and sponsor commitments required by market practice (e.g., standing by in case of potential cost overruns or cash-flow insufficiencies), which the financial institution must examine during decision preparation and evaluate during the decision-making process.

227. It is expected that the financial institution has sufficient information on the sponsor's business data and financial situation, and examines the sponsor with the same detail as the debtor. It is important to evaluate especially the sponsor's role in the project, previous and current activities, references, ownership and financial-economic background in the case of legal entity sponsors, and the sponsor's potential negative impact on the project's reputation.

228. The MNB expects that the financial institution assumes risk only for projects where a main contractor contract is concluded. If not, the financial institution must ensure that the customer contracts with a company having sufficient references capable of fulfilling the expected guarantee obligations.

229. The MNB expects that the financial institution establishes an account structure ensuring the fulfillment of the following conditions:
     a) the financial institution disburses loan amounts to an account where it can ensure their blocking, and from which, using separate transfer orders, amounts certified by the entrusted expert and accepted by the financial institution can be transferred to target accounts corresponding to the financing structure, b) the main contractor must transfer revenues from the project to an account where the blocking of amounts can be ensured, c) if a VAT loan is associated with the loan for financing net costs, the debtor must provide a VAT return with a tax number held by the financial institution, excluded from the debtor's independent disposal, as the place for VAT refund, where the blocking of amounts can be ensured.

XVII.1.3. Real Estate Development Financing

230. Real estate development financing, and within that, residential real estate development financing, can be considered a special case of project financing, and Recommendations No. 12/2018. (II. 27.) MNB, No. 6/2023. (VI. 23.) MNB, and No. 18/2022. (XII. 1.) MNB establish further requirements for their management.

XVII.1.4. Ship Financing

231. In the case of ship purchase and operation, when applying point 83, the MNB expects that the financial institution also examines the following:
     a) operating costs proportional to revenue related to ship maintenance, including insurance, wages, maintenance, and interest costs, b) the ratio of the ship's current age to its expected useful life, c) fleet characteristics relative to the total fleet population (rate of new shipbuilding, number of decommissioned ships, demand for the ship type in question), d) valuations of ships (if they serve as a source of repayment) and expected sales costs.

XVII.1.5. Highly Leveraged Transactions

232. Regarding the credit risk treatment of highly leveraged transactions, the MNB expects that financial institutions fix the following in their internal regulations:
     a) the applied concept of highly leveraged transactions, b) measures ensuring consistent application of the concept of highly leveraged transactions, c) provisions regarding the regular review of the concept of highly leveraged transactions, d) risk appetite and risk strategy for highly leveraged transactions, e) the process and procedure for assuming highly leveraged transactions (limits, decision-making authorities, etc.), f) provisions for risk identification, measurement, monitoring, and control related to highly leveraged transactions.

233. Regarding the credit risk treatment of highly leveraged transactions – including the definition of the concept of highly leveraged transactions – the MNB considers it good practice to follow the contents of the European Central Bank's guidance on leveraged transactions published on May 16, 2017 19.

234. Nevertheless, the MNB expects that financial institutions – despite the specially designed risk assumption and management framework – only assume exposures resulting in highly leveraged transactions to a limited extent.

XVII.2. Foreign Currency Loans

235. In connection with foreign currency-based lending, special attention is required from the financial institution regarding the non-linear relationship between credit risk and market risk, which means that market risk arising from an increase in the foreign exchange rate may disproportionately affect the credit risk of a financial institution's foreign currency loan portfolio, sometimes significantly influencing the financial institution's overall risk profile. Lending in foreign currency may also cause higher residual risk if the value of the loan collateral does not follow the increase in exposure value resulting from the exchange rate increase. All these

Furthermore, the financial organization may also face credit risk concentration if a large part of its loan portfolio is denominated in the same currency or strongly correlated currencies.

236. In view of the special risks of foreign currency lending, the MNB recommends the following:
     a) during client and partner rating, and when making the decision on disbursement, the financial organization shall take into account the client's/partner's expected future revenues in the given currency, as well as the possible impact of exchange rate movements on the client's/partner's solvency and the value of collateral; b) during credit risk monitoring activities, the financial organization shall ensure continuous tracking of the impact of exchange rate movements and take this into account in the assessment of claims and the calculation of capital requirements; c) the financial organization shall regularly evaluate the institutional or group-level effects and risks of foreign currency lending activities.

XVII.3. Country Risk

237. In designing the country risk limit system, the MNB considers the use of both external country rating systems and internal rating systems acceptable.

238. If the financial organization uses its own internal rating, the following are recommended to be taken into account when assessing political risk and transfer risk:
     a) political relations, b) economic performance, economic growth, c) the situation of the balance of trade and payments, d) external debt, debt ratios, e) ratings by external rating agencies, f) debt repayment experience, rescheduled or suspended debts, g) the valuation of international bond markets, h) syndicated borrowing and its terms, i) availability and terms of bank loans and other financing options (forfaiting market), j) the country's economic outlook, the probability of suspension or rescheduling of debt repayment.

XVII.4. Concentration Risk

239. Based on the MNB's expectations, the financial organization strives to reduce its concentration risks. This includes not only the diversification of exposures towards a single client, partner, issuer, or client group (large risk-bearing positions), but also keeping other potential loss-generating concentrations (sectoral concentration, country concentration, collateral concentration, etc.) within appropriate frameworks.

240. For smaller financial organizations and those engaged in special activities (e.g., mortgage credit institutions), it is particularly important to place adequate emphasis on the identification and management of concentration risks. While smaller size and special activity alone do not justify assuming higher concentration risk, as narrower markets and specialized activities can be offset by comparative advantages such as deeper market knowledge and greater expertise, practical experience shows that this group of institutions reacts more sensitively to shocks traceable to common risk factors.

