REPORT

on Activities of the Hungarian Banking Association

2nd Quarter 2005

Budapest, August 2005

I. PROFESSIONAL ISSUES *

II. PAYMENTS *

III. LOAN SCHEMES *

IV. INTERNATIONAL COOPERATION - EUROPEAN BANKING FEDERATION *

V. INTERNATIONAL COOPERATION, ASSOCIATION EVENTS *

1. PROFESSIONAL ISSUES

1. Central credit information system

Only members!

2. Amendments to the Bankruptcy Act (Act No. XLIX of 1991).

The Association has been involved in the drafting of a new Bankruptcy Act since the beginning of 2004. Following the transformation of the government in 2004, the task of drafting the new bankruptcy legislation was transferred to the Ministry of Justice. The concept of the new legislation was presented to the government in March 2005 and reviewed by the Economic Cabinet on April 5. This was followed by reviews between the Ministries and interest representation organisations involved in the codification work, on April 12 and 21. During the review process the Ministry of Justice decided that it would only make some less extensive amendments to the Act this year and a new legislation would only be enacted after further consultations in 2006.

The Justice Ministry's proposal for the concept of the Bankruptcy Act was received for review at the end of April. We provided some comments on the provisions on restructuring, pointing out that the success of restructuring will depend on the effectiveness of the provisions made against the removal of assets from the business. In respect of creditors with real collateral in we expressed our objection to any solution that would allow restructuring without approval of the secured creditors.

We proposed to include in the regulations to be drafted by October 31, 2005 the elimination of the 50% limit in relation to the satisfaction secured claims and to amend the 50% rule to 100%. In relation to the separate satisfaction of mortgagee demands we objected to the fact that in addition to deducting the costs directly related to the pledge, the proposal provides for deducting the part of the procedural costs proportionate to the value of the pledge from the proceeds from the sale of the liquidation assets. We pointed out that this was unacceptable for creditors, given that if the assets subject to liquidation are all mortgaged assets, the proportionate costs of the bankruptcy procedure may entirely offset the sales price. We also pointed out our position that the transfer or assignment of the collateral may not be deemed as null and void in respect of the liquidation assets. These are legal institutions acknowledged in Court practice and should be maintained to ensure the broad and secure financing of the economy.

The concept for the new Bankruptcy Act was adopted by the government on June 15, 2005. The most essential points of the relevant government resolution were as follows:

• the rules for final accounting should be moved from the Bankruptcy Act to the Company Registration Act,
• the regulation on the liability of senior officers for continuing illegal operations should be included in the proposed short-term amendment to the Bankruptcy Act.
• special bankruptcy rules should be developed for company groups,
• the authorities of temporary receivers should be extended to prevent the removal of assets from the business during the period between filing a claim for a liquidation procedure and starting the procedure.
• the starting date of liquidation should be tied to the date of publication in the Companies Gazette of the decision on instituting the liquidation procedure and an insolvency practitioner should be appointed to ensure the protection of the liquidation assets from the date the decision is made.
• insolvency practitioners should be vested with powers to obtain from public registers information required for conducting the procedure.

3. Amendments to the Act on the Hungarian Financial Supervisory Authority

In our comments on the latest version of the proposed amendment to the Act on the Hungarian Financial Supervisory Authority we indicated, inter alia, that there was a disproportion between the rights of the Supervisory Authority and those of the clients, primarily in terms of long deadlines for the Authority and short deadlines for the clients.

We repeated our proposal for standardising the form of reporting to the central bank and the Supervisory Authority and for providing that the information obtained by the National Bank of Hungary (MNB) within the framework of central bank control and forwarded to the Supervisory
Authority should be deemed as known and not be summoned again from the inspected entities.

We also proposed that once a Supervisory Authority decision is published, then the fact that an appeal has been filed against the decision (if any) and the results of such appeal should also be made public.

In agreement with the Supervisory Authority, in relation to government Decree No. 205/1996 on mandatory contents of the Business Rules of organisations providing investment services we proposed an amendment to provide that in the case of standards adopted by professional associations the Supervisory Authority may dispense with an individual licensing procedure and approve such standards under a framework agreement.

4. Amendment to the Land Registration Act

The Ministry of Agriculture and Rural Development sent us for review the proposed amendment to the Land Registration Act (Act No. CXLI of 1997) in April.

The purpose of the proposed amendments was to make certain provisions of the Act more specific and to create consistency between the provisions of the Land Registration Act and those of other laws, especially those of the Act on Administrative Procedures. The amendment provided the legal conditions for the issue of authentic proprietorship registers in the form of official electronic deeds. The general administration time provided in the proposal for the Land Offices is 30 days. The proposal intends to allow for the Treasury Property Directorate and the Tax Authority to perform queries by name for all real estates held by a proprietor. The proposal intends to annul the provision on mandatory legal representation (as previously also proposed by the Association). As is known, from May 1, 2004, legal representation has been mandatory in all land registration procedures. The Ministry thinks this provision is not very well-founded and the requirement of mandatory legal representation may be injurious the role of the land register as a public register. Namely, due to the extra costs legal representation involves, not everybody would use a land registration procedure in certain non-urgent cases (for example, registration of cessation of usufruct). The proposal also settles the proprietary status of land in long-term use.

In our comments we welcomed the proposal to annul the provision on mandatory legal representation; also, some other provisions in the proposal may make banking easier, such as those aimed at accelerating the procedures, those allowing bailiffs to perform queries by name and those settling the proprietary status of land in long-term use and thus, allowing it to be used as collateral. We also submitted proposals for adjustments to certain provisions of the Act and once again drew attention to the fact that the provisions of the Act and those of certain related implementation decrees are inconsistent. Also, we drew attention to the need to amend the Agriculture Ministry Decree No. 109/1999 (XII. 29.). Further, we proposed to include provisions on the structure of topographical lot numbers in the Land Registration Act.

