The Hungarian National Bank announced at the end of May that as of autumn 2014, Hungary wishes to follow the approach taken by many other countries by creating a "bad bank". The bad bank concept is not new in Hungary: the approach was already discussed back in 2010, but was turned down due to lack of financing. A bad bank is a special institution with the sole purpose of purchasing and managing the non-performing loans ("NPLs") of commercial banks, so the overall quality of the corporate portfolio of the commercial banks will improve and to make it easier for the banks to meet their capital requirements.

The proposed measure aims at the corporate portfolios of the banks. The bad bank would purchase corporate NPLs from the banks at an as yet undefined discount rate. Retail mortgage loan portfolios are currently not envisaged to be involved and they are not expected to be involved in the future as well. The rationale behind this is that there is an institution already in place for the retail NPLs, namely the National Asset Manager. However, the National Asset Manager works on a different structure, as it buys the houses of retail debtors and leases such houses back to them -- effectively turning the mortgage loans into an operative leasing structure. Moreover, it is not the banks, but rather the debtors who can turn to the National Asset Manager and offer their houses for sale. The purchase price is supposed to cover the debtors' outstanding debt towards the bank.

Turning back to the bad bank model: What are the current plans for financing it? That remains unclear, but it is expected that the bad bank will be state-owned, either directly or indirectly Even the idea of establishing the bad bank within the Hungarian National Bank (as a department or something of the like) has been floated. There are estimates that up to 400 billion forints may be required for the NPL purchases, depending on the scope of the bad bank's operations and the discount rate applied. This estimate is based on the data that Hungary's commercial banks have already written off sixty per cent of their corporate NPLs.

Whether a Hungarian bad bank is a success will ultimately depend on the details - and these are not clear at the moment. However, if this approach proves to be successful, then it may be beneficial to the commercial banks, to the state, and even to the corporate debtors and may give a boost to the Hungarian economy as a whole.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.