241. An institution subject to the CRR (hereinafter: institution, in the context of points 241–245, XVII.11, and XVII.12) is obliged to notify the supervisory authority immediately if its exposures exceed the thresholds set out in Article 395(1). In reporting the breach of large exposure limits pursuant to Article 396(1) of the CRR, the MNB expects at least the following information to be made available:
     a) the amount of the breaches and the magnitude of the breach of large exposure limits relative to the core capital; b) the name and identification data of the affected client, and where applicable, the name of the group of connected affected clients; c) the time of occurrence of the breach of the limits; d) a description of the available collateral(s) (regardless of whether the collateral qualifies as eligible collateral for credit risk mitigation purposes), if any; e) a detailed explanation of the reasons for the breach of the limits; f) corrective measures already implemented or planned; g) the expected duration required to regain compliance with the large exposure limits. In the case of a client group, the information specified in points (a) and (c)–(g) is expected to be presented not only at the client group level but also broken down by members belonging to the client group, provided these can be interpreted at the client group member level.

242. If the MNB grants the institution a period longer than three months to regain compliance with the thresholds referred to in Article 395(1) of the CRR in connection with the institution's notification, it is expected that the institution submits a compliance plan to the MNB aimed at regaining compliance with the large exposure limits within fifteen days from the date the institution becomes aware of the deadline for restoring compliance with the large exposure limits.

243. Based on the MNB's expectations, the compliance plan referred to in point 242 must cover at least the following:
     a) determination of measures aimed at restoring the large exposure limits, including measures to reduce the affected exposure(s) and, where appropriate, measures to increase the institution's own funds; b) measures necessary to strengthen risk management and internal control (risk control, compliance assurance) procedures in connection with the breach of large exposure limits, including necessary modifications to policies and regulations affecting risk management and internal controls; c) procedures ensuring the timely implementation of the measures specified in point (a); d) a detailed schedule for the implementation of the measures specified in point (a), taking into account the final deadline determined by the MNB for regaining compliance with the large exposure limits; e) the risks and possible obstacles to the successful and timely implementation of the compliance plan.

244. It is expected that the institution notifies the MNB immediately if, during the implementation of the compliance plan, it determines that certain prescribed measures cannot be realized as planned.

245. In line with the general expectations of Recommendation No. 12/2022. (VIII. 11.) of the MNB, it is expected that the responsibility of the governing body of the institution lies in determining the execution of measures taken to ensure regaining compliance with the thresholds referred to in Article 395(1) of the CRR within the deadline determined by the MNB, and that the governing body pays special attention to overseeing the execution of measures necessary for regaining compliance with the large exposure limits.

XVII.5. Securitization Risk

246. Securitization is relevant for the financial organization either as a participant in the securitization transaction (e.g., an investor assuming credit risk or a sponsor) or as a user of securitization as a risk-reduction tool. The MNB expects that the economic substance of transactions is reflected in the financial organization's risk-taking decisions, and that the financial organization takes into account the management and monitoring of risks associated with securitization.

XVII.6. Pre-settlement Risk

247. Financial organizations executing spot transactions, as well as forward and option transactions, are exposed to pre-settlement risk due to exchange rate changes until settlement. The risk consists of the replacement cost of the transaction if positive, which may be supplemented by the "opportunity cost" of foregone exchange gains if the transaction is renewed at a worse rate or not at all, as well as the amount of the possible future credit risk (volatility) of the financial instrument included in the transaction for the period until the instruction for settlement is revoked. The MNB recommends that financial organizations limit pre-settlement risks by requiring segregation of security deposits (cash collateral, margin) or by defining pre-settlement limits.

248. The MNB expects that the method for calculating the creation and change of security deposits, as well as the method for creating and changing pre-settlement limits and the specific limits and their loading methods, are determined by an organizational unit independent of the business area of the financial organization, in accordance with the provisions of the internal regulations.

XVII.7. Settlement Risk and Open Forward Risk

249. Treasury transactions, trading book items (transactions), and capital market transactions concluded within the framework of investment services activities carry settlement risk, which constitutes a unique blend of credit and liquidity risk. For the financial organization, this poses a risk that the contracting partner does not fulfill or delays fulfilling its obligations (e.g., payment or delivery of securities). Due to close business relationships between financial organizations, this may cause the originally performing party to be unable to fulfill transactions with third parties in time (e.g., due to unavailability of financial instruments or liquidity problems). Market participants assume varying degrees of risk related to securities clearing depending on whether the transaction is guaranteed (whether it takes place with the participation of a central counterparty), how clearing occurs, and how many markets or clearing systems are involved. The MNB draws attention to the fact that cross-border and multi-market securities clearing – especially difficulties arising from lack of interoperability of systems – contain increased risks, and custody chains also indicate the relevance of replacement costs and liquidity risk.

250. Since settlement risk consists of credit and liquidity risk elements, it is expected that its management is also carried out in a combined manner (strategy, policy development, internal regulation, limitation of transaction types, definition of limits, risk measurement methods, risk control activities), taking into account the provisions contained in this recommendation and in Recommendation No. 12/2015. (VIII. 24.) of the MNB on the measurement, management, and control of liquidity risks issued at the time of this recommendation.