The draft law was revised and then reviewed again in May 2005. Several of our proposals were taken into account in the revised version. The abolition of mandatory legal representation remained open as an issue of debate between the Ministry of Agriculture and the Ministry of Justice. The issue of allowing Document Offices to issue proprietorship registers also remained pending. At the inter-ministerial review we only made some proposals for making certain provisions more specific in the draft law.

5. Central bank reporting

Reporting officers from some major member banks requested the Association to make steps for improving the quality of central bank reporting and for constructive cooperation with the central bank.

Each year, the Statistical Department of the MNB sends evaluation letters to the banks on the quality of reporting. Banks say the objectiveness of these assessments is questionable, especially because the evaluation criteria are unknown for the banks. Banks do not see the MNB's sanctioning principles properly reflected in the annual evaluations, especially as regards transparency and normativity. Banks would like to understand the central bank's evaluation criteria. The central bank would differentiate between large banks with a wide product range and large networks and smaller banks specialising in a particular product; daily reports with preliminary data and monthly reports providing an overall balance sheet position would be given different weights in the evaluation. It was also proposed that the central bank issue a more specific reporting guide and furnish banks with the program it uses for correlation checks.

Keeping up and improving the quality of reports is just as important for the banks. The Association forwarded the banks' comments to the competent Vice-President of MNB and offered the assistance and cooperation of experienced professionals from the banks.

In his response letter the competent Vice-President of MNB expressed their thanks for the cooperation proposed and indicated that they would use such assistance it in their quality assurance enhancement program. He emphasised that the reporting organisations play a key role in producing good statistics adjusted to the ever-changing requirements and avoiding any unwarranted reporting burdens is a key aspect in developing new reports or extending the existing ones.

The central bank reaffirmed that transparency and normativity are fundamental principles in the central bank's sanctioning policy and quality assurance system. They agree with our comment that these principles could be better served by publishing the criteria for the annual evaluation and details of the sanctioning policy. In consideration of this, the MNB will publish all these details on its website; issues arising mid-year will continue to be indicated to the banks on an ongoing basis.

In his letter the Vice-President pointed out that although reporting discipline has improved a lot in recent years, further efforts are need on both the central bank's and the reporting organisations' part to further improve quality.

6. Interest income reporting

Pursuant to the Act on Taxation, banks are required to collect data on interest income paid to EU citizens In line with the relevant EU Directive, effective from July 1, 2005. The conditions required for banks to prepare for this reporting obligation were clarified at the end of June after the Tax Office had published the relevant draft guide and form on its website. The new reporting obligation will be applied from January 1, 2006 and the final report format is expected to be published in December 2005. Interest income generated and credited between July 1 and December 31 will have to be reported to the Tax Office by March 20, 2006; thus, the reporting organisations will have sufficient time to develop the necessary IT support.

7. Ministry of Finance proposal for the standardisation of employer's certificates

The Minister of Finance conducted a survey with employer associations on how to reduce administrative burdens on businesses. One of these organisations, the Confederation of Hungarian Employers and Industrialists (MGYOSZ) criticised banks for using different employer's certificate forms and for their practice of checking on the authenticity of the employer's certificate. Completing the different forms and answering inquiries by mail or phone is a substantial burden on businesses. The Ministry of Finance requested the Association to check with the banks on the possibility to standardise the required employer certificate forms.

After consulting with a number of banks affected, we rejected the proposal. Banks emphasised that employer's certificates are key elements in assessing the customer's creditworthiness and in some areas, such as consumer lending, are the only source for a lender to make a responsible decision within the short time given. In our written response to the Ministry of Finance we pointed out that it is the banks' freedom to decide the criteria they use for judging a customer's creditworthiness, and therefore the information requirements may vary by bank; anyway, the amount of information a bank requires for credit rating purposes is also a competitive factor.

We also emphasised that a standard form would limit competition, or, combining all data requested by all banks in one standard form would just lead to a confusing and blurred pile of information. While accepting that verification inquiries may be a burden for businesses, we pointed out that such random checks are necessary given that employer's certificates are also forged.

8. Municipality Guarantee Fund

Although the Association's Board had previously concluded that the National Development Office's proposal for setting up a Municipality Guarantee Fund had not been elaborate enough, the Association agreed to a survey by the National Development Office (NDO) to find out whether banks are interested in setting up this guarantee fund.

At the consultation organised by the Association, the NDO's representative informed member banks that the main purpose of the proposed guarantee fund was to promote municipality development projects financed from EU funds under the 2nd National Development Plan, by providing advance loans for the required own equity. According to the presenter, this would generate over HUF 50 billion in new borrowing demand, so banks would actually create new opportunities for themselves through this fund. He acknowledged that a number of legal, economic and institutional steps would still be needed to enhance municipalities' creditworthiness and the pay-off of guarantees provided to them, while reaffirming the government's firm commitment to this issue. He outlined how the law regulating municipality borrowings would be modified. In major municipalities a new position called town manager would be established (the town manager would be responsible for administration and development of the municipality). The Act on the debt settlement (insolvency) of municipalities would also be amended in view of the new guarantee institution and setting up a credit rating institution to commence operations in 2006 is also being considered.

Banks said the information provided was insufficient to decide whether to subscribe to one-third of the proposed HUF 3.6 billion fund. A number of questions were also raised concerning the business policy of the Fund, shareholder rights, opportunities for municipalities and banks not participating in the Fund and related competition law implications. The presenter promised to answer these questions later (counting on banks' assistance in developing the solutions required). Meanwhile, he asked for banks' response within a week-time regarding their intention to participate.

We sent the minutes of the meeting to our member banks, a requesting them to respond to the NDO's request. Fifteen banks indicated their interest in participating as shareholders in the Fund. However, all fifteen emphasised that their interest was conditional and they could not commit themselves until all essential business policy, ownership, legal and organisational details are clarified and agreed.

We forwarded the registrations along with the conditions and questions provided by banks to the NDO. In the meantime, the NDO has indicated that the issue of setting up the Guarantee Fund has been set aside for the time being and the government is considering assigning the relevant tasks to Credit Guarantee Ltd., which has similar functions.

9. Eligibility of asylees for home subsidies

The Immigration Office of the Ministry of Interior contacted the Association, asking it to draw banks' attention to an illegitimate practice followed in home lending. According to the Immigration Office, it is illegitimate for banks to require customers with an asylee status to obtain the National Housing and Construction Office's (OLÉH's) permit to be eligible for state subsidies, because the Asylum Act clearly provides that asylees have the same rights as Hungarian citizens.

Banks confirmed the Immigration Office's information that asylees are referred to the OLÉH for a permit, drawing attention to the relevant Government Decree, which provides that the approval of the responsible Minister without Portfolio (who is also responsible for home lending) must be obtained for an "unsubsidised persons" to receive state subsidies ("unsubsidised person" is the definition in the Decree, meaning non-Hungarian citizens and non-EU employees). Government Decree No. 4/2005, regulating the so-called "nest-making" loans does not require an OLÉH permit for the asylee to receive the state guarantee required for the state subsidy; however, given that the loan facility is normally associated with other state subsidies, the provisions of the previously mentioned Government Decree will again apply.

The Association communicated all these facts to the Immigration Office, proposing that the Office take up the matter directly with the responsible Minister without Portfolio and OLÉH and try to have the issue settled by the Minister through a ruling or an amendment to the regulation.

10. Banks' complaints over Land Office services

Several banks indicated to the Association that they had problems with the services provided by the Land Office. Some of them complained about the radical increase in the TAKARNET electronic services which had been effected without any preliminary consultation and which is in no way justified by the often substandard service quality. Others complained about the unacceptably high rate of errors in the classic Land Office service of issuing proprietorship registers (one of the banks mentioned an error of 12%).

We approached all member banks for comments, the comments received confirmed the complaints raised. Based on this, we turned in a letter to the Ministry of Agriculture, as the supervisor of Land Offices.

In our letter to the competent Deputy State Secretary we expressed our objection to the fact that the Decree on increasing the fees for the TAKARNET electronic services had been issued by the Ministry without consulting banks, one of their largest customer groups. The law drafter should be aware of the potential impacts of its decisions and banks could have informed it on the fact that this radical increase would affect the charges of borrowing. (Namely, thus far banks have assumed for the borrower the Land Office's fees but they cannot afford it any longer.). We drew attention to the fact that the increase in the fees for electronic services is against the general market trend and expressed our hope that the price increase will entail an improvement on the technical side of the service (reduction of connection problems) and expansion in the contents of the service (electronic access to sketch maps).

In a letter to the Agriculture Ministry's department supervising Land Offices we informed the Ministry's competent staff on the errors mentioned by our member banks. We indicated that although the services have improved, the current 5 to 8 per cent error rate is still very high and causes significant losses to banks. Based on banks' comments we gave a detailed description of the errors encountered and requested the department to take the necessary actions in the matter. (Some of the errors are due to problems in the interpretation of the relevant regulations, some to insufficient staff information and the rate of mistyping errors is high).

We indicated that banks' dissatisfaction could eased by the Ministry trying to find some remedy for the fee increases of the TAKARNET service. We suggested granting banks a group discount (as is done in the case of other databases) or introducing bracketed fees.

11. Ombudsman's recommendation regarding home subsidies

The Ombudsman for Citizen Rights sent us his report addressing customer complaints related to home loan subsidies and making recommendation for amendments to the relevant laws.

The report sharply criticises the fact that it is basically the banks that decide whether or not a citizen may have access to state subsidies and there is no government forum to appeal to. According to the Ombudsman, banks should only decide on the creditworthiness of the customer; the granting of state subsidies, including all the related guarantee elements should be the decision of a government body. Another important recommendation of the report is that the possession of a flat that has been sold with ownership retained until receipt of the payment should not be a prohibitive factor: in most cases (e.g., sale and purchase with multiple parties involved) the various administrative procedures (land registration, credit approval, lawyer's work) unavoidably lengthen the financing process and therefore, the customer may meanwhile temporarily own more than one property. A third recommendation affecting banks was that in their customer information on state subsidies, banks should provide detailed information on the terms and conditions for the various home subsidies.

We gave our comments to the Ombudsman based on consultations with member banks. In our letter we explained that banks have several times communicated to the Ministry of Finance their complaint over having to perform a number of non-banking administrative tasks in relation to home lending (for example, verifying the presence of conditions required by law). The Ministry's answer each time was that home lending is not compulsory and these are the condition under which the organisation representing the state concludes subsidy management contracts with the banks. At the same time banks do admit that the current practice is more favourable for the customers, who, thus, do not have to go with the various certificates to a second official forum. In our letter we also pointed out that banks dedicate considerable staff resources to be able to responsibly verify the various certificates. (Otherwise, in disputed cases they always approach the law drafter for decision).