XVII.8. Special Risks of Commission-Based Trading

251. A financial organization concludes commission-based transactions with advance fulfillment, free advance fulfillment limit, or collateral. In the case of advance fulfillment, in a purchase order transaction, the consideration, or in the case of a securities sale, the securities are deposited with the financial organization by the instructing client at the time of concluding the mandate contract. At this time, the financial organization has neither performance nor open forward risk towards the client. However, if the instructing client has not fulfilled in advance, but the financial organization has concluded the contract with the trading partner regarding the subject matter of the mandate, the financial organization assumes risk towards the client because it must perform towards the partner at the contractual price even if the instructing client does not perform. In commission-based buying, if the spot price is lower than the contracted price, the financial organization suffers a loss up to the extent of the exchange rate difference because, in case of non-performance by the instructing client, it must sell the securities or currency bought for the instructing client and held in margin at the spot price. In commission-based selling, conversely, a loss up to the extent of the exchange rate difference arises if the spot price is higher than the contracted price. It is expected that the special risks arising in connection with the above are managed as part of credit risk management.

XVII.9. Special Risks of the Insurance Sector

252. It is expected that when applying legal provisions and relevant recommendations of the MNB, including among others the Recommendation No. 22/2015. (XII. 8.) of the MNB on the management of market and counterparty exposures determined by the standard formula, insurers and reinsurers (hereinafter together: insurer) pay particular attention to the following principles during the management of credit risks:
     a) the insurer shall take appropriate steps to ensure that the methods and models used are suitable to adequately assess credit risk in cases where the insurer's exposures are significant in absolute terms and simultaneously it has a large number of significant partners; b) when determining the credit rating classification used for calculating the credit risk-related capital requirement linked to the solvency capital requirement, if the insurer does not determine it based on an approved model, it shall not make biased estimates of credit risk, and the insurer's own credit rating shall not lead to a capital requirement lower than that derived from external ratings; c) the adjustment of credit risk to the basic risk-free return shall be performed based on market interest rates reflecting credit risk appearing in the variable interest rate of interest rate swaps, to which the insurer applies the relevant provisions of Directive 2014/51/EU of the European Parliament and of the Council 20 and Commission Delegated Regulation (EU) 2015/35; d) when a reliable credit risk interest rate differential cannot be derived from default statistics, such as in the case of exposures against government bonds, the insurer shall apply points (b) and (c) of Article 77c(2) of Solvency II and act in accordance with Article 77e(1). In the case of exposures against central governments and central banks of Member States, the asset class reflects differences between individual Member States; e) all credit risks must be taken into account in the solvency capital requirement calculated by the standard formula, including all credit risks related to every partner to which the insurer is exposed, and every exposure that is not taken into account by either the interest rate risk sub-module or the counterparty default risk module as "Type-1" exposure; these shall be taken into account as "Type-2" exposure in the counterparty default risk module; f) in the event of counterparty default, the counterparty default risk module of the standard formula reflects the economic effect of collateral agreements, particularly considering whether full ownership of the collateral is transferred, and how it is considered whether the insurer receives the collateral when determining the proportional share exceeding the collateral in case of counterparty insolvency; g) insured persons, policyholders, beneficiaries, and any injured party who has direct right of action against the insurer due to a claim for damages arising from insurance transactions shall be protected in liquidation proceedings, except for claims that do not arise from obligations resulting from insurance contracts or insurance transactions.

20 Directive 2014/51/EU of the European Parliament and of the Council of 16 April 2014 amending Directives 2003/71/EC and 2009/138/EC and Regulations (EC) No 1060/2009, (EU) No 1094/2010 and (EU) No 1095/2010 in respect of the powers of the European Supervisory Authority (European Insurance and Occupational Pensions Authority) and the European Supervisory Authority (European Securities and Markets Authority)

XVII.10. Specific Expectations Regarding Asset Managers

253. With regard to asset managers, the MNB expects the application of the expectations of this recommendation, taking into account the specific supervisory expectations applicable to the affected financial organizations 21.

21 At the time of issuance of this recommendation: Recommendation No. 3/2021. (III. 4.) of the MNB on stress testing scenarios for money market funds, Recommendation No. 12/2021. (VIII. 24.) of the MNB on the measurement and calculation of total exposure and counterparty risk of UCITS and UCITS asset managers, Recommendation No. 13/2021. (VIII. 24.) of the MNB on the operational requirements of index-tracking UCITS and exchange-traded funds qualifying as UCITS, Recommendation No. 9/2023. (IX. 15.) of the MNB on internal rules of capital market institutions regarding personal transactions.

XVII.11. Management of Risk Exposures According to Recital (60) of the CRR

254. Recital (60) of the CRR provides for the management of risk exposures towards the institution's own parent undertaking or other subsidiaries of the parent undertaking. In this context, the MNB expects that the institution applies the treatment established in Recital (60) of the CRR towards direct or indirect owners holding a participating interest of 10% or more in the institution, persons with managerial rights based on contract or other grounds (e.g., appointment of members of governing bodies, decisions on dividend payment) in the institution (hereinafter together: owner, in the context of point XVII.11), and towards interests of such owners, which hold a direct or indirect participating interest of 10% or more, or have managerial rights based on contract or other grounds (e.g., appointment of members of governing bodies, decisions on dividend payment). Persons towards whom risk exposures are secured by collateral placed by the owners for the benefit of the institution must also be included in this category.

255. In line with Recital (60) of the CRR, it is not necessary to apply the expectations fixed in point XVII.11 in cases where the owner is a financial holding company or credit institution, or if the other subsidiaries are credit institutions or financial undertakings or ancillary service-providing undertakings, provided that consolidated supervision extends to all such undertakings.

256. The MNB expects that the governing body with managerial powers – in a documentable manner – directly monitors the development of the portfolio of exposures referred to in point 254, ensures regular verification of the current solvency of persons falling under the scope of the prescription, and continuously monitors the degree of change in risks.