We expressed our full support for the Ombudsman's recommendation that a flat temporarily held for technical reasons (and practically sold) should not prohibit someone from purchasing a new flat and receiving the relevant subsidies. (We reminded that the Association itself had made a similar proposal during an earlier review of the decree on housing subsidies).

We also expressed our support for the recommendation for banks to provide customers with detailed information on the terms and conditions for state subsidies. However, we noted that it should be the organisation representing the state that should provide for the contents of such customer information (perhaps in the subsidy management contract to be concluded with the banks).

12. List of bailiffs

One of our member banks requested us to try to achieve that the Hungarian Chamber of Bailiffs provide banks, on a regular basis, with an updated list of their members and the escrow accounts they use for prompt collections. This service previously provided but later stopped by the Chamber is important for banks because under the Act on Judicial Distraint, bailiffs may submit prompt collection orders directly to the obligor's bank without involving their bankers (which would allow the obligor's bank to duly verify the order). Given the often very high collection amounts involved, obligors' banks are assuming high risks if they execute a transfer to an account that is designated in a letter or document presented in person at the bank branch. Some banks are putting special efforts in verifying the identity of the bailiff and the account number.

With banks confirming the need for this service from the Chamber, we turned in a letter to the Hungarian Chamber of Bailiffs with a request for renewing the service. In its response, the Chamber of Bailliffs expressed their willingness to cooperate and informed that the service will be made available on their website, currently under upgrading. Meanwhile they said banks may turn to them with their inquiries, which will be answered promptly.

At the same time the Chamber said it would not provide the information as a formal list, given that during the roughly one-month lead time the data may change and the chamber does not take any responsibility for any ensuing damages.

13. Complaint over a Treasury Property Directorate practice

The Association raised a complaint with the Treasury Property Directorate over the Directorate's practice that if the proprietorship register contains a mortgage in favour of the Hungarian State and a prohibition of alienation and encumbrance to secure the mortgage, then another mortgage may only be registered for a maximum 50% of the value of the loan collateral and, in addition, the relevant request must be accompanied by a copy of the bank's value appraisal and a certificate of the value of the collateral.

In our letter we explained that this practice makes retail lending difficult, sometimes impossible. First, the collateral value and the appraisal are bank and business secrets; secondly, this voluntary extra precaution (higher than what banks apply) by the Treasury Property Directorate (which is not subject to the Act on Mortgage Credit Institutions) is unwarranted and impractical, given that by definition, in determining the value of collateral, encumbrances on the property are taken into account and therefore, any additional encumbrance on the property is limited by existing encumbrances and the prudential rules applicable to banks.

Pursuant to the Act on Judicial Distraint, mortgagees' claims are satisfied in the order of lien priority. Thus, registration of a mortgage to a subsequent position does not prejudice the satisfaction of the preceding mortgagee's claim in the judicial distraint procedure. The Directorate' practice is also impractical because the loan secured by the mortgage that has been registered subsequent to the state's mortgage is normally used by the borrower for the property in question (for refurbishment, enlargement, upgrading) and this increases the value of the collateral.

14. Concept for the 4^th pillar to promote preliminary pension savings

This concept, developed by the Budapest Stock Exchange is related to what is called the 4^th pillar and is aimed at promoting preliminary pension savings. While expressing our general support for the concept, we pointed out that further work would be required for a prospective product, saleable in the long-term, to be added to the product range of commercial and banks and investment service providers. We also pointed out our objection from legal, financial and economic points of view to the idea of giving insurance companies the right of account management.

15. Preparation of investment proposals

Accepting the cooperation proposal of the National Association of Securities Dealers, the Association, jointly with them, the Hungarian Association of Investment Fund Managers, the Budapest Stock Exchange and the Hungarian Capital Market Professionals' Society launched a project aimed at providing investor information, with special regard to developing a professional guide for the preparation of investment proposals.

16. Bank security, money laundering

Bank robberies have increased in the past period. Aimed to prevent and counter further assaults, the National Police Headquarters and banks with major networks held a meeting in September. A working group was set up from members of the Bank Security Working Committee and specialists from the National Police Headquarters to prepare the ground for closer cooperation between the Association's member banks and the police.

II. PAYMENTS

1. Experiment for comparing banks' terms and conditions for current accounts

The Hungarian Financial Supervisory Authority requested the Association to comment on the method it plans to use to compare the various banks' terms and conditions for current accounts. The Supervisory Authority is strengthening its consumer protection operations and is publishing more information on its website with a view to assisting customers in choosing between the various complex products and between banks. Of course, the information appearing on them on the Supervisory Authority's homepage is not indifferent for banks; therefore, the Supervisory Authority thought banks would be interested in cooperating with the Authority in developing a fair comparison method.

Retail accounts are complex products; therefore, listing all the related conditions (account management fee, term deposit facilities, annual bank card fees, bank card transaction charges, overdraft interest rates, fees for Internet banking transactions, etc.) would not help customers in their choice. The Supervisory Authority has developed an APR-based solution that would embody all the various factors, based on a certain ordering principle, as a single number. The solution assumes three forms of customer behaviour and assigns a consumption pattern to each. These three types of customers, the "conservative", the "average" and the "active", each use the various facilities of the current account in a different structure and at a different frequency. The conservative customer focuses on basic services and prefers to handle his affairs in person at the bank branch or post office; the average type of customer is braver in using bank cards, communicating by SMS, but is cost-conscious; the active customer is open to new opportunities, makes maximum use of the latest technologies (e-banking) and is less cost-sensitive (often uses overdraft). The proposal quantifies these behavioural patterns, by listing all the services attached to the current account and estimating the frequencies at which the three customer groups use each of those services. The annual current account fee is then obtained by multiplying the frequencies by the relevant service charges. Thus, each bank will have three different annual fees for the three different customer groups. According to the Authority's concept, the customer will have to decide which customer group he/she belongs to and then compare the various offers accordingly.