257. The MNB expects that the institution has a procedural system and processes suitable for identifying risk exposures referred to in point 254, and appropriately managing the risks arising from the belonging of these risk exposures to the owner-interest circle, including but not exclusively providing a sufficiently high level of decision-making, prudent decision-making procedure, establishment of relevant internal limits, and high-level monitoring of such types of risk exposures.

258. The MNB deems it justified that this procedural system and processes for risk exposures referred to in point 254, and for persons towards whom the risk exposure is made (borrower) and who provide collateral (obligation containing a payment promise, e.g., guarantee) for the risk exposure (hereinafter: collateral provider), ensure the regular and documented verification and analysis of the following, and the appropriate management of risks arising from their current state and changes therein:
     a) the identification of the borrower's, and where relevant the collateral provider's owner circle, including the ultimate beneficiary circle, and the participating percentages of each owner; b) the development and exercise of managerial rights over the borrower, and where relevant the collateral provider; c) the development of the collateral relationship (new collateral provider or existence of collateral, or release of collateral); d) the borrower's, and where relevant the collateral provider's:
     da) payment (repayment) history, db) expected development of payment ability, dc) analysis of financial data, dd) evaluation of current and expected future market and competitive position in the industry/business sector; e) the development of the current value and enforceability of the collaterals; f) the actual or expected impact on the economic situation of the institution's owner circle in case of deterioration of the economic position of the borrower and the collateral provider (actual or probable).

259. In the MNB's opinion, the sufficiently high level of decision-making procedure regarding risk exposures referred to in point 254 means the competence of the highest level of the institution's body making risk-taking decisions or a special body in which members of the governing body with managerial powers play a decisive role.

260. The MNB further expects that
     a) the area responsible for operational risk management of the institution regularly prepares a statement containing exposures towards persons referred to in point 254 broken down by owners according to the criteria given in point 258; b) the statement prepared by the area responsible for operational risk management of the institution contains the conditions of risk exposures towards persons referred to in point 254, highlighting those items where the accepted conditions differ from the generally applied conditions in internal regulations, product descriptions, or where the transaction was authorized by an individual (override) decision due to non-compliance with the prescribed conditions for risk exposure; c) the area responsible for operational risk management of the institution ensures proper documentation of the statements specified in points (a) and (b); d) the risk control function and the compliance area receive the statements specified in points (a) and (b), and both areas regularly evaluate them; e) the head of the risk control function, with the agreement of the head of the compliance area, directly or through the 12/2022. (VIII.

11.) Through the Chief Risk Officer (CRO) referred to in point 102, submit a quarterly report to the governing body and the supervisory body for discussion; the bodies must then decide by resolution on the acceptance of the information or on the method of managing risks arising from the application of different conditions;

f) receive ad hoc information from the governing body and the supervisory body regarding new large exposures and breaches of large exposure limits as specified in point 254;

g) give special priority in the risk analysis preceding the preparation of the internal audit annual plan to the examination of exposures referred to in point 254 (including the control of record-keeping and the examination of the adequacy of exposure decisions), taking into account the risk weight of such types of exposures at the institution;

h) as a best practice, the institution's internal audit shall examine the records concerning exposures referred to in point 254 at least annually, and subject the transactions classified as large exposures included therein to item-by-item examination with the same frequency, recording any omission and its reasons in the annual audit plan.

261. The MNB also expects that the institution sends the examination report containing the results of the examination performed by the internal audit, as well as information on the measures taken to eliminate deficiencies, to the MNB no later than June 30 of the relevant year, following its acceptance by the governing body and the supervisory body.

XVII.12. Proportional diversification methods for exposures to retail customers at financial institutions

262. According to Article 123 of the CRR, one of the conditions for classifying an exposure as an exposure to a retail customer is that the exposure in question is one of a significant number of exposures with similar characteristics, i.e., it belongs to a sufficiently diversified portfolio. In the MNB's opinion, an institution may consider a credit portfolio to be a sufficiently diversified portfolio if the ratio of the value of large, acceptable exposures to retail customers in the portfolio to the total value of all acceptable exposures to retail customers of the institution does not exceed 10%.

263. If the institution's portfolio consisting of all exposures to retail customers meeting the conditions of Article 123(1)(a), (b), and (d) of the CRR does not meet the condition defined in point 262, the institution may exclude one or more large, acceptable exposures to retail customers from the portfolio in order for the portfolio to meet the condition defined in point 262.

264. An exposure excluded according to point 263 shall not be considered an exposure belonging to a significant number of exposures with similar characteristics for the purposes of Article 123(1)(c) of the CRR.

265. In the opinion of the MNB, in the case of portfolios containing securitized exposures, the assessment of compliance with the diversification condition mentioned in point 262 regarding the underlying exposures to retail customers serving as the basis for securitization shall be carried out in accordance with Article 255(6) of the CRR as if these underlying exposures had not been securitized. Therefore, the institution is expected to calculate the ratio mentioned in point 262 and determine large, acceptable exposures to retail customers separately for three sub-portfolios as follows:

a) in the case of the sub-portfolio consisting of non-securitized exposures, only non-securitized exposures are included in the numerator and the denominator;

b) in the case of the sub-portfolio consisting of securitized exposures, if the institution acts as a securitizer, both the numerator and the denominator include these securitized exposures and all non-securitized exposures;

c) in the case of the sub-portfolio consisting of securitized exposures, if the institution acts as an investor, the numerator and the denominator include only the underlying securitized exposures.