In our comments, based on the opinions received from member banks, we basically agreed with the concept but also provided some complementary proposals. The most important comment banks made was that the account balance and the average transaction amount should not be ignored (that is: these should also be estimated for each behaviour group).
Another important proposal was that practically each bank offers current account packages and these should also be taken into account. According to banks the three different behaviours should be distinguished even more markedly by expressing the number of times the service is used. A less important proposal but useful from the point of view of the usability of the method was that fees should be expressed on a monthly bases, instead of on an annual basis.

Based on these comments the Association proposed that the Supervisory Authority continue to work on the method with the involvement of specialists from member banks.

2. Paying by credit cards at Document Offices

In order to implement and promote e-Government, the conditions should be created for replacing cash with cashless payment methods in administration. The Ministry of Interior has been tasked to make it possible for clients to pay for the various charges by credit card, effective from September 1, 2005. Due to the short deadline, the harmonisation of existing systems required the involvement of financial specialists experienced in bankcard transactions and settlements, in order to develop an appropriate payment and settlement concept for payments by bankcards. Therefore, the competent associates at the Ministry of Interior on March 17, 2005 requested the Ministry of Finance to organise a professional consultation with the participation of specialists from MNB and the Hungarian Banking Association.

At the meeting it was agreed that a working group set up by the of the Payment System Forum's Card Technical Group will prepare a document that will include a detailed process for bank card payments at Document Offices and the role, responsibilities and tasks of the various participants in the process and the support infrastructure required. The group was also tasked to assist in developing the relevant business terms and conditions. MNB was given the task to review the relevant legal framework and to propose the necessary changes. At a meeting held at MNB on March 24, associates of the Ministry of Finance, the Prime Minister's Office and the Ministry of Interior presented the task to banking members of the Card Technical Committee and answered the questions raised.

The working group was also set up and compiled the document mentioned by April 14, 2004. The working group was headed by the representative of Giro Bank Card Ltd. The document, titled Electronic Payments in Administration, was presented to the competent government organisations. This document, containing the description of the payment systems, including the authorisation and settlement of transactions, the business model, the main criteria for the concept to be developed and a proposal for a payment and settlement system adjusted to systems used at the various administrative bodies will help the Ministry of Interior draft the public procurement tender invitation. The tender invitation will contain the conditions under which banks may take part in the implementation of the concept.

3. EU questionnaire for the report mentioned in Article 8 of Regulation 2560/2001 on cross-border payments in euro.

Article 8 of Regulation 2560/2001/EC of December 19, 2001 on cross-border payments in euro is a Review Clause. This clause provides that not later than 1 July 2004, the Commission should submit to the European Parliament and to the Council a report on the application of the regulation, and in particular on

• changes in cross-border payment system infrastructures,
• the advisability of improving consumer services by strengthening the conditions of competition in the provision of cross-border payment services,
• the impact of the application of the regulation on charges levied for payments made within a member state,
• the advisability of increasing the amount provided for in Article 6(1) regarding national reporting obligations for balance-of-payment statistics to EUR 50 000 as from 1 January 2006.

The Review Clause also provides that the report should be accompanied, where appropriate, by proposals for amendments.

The report had not been submitted by the deadline set in the Regulation. To avoid further delays the Council invited answers to the questionnaire compiled to help make the report, latest by June 15, 2005. The task of answering the questionnaire was split between the MNB and the Association. The answers banks gave to the questions affecting them were forwarded in an edited form to the Ministry of Finance. The answers were reviewed jointly by the Ministry of Finance, the MNB and the Association and the questionnaire thus finalised and completed was forwarded to the competent persons by the Ministry of Finance.

4. Requests for preferential account management facilities

The Association was approached by the Hungarian Financial Supervisory Authority with a request for banks to provide preferential account management facilities for the blind and a similar request in respect of pensioners was received from the Ombudsman for Citizen Rights. Based on answers received from member banks we informed both organisations that there are several new preferential account management packages available, adjusted to customer needs. Details of these facilities are displayed on the banks' websites. The new facilities prefer customers that are open to electronic banking services. Under these facilities, customer may avail themselves of account management services and perform a set number of transactions for a fee as low as HUF 199 a month.

We drew our member banks' attention to the fact that pensioners are still averse to electronic banking and requested them to develop preferential packages for the elderly who insist on traditional banking. In their answers member banks indicated that they are in the process of analysing pensioners' account management habits are conducting negotiations with the Pension Disbursement Office to simplify the process of transferring pensions to bank accounts.

5. HUF transactions affecting the balance of payments

The Statistical Department of the MNB requested the Association to review banks' current practices in the statistical coding of items affecting the balance of payments and to indicate if these practices could be improved. The MNB would like to incorporate a respective proposal in its Ordinance on the 2006 reporting requirements.

As the central bank's inspections revealed, banks follow different statistical coding practices and not every bank observes the relevant rules. One of our member banks has developed a new proposal for the statistical coding of HUF items. According to the proposal, each bank could decide whether to apply the new method in parallel with its current practice. The proposed method does not require any IT development. The proposal is aimed at incorporating the current inter-bank reconciliation practice into a standard legal framework (MNB ordinance) and to reduce the number of items reconciled and coded at month-ends.

The alternative proposal was unanimously accepted by all banks involved in reporting. The competent MNB department also endorsed the proposal and promised to incorporate it in is 2006 reporting guide.

6. Technical proposal for tax and contribution payments

In consultation with member banks, the Association submitted its comments to the Simplification and Deregulation Working Group of the Tax Reform Committee and its proposal for the introduction of list transfers (a solution with a more comprehensive purpose than that proposed by the Working Group). According to this proposal, similarly to multiple transfers, the transfer order is submitted in one batch, with a detailed list showing the items belonging to the transfer. The difference between multiple transfers and list payments is that while in the case of multiple transfers the transfer orders is sent to several banks, in the case of list transfers the beneficiary is an institution, which receives a detailed list along with the transfer, based on which it can process the items in question.

Within the framework of review of the proposed amendment to Act XCII of 2003 on the Rules of Taxation, we again drew the attention of the Administrative State Secretary of the Ministry of Finance that the proposal of the Simplification and Deregulation Working Group of the Tax Reform Committee was a partial solution and involved high development costs compared to our proposal and would entail unnecessary extra work and a disproportionately high responsibility for banks without any benefits whatsoever for the taxpayers. It would not reduce the chance for errors and would encourage the use of hard-copy vouchers rather than electronic payments.

We maintained our proposal made in April, in which we pointed out that the possibility of developing and implementing a state-of-the-art multi-purpose list payments system had been reviewed in details by the Payment System Forum's competent working group and the new payment method could simplify tax payments and make the execution of transfer orders easier in other areas as well. No answer has been received to our letter. However, the solution proposed by the Simplification and Deregulation Working Group is not included in the law amendment for the time being.

III. LOAN SCHEMES

1. Agricultural loans schemes

Banks raised a number of questions in relation to certain agricultural supports (land based supports). To clarify these issues the Association organised a meeting with the participation of specialists from the Ministry of Agriculture. Several questions were clarified during this meeting and the Ministry issued a handout based on the discussion. However, banks said the handout failed to clarify all points raised; therefore, we submitted further proposals and comments to the Ministry. A major problem in seeking clarifications is that the procedures of the Agricultural and Rural Office are not uniform in all locations in the country. This causes difficulties to customers and banks alike. (To this end, a consultation was held with specialists of the Agricultural and Rural Office in the third quarter).

Self-assessments on the year 2004 under the loan scheme for businesses operating in adverse areas were evaluated in this quarter. To help evaluation, banks received a guide from the Agricultural Ministry to improve the regularity of their self-assessments. The banks involved reviewed and provided their comments on the self-assessments largely in time.

The Ministry of Agriculture drafted a decree on the settlement of debts of Hajdúbét Rt. and Parmalat Hungária Rt. The banks involved reviewed the draft decree and provided their comments, pointing out that the most important thing is that the support is transferred to the appropriate bank account.

2. SME loans

Hungarian Development Bank drafted a proposal for its Enterprise Development Loan Scheme for a Successful Hungary. The idea is that previous loan schemes refinanced by Hungarian Development Bank under an exchange rate guarantee provided by the state will be consolidated under one big loan scheme. A meeting, organised by the Association on the proposed scheme was held with the participation of specialists from Hungarian Development Bank and banks involved. Following this meeting, Hungarian Development Bank furnished its refinancing framework agreement, product description and rules of the refinancing procedure.

IV. INTERNATIONAL COOPERATION - EUROPEAN BANKING FEDERATION

1. Banking Supervision Committee - Capital adequacy Working Group

1.1 Capital Requirements Directive

Draft Report of the EP Rapporteur (Radwan Report)

The EP rapporteur, Alexander Radwan's draft report was published at the beginning of April. The draft report contained nearly 300 proposals on more than one hundred pages regarding the Draft Directive submitted by the European Commission in July 2004. Some of the proposals meant the adoption of amendatory and corrective motions passed by the Council in December 2004 but the rapporteur made a number of new initiative and there were several points, where he did not support the Council's proposals.

The most important amendatory proposals concerning the recitals of the Directive were related to the need to revise the rules for own capital and data protection, to the role of external rating agencies, increased recognition of customary banking collaterals, the recognition of insurance, annual reporting by the CEBS with regard to the convergence on supervisory practices and ensuring the Parliamentary control of the Commission's and the CEBS's work.

The most important proposals concerning the various articles of the Directive related to the mandatory application of the exemption from individual compliance within a member state, amending the conditions for solo consolidation and the extension of the favourable weighting of intra group exposures to groups belonging to the same institution protection schemes. According to the rapporteur, exemption from an individual application and the extension of the zero risk weighting of intra group exposures at EU level is untimely at present. However, he supports that the Commission re-examine the issue in five years' time. Mr Radwan proposes to require banks to disclose their rating decisions comprehensibly in writing to the individual applicants for loans, and to change the 90 days to 180 days in the definition of default. He also proposed that technical adjustments and implementing measures may enter into force only if the European Parliament or the Council has raised no objections within six months. He also presented amendatory proposals (such as those related to the SME sector and retail portfolios) aimed at ensuring that smaller institutions are not disadvantaged to their larger competitors when the directive is applied. At the end of his report the rapporteur offered four points for discussion by the European Parliament: the scope of the Directive, the treatment of internal group lending, the allocation of responsibilities within home and host country supervisors and the applicability of comitology.

Amendatory proposals by MEPs

MEPs had until mid-May to make amendatory proposals to the Draft Directive. According to the document published on May 27, 2005, a total of 887 amendatory proposals were submitted (including those 288 contained in the Radwan Report), an extremely high number even if half of them were of a corrective nature and many contained similar or opposite proposals in relation to the same Articles. (Proposal not withdrawn until that date was voted on by ECON on its July 13 meeting).