266. Contrary to point 265, in the case of securitized exposures where the institution acts as an investor, the institution may consider the assessment of diversification defined in point 262 for its existing investor position in securitization to be automatically fulfilled if, regarding the underlying exposures, the templates referred to in Article 7 of Regulation (EU) 2017/2402 of the European Parliament and of the Council do not require information on the obligor and the exposure value of the underlying exposures of the given securitization positions in accordance with the transparency and disclosure requirements defined in Articles 5 and 7 of Regulation (EU) 2017/2402. This exception may only be applied in cases where the templates prescribed based on Article 7(4) of Regulation (EU) 2017/2402 do not contain information on the obligor and the size of the obligor.

XVIII. Restructuring

267. Financial organizations often make use of the tool of claim restructuring. The reasons for this may be various. From a risk management perspective, the MNB encourages any practice aimed at the permanent restoration of the borrower's solvency or the prevention of the emergence of problems affecting the fulfillment of the borrower's financial obligations (becoming non-performing).

268. It is expected that the financial organization develops a restructuring policy consistent with its specific characteristics, approved by the governing body of the financial organization and regularly reviewed (the MNB considers annual evaluation at least as good practice), and operates a corresponding restructuring practice. Different policies may be established for different segments, adapting to the specific characteristics of the respective segment (for example, in the case of less complex transactions representing smaller exposures, it is advisable to strive for simple decision-making processes and standard solutions).

269. The MNB expects that the financial organization specifies in its internal regulations in connection with restructuring:

a) the financial and other information to be requested from the borrower to justify the decision on restructuring measures;

b) the set of indicators and rates used for the assessment of the borrower's payment capacity according to point 277;

c) the applicable short-term and long-term restructuring measures;

d) the collateral valuation rules associated with the restructuring measure;

e) the process, procedure, responsibility, and authority system for selecting the restructuring measure actually applied or the combination of restructuring measures;

f) the decision-making procedure for the restructuring measure, addressing the regulations applicable in the event of repeated restructuring;

g) if relevant, specific regulations regarding the restructuring of retail claims, including among others the determination of affected portfolios, segments, and standardized restructuring measures, the process of their application, procedure, responsibility, and authority system;

h) the organizational framework for the management of restructured exposures;

i) documentation and record-keeping requirements for restructured claims, which enable, among other things, the subsequent determination of how the conditions of the original contract were modified and what new conditions were established;

j) processes for the continuous monitoring of restructured exposures;

k) internal reporting requirements affecting restructuring measures;

l) internal audit tasks, procedures, and systems related to restructuring (process-embedded, managerial control, and internal audit).

270. The MNB expects that the financial organization applies only short-term or long-term restructuring measures that are viable and represent a real solution to the problems arising. In most cases, a combination of short-term and long-term measures represents the most effective method, the assessment of which should be based on comparing the net present value of the result achievable by the proposed solution with the net present value of the result achievable by other possible solutions (e.g., sale of the claim).

271. The MNB recommends the standalone application of short-term restructuring measures (not exceeding one year for project loans, and up to two years for other claims) only if the following conditions are met simultaneously:

a) an extraordinary circumstance causing the borrower's temporary liquidity difficulties can be clearly identified, and it does not affect the borrower's long-term solvency;

b) the borrower's income situation is expected to be resolved in the short term;

c) the borrower is cooperative and has fully complied with the contractual payment obligation during the period specified in the financial organization's internal regulations prior to the restructuring measure.

272. A short-term restructuring measure is considered viable in the following cases:

a) the borrower is able to fulfill its obligations in accordance with the modified contractual terms;

b) the financial organization is convinced that the borrower is expected to be able to fully settle the original payment obligations after the measure;

c) the solution truly serves only short-term goals, and the same exposure is not applied without interruption or in succession multiple times within a short period.

273. A long-term restructuring measure is considered viable in the following cases:

a) the borrower is able to fulfill its obligations in accordance with the modified contractual terms;

b) the collection of all capital and other claims under the modified contract (not just part of the claims, e.g., interest) is aimed at, and the total amount of claims against the borrower is expected to decrease even in the medium term;

c) if the measure follows a previous restructuring measure or replaces it, additional control elements are incorporated (e.g., prior involvement of risk management, conducting a completely new exposure decision-making procedure).

274. The following may be applied particularly as short-term restructuring measures:

a) the borrower fulfills only its interest payment obligations for a predetermined short period, with the amount of the capital claim remaining unchanged, such that the repayment structure is re-evaluated after the restructuring measure;

b) the borrower pays reduced installments for a predetermined short period, with an unchanged interest rate;

c) moratorium on capital and interest payments.

275. The following may be applied particularly as long-term restructuring measures:

a) reduction of the interest rate, granting other favorable terms regarding pricing;

b) extension of the maturity;

c) provision of additional collateral (not as a standalone measure);

d) exchange of collateral stipulated in the original contract with other collateral, or waiver of collateral (release of collateral);

e) sale of the collateral provided by the borrower with the assistance of the financial organization, and reduction of the claim amount by that;

f) development of new contractual terms (including, for example, the involvement of a new co-borrower, application of legal provisions) or the elimination of part of the original terms;

g) complete review of the repayment program, which may aim at partial prepayment, increasing the amount of the capital claim by the amount of overdue capital or interest claims, enabling a so-called "balloon or bullet" structure, or ensuring continuously increasing repayments;

h) change of the currency of the claim;

i) provision of new credit;

j) debt consolidation, transformation of multiple existing claims into one claim;

k) total or partial debt forgiveness.

276. Based on the MNB's expectations, a restructuring measure may only be applied following an appropriate decision-preparation procedure and in a documented manner.

277. It is expected that the preparation of the decision to apply a restructuring measure includes an examination of whether the borrower is expected to be able to meet its obligations under the new terms offered by the financial organization, based on the assessment of its current and conservatively evaluated future payment capacities. In the case of retail claims, the use of decision trees is permitted when applying standardized restructuring measures.