The most important proposals related to the levels of application (individual or only consolidated), the criteria for the zero weighting of internal group lending (particularly with regard to integrations of savings co-operatives), the predominance of consolidated supervision, fine-tuning of the wording of the rules for cooperation between home and host country supervisors, extension of the retail portfolio, the more favourable weighting of the SME sector under the standardised approach, and relaxing the rules related to risk mitigation.

Out of the three amendatory motions made by a Hungarian MEP, especially important is the one which proposes that, up to 2012, all government bonds of a member state, denominated in the national currencies of other EU member states may be treated (weighted) as those denominated in own national currency. (At the Association's request, the FBE also expressed its support for the proposal. The motion was endorsed by the ECON meeting).

Professional associations for comitology

International professional associations (FBE, ISDA, LIBA, etc.) and the IIF, ahead of the ECON's meeting of July 13, wrote a joint letter to the European Commission, the U.K. Presidency and MEPs active in this issue to ensure that the possibility of comitology in Level 1, 2 and 3 committees is included in the Directive. The letter points out that while highly appreciating the efforts made to pass the CRD at first reading, professional associations are seriously concerned about the omission of the provisions on comitology. Ever since the CRD proposal was published in July 2004 the profession has taken it for granted that the Annexes to the Directive will be amendable by the Lámfalussy committees within the comitology framework. The associations respect the EP's endeavours to ensure the democratic accountability of the rulemaking process; however, the omission of the comitology provisions would make the regulatory framework rigid and impossible for it to keep pace with global development. The lack of flexibility would jeopardise the implementation of the Lisbon financial services objectives.

Compromise proposals of the Presidency and the EP Rapporteur - the ECON's meeting of July 13

In consideration of the amendatory proposals submitted by MEPs, the Luxembourg Presidency drafted a compromise proposal for the CRD in June. The proposal included the adoption of some 200 MEPs’ proposals and provided compromise wording for more than 100 proposals.

Based on the proposals submitted by MEPs and the compromise proposal of the Presidency, additional compromise proposals were developed by the Rapporteur for the Economic and Monetary Committee's meeting of July 13. All of these proposals as well as those orally submitted by the Rapporteur were adopted by the ECON without any changes, thus increasing the chance for the CRD to be passed at first reading (36 representatives voted for passing the CRD at first reading, 6 abstained).

The following are the main items of the compromise adopted by the ECON in relation to the various articles of the Directive:

- The provisions on comitology will not be omitted from the Directive; however, they will be suspended until an agreement - that safeguards the Parliament's right, in accordance with the Draft Constitution, to cancel the rules made in the committees - is reached between the institutions.

- As for application levels, the objective is for the Directive to be applied on the consolidated level and, if the supervisors deem it appropriate, also on the individual level. Accordingly, the exemption of the parent company and subsidiaries under certain stringent conditions from an individual application is provided in Draft Directive as an option, not an obligation.

- The criteria regarding the degree of diversification for the classification of loans in the retail portfolio were relaxed in order not to disproportionately restrict business opportunities for smaller institutions. Loans secured by real estate collateral were taken out of the EUR 1 million floor and the treatment of the retail portfolio under the IRB and standardised approaches was harmonised.

- The zero weighting of intra group exposures - within a member state (!) - will be allowed under the conditions specified in the original text provided by the Commission. The option of zero weighting will be extended to participants in those institution protection schemes as per Directive 94/19 EC meeting the prudential requirements set for them by the Directive (in a new Article). (A full and unlimited guarantee by all members of the internal group lending risks must be present, the requirement for consolidation in one group must be met, a common risk management system should be in place, an aggregate report published at least once a year, etc).

- The minimum data requirements for the application of the IRB approach will be relaxed, particularly for those introducing the IRB approach before 2010.

The alternative treatment of exposures to Collective Investment Undertakings (CIUs) will be allowed.

- The disclosure of rating decisions comprehensibly in writing to corporate and SME loan applicants will be mandatory; should this fail to work on a voluntary basis, the requirement shall be provided for by legislation at the national level.

- The definition of default may be increased from 90 to 180 days under national discretion, if the circumstances so require. This option will available until 2011 and the number of days may vary by product line.

- The period for Council and Parliamentary review of the Articles related to the levels of application and consolidated supervision was reduced from five years to four years.

Compromise solutions were reached in relation to covered bonds, revolving credits, stress tests, minimum data requirements for the IRB approach (2 years, yearly increased by one year up to five years), the supervision of financial holdings and the exemption of certain service providers in respect of operational risk within a national discretion. According to the agreement, the requirement of classifying the same borrower in the same rating category may be dispensed with if the exchange of data of the borrower is prohibited by customer protection, bank secrecy or any other regulations.

The new Draft Decree, revised in accordance with the compromise proposals and complemented with the trading book rules adopted in Basel, is planned to be passed by the EU Parliament and Council in the autumn, hopefully at first reading.

FBE lobbying

The FBE secretariat has made strong lobbying efforts in the past few months to achieve an amendment to the proposed Directive, professionally warranted and supported by all members. The most important long-term objectives - application exclusively on the consolidated level, consolidated supervision, the zero weighting of intra group exposures within the EU - have proved to be unachievable in the short-term. As for the compromise solutions endorsed by ECON the FBE did not agree with the extension of zero weighting to members of institution protection schemes, the relaxing on data requirements for the IRB approach, the treatment of covered bonds and the exemption for investment service providers.

The FBE has been assigned an important role in correcting technical mistakes in the Directive and ensuring the consistency of provisions within the Directive and with those of the Basel II Accord.