278. In the case of retail claims, the MNB considers it good practice during the assessment according to point 277 that:

a) the financial organization reviews the claims against the same borrower individually and collectively;

b) the financial organization analyzes when and what reasons led to the emergence of the borrower's financial difficulties and what probable consequences the previous events may have regarding the proposed solution;

c) the borrower's current and expected payment ability is also evaluated;

d) financial and non-financial information regarding the borrower is taken into account during the assessment;

e) the financial organization takes into account the borrower's total indebtedness level;

f) the financial organization examines the amount of the borrower's current expenses and their expected increase or decrease;

g) the installments of the new structure (especially if they are higher than the installments of the original contract due to the capitalization of interest and unchanged maturity) do not exceed the amount remaining after deducting the borrower's expected expenses and other obligations from the borrower's expected income;

h) an assessment is made as to whether the new contractual terms are acceptable considering the borrower's minimally required standard of living;

i) in the case of maturity extension, the financial organization takes into account whether there is any factor (e.g., the borrower's expected retirement) that may affect the viability of the structure;

j) if relevant, the financial organization also examines the payment ability of the provider of the collateral;

k) the documents of the last collateral valuation are taken into account.

279. In the case of retail claims, when evaluating the current payment ability, the financial organization should preferably take into account the following factors:

a) personal financial and non-financial information (e.g., dependents, household expenses, employment, income, expenses);

b) the borrower's total indebtedness;

c) the amount of the delay;

d) the borrower's current payment capacity;

e) past payment data;

f) the reasons for the payment delay (e.g., income decrease, unemployment);

g) the borrower's age.

280. In the case of retail claims, when evaluating future payment ability, the financial organization should preferably take into account the following factors:

a) the borrower's income;

b) the borrower's life stage;

c) the number and age of dependents;

d) the borrower's employment status and its prospects;

e) the industry in which the borrower operates;

f) the borrower's savings and other assets;

g) the borrower's other loans and obligations;

h) the borrower's future payment capacities;

i) minimum standard of living;

j) relevant labor market indicators;

k) foreseeable changes in the borrower's circumstances (e.g., planned retirement).

281. In the case of corporate borrowers, the MNB expects that during the assessment according to point 277:

a) the financial organization reviews the claims against the same borrower individually and collectively;

b) the financial organization analyzes when and what reasons led to the emergence of the borrower's financial difficulties and what probable consequences the previous events may have regarding the proposed solution;

c) the borrower's current and expected payment ability is also evaluated;

d) financial and non-financial information regarding the borrower is taken into account during the assessment;

e) the financial organization takes into account the borrower's total indebtedness level;

f) the installments of the new structure do not exceed the amount of the borrower's expected free cash flow;

g) if relevant, the financial organization also examines the payment ability of the provider of the collateral;

h) the documents of the last collateral valuation are taken into account.

282. In the case of corporate borrowers, when evaluating current and future solvency, the financial organization addresses the analysis of the following:

a) the borrower's current business model and expected changes;

b) past financial data;

c) the borrower's business plan (SWOT analysis, industry analysis, forecasts regarding financial ratios, basis of forecasts, evaluation of assumptions, etc.);

d) forecasts regarding cash flow and various cash flow indicators.

283. The MNB draws attention that when applying restructuring measures related to retail mortgage loans, the expectations contained in MNB Recommendation No. 5/2022 (IV. 22) on consumer protection principles expected in the handling of retail loan, loan, and financial leasing contracts affected by payment delay must also be taken into account.

XIX. Handling of non-performing exposures and restructured claims

284. The MNB expects that, taking into account the specific characteristics of the financial organization (volume of activities, nature, credit risk policy, exposures, consistency with other risks), it separately manages and keeps records of its non-performing exposures and restructured claims.

285. The MNB expects that the financial organization establishes processes, procedures, organizational systems, decision-making, responsibility, and authority systems for the measurement, management, and control of its non-performing exposures, proportional to the magnitude of the non-performing exposures (including early warning systems enabling the identification of potentially non-performing exposures).

286. The concepts of non-performing exposures and restructured claims are defined in MNB Regulation No. 39/2016. (X. 11.)22, and the MNB considers it good practice to follow the claims defined therein also in credit risk management activities. If supported by appropriate reasons, financial institutions and investment firms subject to MNB Regulation No. 39/2016. (X. 11.) may also use different concepts of non-performing exposures and restructured claims for risk management purposes.

287. It is expected that the financial organization defines in its internally approved and regularly reviewed regulations (the MNB considers annual evaluation at least as good practice) the following regarding non-performing exposures and restructured claims:

a) processes, procedures, tasks, organizational systems, responsibility, decision-making, and control authorities related to their management;

b) tools applicable during their management;

c) principles of management by external service providers, the method of contact with external claim managers;

d) its connections with asset classification, capital requirement calculation, and accounting treatment (impairment calculation, write-down);

e) its record-keeping and documentation requirements;

f) its reporting system;

g) its related control tasks (procedures, systems) connected with risk management and risk control functions.

288. The MNB expects that if the financial organization, with a customer (customer group),

22 The concepts defined in Articles 47a and 47b of the CRR can be mapped to the concepts of MNB Regulation No. 39/2016. (X. 11.).

If a transaction with a counterparty or issuer is classified as non-performing, the financial institution must treat all other credit risk-bearing transactions with that client (client group), counterparty, or issuer together with, or in light of, the non-performing transaction.

289. In line with the MNB's expectation, financial institutions should strive to use tools for managing their non-performing exposures (both individually and at the portfolio level) that do not result in the creation of a larger credit risk exposure than the original.

290. In maintaining contact with clients, counterparties, or issuers, in addition to complying with the provisions of Act XLVII of 2008 on the Prohibition of Unfair Commercial Practices Towards Consumers and sectoral legislation, it is expected that debt managers also follow the MNB's recommendations regarding consumer protection.

291. Regarding the management of non-performing real estate financing project loans, in addition to the above, the MNB also expects the implementation of the provisions set out in MNB Recommendation No. 12/2018. (II. 27.).

292. The MNB considers it important that experiences related to the emergence and management of non-performing exposures be integrated into the financial institution's internal regulations, procedures, methodologies, as well as its internal training and education system.

XX. Management of Claims Using External Service Providers

293. The MNB expects that financial institutions subject to the Financial Institutions Act (Hpt.) act in accordance with the expectations set out in Section 6(1) point 90(b) of the Hpt. and MNB Recommendation No. 7/2020. (VI. 3.) when they entrust an external service provider with the management of claims against any client, client group, counterparty, or issuer that are in any phase of non-performance, including overdue but not yet classified as non-performing according to MNB Regulation No. 39/2016. (X. 11.), claims classified as non-performing according to MNB Regulation No. 39/2016. (X. 11.), and claims subject to statutory debt restructuring procedures – including claims against guarantors – without transferring the claim to a third party.

294. Regarding the selection of external service providers who professionally engage in debt collection activities – excluding debt collection mandates within a financial group – the MNB considers best practice to be a selection process conducted via tender, with a frequency of at least every three years and participation of a minimum of three bidders.

295. The MNB expects that financial institutions pay attention to potential risks arising from concentration when entrusting debt collection activities to external service providers.

296. The MNB expects that the management of claims using external service providers be preceded by a risk assessment and a review by the compliance function responsible for ensuring conformity.

297. It is expected that agreements concluded for the management of claims using external service providers include, among other things:
     a) the debt collection and recovery tasks to be performed by the external service provider; b) the external service provider's obligations for regular and extraordinary reporting to the financial institution; c) the obligation to provide all information that comes to the knowledge of the external service provider during the debt collection process, which may be important for the financial institution from a risk management perspective.

298. The MNB considers it best practice if the commission or fee charged for the management of the claim is paid by the financial institution, not by the client or counterparty.

299. It is expected that the results of the risk assessment be reviewed regularly, at least once a year, regarding the use of external service providers for claims.

300. In connection with the application of point 33 of MNB Recommendation No. 7/2020. (VI. 3.), the MNB further expects that the regular reporting to the governing body with management authority give special attention to the provision of claim management services using external service providers.

301. It is expected that the financial institution regularly measure the performance of external service providers conducting debt collection activities for it and take the results of these evaluations into account when granting mandates to external service providers (in case of negative experiences, for example, by withdrawing certain debt collection activities from a specific provider, reallocating them to another provider, or terminating a contract with a specific provider).

302. The MNB expects that the mandate contract concluded with the external debt collection service provider clearly state what recovery and management steps the financial institution expects from the external debt collection service provider (for example, minimally required recovery steps, expected reporting obligations, suggestions for strategy, participation in negotiations). Furthermore, it is expected that the financial institution regularly measure the work of external service providers. Depending on the results of these measurements, it should determine measures (in case of negative experiences, for example, modifying the contract, reducing fees, reducing the number of mandates, restricting new mandates).

XXI. Recording, Reporting and Control System of Credit Risk

303. In line with the MNB's expectations, the internal systems, procedures, and processes of the financial institution, while effectively supporting the financial institution's credit risk management activities, must also provide a suitable environment for the monitoring and control of credit risk.

304. In accordance with the MNB's expectations, the financial institution's documentation and recording system related to credit risk exposures must extend to the preservation and maintenance of records of documents generated in connection with the assumption of credit risk, credit risk monitoring, identification and measurement of credit risk, classification of exposures, impairment accounting, provision formation, and capital requirement calculation.

305. The MNB expects that the management and the governing body with management authority of the financial institution be regularly informed – at least quarterly even for smaller financial institutions – about the financial institution's credit risk exposure – including recognized impairment – and its expected development.

306. It is a general expectation that the financial institution have an internal reporting system approved by the governing body with management authority and reviewed at frequencies specified in internal regulations, in order to ensure that the management of the financial institution and persons or organizational units involved in risk management and the implementation of the risk control function receive timely, accurate, clear, understandable, relevant and usable information with appropriate detail for the respective management level or organizational unit, capable of supporting decision-making regarding the extent, size, and types of credit risk, as well as the identification, measurement, or evaluation and monitoring of credit risks.

307. The management information system – taking into account the specificities of the financial institution – is recommended to incorporate the most important data and information related to credit risk exposure – including data and information related to the operation of the limit system, assumption of credit risk, credit risk monitoring activities, classification of exposures, impairment accounting, as well as non-performing exposures and restructured claims – which are regularly evaluated by the management and the governing body with management authority of the financial institution. The management information system must provide adequate oversight for the assessment of the credit risk of the entire financial institution. In accordance with the MNB's expectations, it shall be designed in line with the nature of the business model applied, as well as the specificities of the services provided by the financial institution or group – including characteristics arising from the organizational form – its extent, complexity, and risks. It is also expected that the operation of the management information system be reviewed if unforeseen, significant changes occur in the financial institution's risk characteristics and the economic environment.

308. It is recommended that internal audit, within the framework of its general examination program, periodically review the financial institution's credit risk exposure and its credit risk management and control activities (assumption, identification, measurement, continuous monitoring, process-embedded and management control). As part of this, it should examine the financial institution's credit risk policy, related internal regulation, systems – including internal and external reports – processes, procedures, applied assumptions and parameters, evaluate the adequacy of methods, review and test the applied measurement methods, and inform the management and the governing body with management authority about the results of the evaluation.

XXII. Data Infrastructure, Data Quality and IT Background of Credit Risk Management

309. It is expected that the financial institution have adequate data infrastructure to support the assumption, measurement, management, and control of credit risk as per this recommendation. The MNB considers best practice the use of the data fields of the transaction forms developed by the EBA for non-performing transactions in the establishment of credit risk data infrastructure.

310. In accordance with the MNB's expectations, the data infrastructure must be sufficiently detailed and ensure the availability of information regarding the exposure, client, counterparty, or issuer, as well as collateral, for all transactions, ensuring data continuity, integrity, and security throughout the validity period of the credit risk limit or the maturity of the assumed credit risk.

311. It is expected that the IT processes, systems, and applications used by the financial institution for the continuation, processing, and recording of its activities, as well as for the preparation of financial statements, be capable of supporting the assumption, measurement, management, and control of credit risk.

312. The MNB expects that the IT processes, systems, and applications of the financial institution:
     a) be capable of fully and clearly recording and aggregating all transactions carried out by the financial institution, taking into account their credit risk characteristics [including: classification category, estimated probability of default with appropriate adjustments, delinquency, "unlikely to pay" 25, loan-to-value ratio, historical loss rates, product type, repayment schedule, market segment, geographical location, remaining maturity, equity contribution, collateral]; b) adapt to the complexity and number of transactions resulting in credit risk; c) as far as possible, provide a unified basis for the measurement of credit risk, the determination of expected credit losses for accounting purposes, and the determination of expected losses for capital requirement purposes, in order to strengthen their reliability and consistency; d) be sufficiently flexible to handle a reasonable number and content of stress scenarios and to apply new scenarios; e) be capable of keeping pace with the introduction of new products; f) be regularly reviewed in light of necessary modifications due to changes in credit risk assumption activities and business processes.

313. It is expected that IT processes, systems, and applications enable the identification and measurement of the contribution of individual transactions to the credit risk exposure of the entire financial institution or group, and conversely, the impact of individual assets or portfolios within credit risk. In the case of financial groups, it is expected that unified data management systems be capable of ensuring the identification of concentration risks and problem clients at the group level.

314. In the case of complex, structured products, in order to comply with the MNB's expectations, IT systems must be capable of collecting information on the individual parts of the transaction and recording their credit risk characteristics.

315. The MNB expects that appropriate control mechanisms be in place regarding IT systems to prevent damage to data used by computer systems and applications dealing with credit risk, and to monitor changes in the coding used by such applications, particularly to ensure:
     a) the reliability of market and internal data used as input for credit risk models and the integrity of systems performing processing; b) the minimization, identification, and management of deficiencies related to the IT system (including errors occurring during data processing and aggregation); and c) the taking of appropriate measures in the event of market disruptions or recession 26.

XXIII. Disclosure

316. In disclosing information related to credit risk, the financial institution shall act in accordance with the requirements of relevant sectoral legislation 27 and the expectations of related supervisory regulatory instruments 28.

317. The MNB expects that financial institutions subject to the CRR disclose information as per Article 435 of the CRR also in relation to credit risk.

318. For financial institutions applying an impairment model based on expected credit losses, the MNB considers it particularly important in relation to disclosures on credit risk to ensure consistency between information disclosed within the prudential regulation and accounting regulation frameworks, and to consciously manage discrepancies.

319. In the context of disclosure within the prudential regulation framework, for financial institutions preparing their annual financial statements in accordance with IFRSs, it is considered best practice to disclose the information required by the IFRS 9 standard or to refer to the appropriate parts of the annual financial statement.

320. In publishing the report on solvency and financial position at both individual and group levels (which includes details of risk categories – including credit risk) – insurers shall act in accordance with Solvency II, Commission Delegated Regulation (EU) 2015/35, and implementing technical standards issued in accordance with Solvency II 29, taking into account the provisions of Section 108 of the Insurance Act (Bit.).

321. Regarding credit risk, in addition to the information required by relevant legal provisions and expected by supervisory regulatory instruments, the financial institution may also disclose descriptive information (for example, analyses of the expected development of the financial institution's credit risk exposure) and numerical information (for example, presenting concentration risks in a different context). The procedure for this should be appropriately recorded in internal regulations (for example, within the framework of the disclosure policy, although other solutions are also acceptable), specifying the purpose, depth, method, and frequency of the disclosure.

XXIV. Final Provisions

322. This recommendation is a regulatory instrument issued pursuant to Section 13(2)(i) of the MNB Act, which does not have binding force for supervised financial institutions. The content of the recommendation issued by the MNB expresses the requirements imposed by laws, principles and methods recommended for application based on the MNB's law enforcement practice, as well as market standards and customs.

323. The MNB monitors and evaluates compliance with the recommendation among the financial institutions it supervises during its monitoring and supervision activities, in line with general European supervisory practice.

324. The MNB draws attention to the fact that the financial institution may incorporate the content of the recommendation into its regulations. In this case, the financial institution is entitled to state that the provisions contained in its relevant regulations comply with the relevant numbered recommendation issued by the MNB. If the financial institution wishes to include only certain parts of the recommendation in its regulations, it should avoid referencing the recommendation and apply it only with regard to the parts lifted from the recommendation.

325. The MNB expects the affected financial institutions to apply this recommendation starting from October 1, 2026.

326. On October 1, 2026, Recommendation No. 7/2024. (VI. 21.) of the Magyar Nemzeti Bank on the Assumption, Measurement, Management and Control of Credit Risk shall cease to be in force.

Mihály Varga s.
President of the Magyar Nemzeti Bank