Trading Book Review (TBR)

The Basel Committee and concurrently, the European Commission in April published a consultation paper on proposed modifications to the rules for trading books. Comments were invited to be submitted until May 27. The modifications were related to the following:

• the treatment of counterparty credit risk (for OTC derivatives, repos and reverse repos transactions, securities lending and borrowing transactions, lending against variable deposits, long settlement positions) and the treatment of cross-product netting arrangements;
• the treatment of double-default effects for trading and banking book exposures;
• the short-term maturity adjustment in the internal ratings-based approach;
• improvements to the current trading book regime, in particular the treatment of specific risk, and
• the capital requirement for unsettled and failed transactions.

There are four methods of different complexity for measuring counterparty credit risks: the Original Exposure Method, the (existing) Mark to Market approach, the Standardised Method and the Internal Model Method. Netting can only be performed on a bilateral basis, netting between different products is not recognised under the new regulation at present.

The method developed for the treatment of double default takes into account the circumstance that in the case of hedged exposures, a loss in only incurred if both the obligor (borrower) and the guarantor default. The capital requirement for hedged exposures is calculated as a function of the PDs of the borrower and the guarantor, the LGD of the guarantor, the maturity of the exposure and three correlation factors. These latter parameters express the sensitivity of the borrower and guarantor to the systemic risk factor and the correlation between the borrower and the guarantor. The preferential calculation may be equally applied to the banking book and the trading book, but only by those using the IRB approach.

Under the IRB approach, national supervisors may grant an exemption from the one year floor for maturity adjustment for short-term transactions, where no longer-term customer relationship exists.

Improvements to the current trading book regime include a more precise specification of trading book items, a more stringent process for the valuation of illiquid positions, review of the requirements for the calculation of individual exposures in the internal models and developing a more reliable and more specific set of requirements for the modelling of a deterioration in credit quality and bankruptcy exposures.

Previously there had been no standard rules for the treatment of unsettled and failed transactions. The proposed amendment is gap-filling in this respect by distinguishing between DVP and non-DVP transactions.

The new rules for trading books were adopted by the Basel Committee on July 12. After that, the proposed text of the European Commission, reflecting the agreements made was disclosed. The proposed amendments to the trading book are planned to be enacted under the new capital regulation from January 1, 2007.

U.S. developments related to Basel II

The timetable for introducing the Basel II capital accord in the U.S. has been thrown into doubt. The results of the Fourth Quantitative Impact Study (QIS4) undertaken by U.S. banks suggested that the new regulatory framework might result an unacceptable drop in capital. The four U.S. regulatory agencies³ are deeply divided over the causes of this drop in capital, the size of the problem it might cause and the extent to which the drop in capital can be attributed to the unreliability of data. According to the joint statement issued by the regulatory agencies on April 29, additional time will be needed to establish why the new capital framework leads to material reductions in the aggregate minimum required capital. This may cause a delay in drafting the Notice of Proposed Rulemaking (NPR), a critical step of introducing Basel II in the US. (The joint statement gives no indication about the extent of the delay). Originally, the plan had been to publish the NPR by end-June 2005. The FDIC says the U.S. should retain the current regulatory framework of Prompt Corrective Action (PCA) and leverage ratio, other agencies have suggested that Basel II might replace the existing PCA. The OCC (the U.S. Treasury) and the Office of the Thrift Supervision continue to emphasise their concerns over some Basel II formulas, while the Fed has given its full support to the proposed new regulation. The disagreements between the regulatory agencies might reignite the interest of the US Congress in Basel II. This would risk politicising the rulemaking process.

As for the introduction of the new regulatory framework generally, a lot will depend on the results of the Fifth Quantitative Impact Study to be completed in the second half of 2005. This study will be more comprehensive than the previous ones and will also address the impacts of changes in the rules for trading books. If the results of this study reveal a drop in capital requirements similar to that in the U.S, significant adjustments to the Basel II Accord may become necessary.

1.2 Committee of European Banking Supervisors (CEBS)

During its one and a half year of history up to mid-July the CEBS had published ten consultative documents. In the past period the CEBS has become a key negotiating counterpart for the FBE; the CEBS greatly relies on the opinions of the FBE in the open consultation process and its representatives have carried on discussions with FBE's professionals on a number of issues.

Revised consultation paper on the supervisory review process (New CP3)

This consultation paper, originally published in May 2004, was substantially revised to reflect the comments received and resubmitted for discussion, with comments invited by October 21, 2005. The document has been complemented to include guidelines for the general application of internal governance (IG) and how it applies to an institution's internal capital adequacy assessment process (ICAAP). It also discusses in more details the relationship between an institution and its supervisor and how supervisors should use their internal risk assessment systems in the supervisory review and evaluation process.

The document explicitly provides that institutions should own their risk management processes, the ICAAP belongs to the institution and supervisors should not dictate how it is applied; the task of the supervisory authority is to review and evaluate the ICAAP and the soundness of the internal processes.

Internal governance is central to an institution’s ICAAP. The guidelines include a section explaining, in 21 points, supervisory expectations regarding an institution’s internal governance. The paper addresses in details the dialogue between the supervisory authorities and the institutions: this dialogue should be transparent, clear and consistent. The intensity and depth of the dialogue should be proportional to the scale, complexity and importance of the institution. The principle of proportionality also applies to the institution's ICAAP.The CEBS plans to issue a handbook that will contain the full set of Pillar 2 building blocks and step-by-step components that supervisors will use in the review and evaluation process.

7. Consultation paper on the recognitions of External Credit Assessment Institutions (ECAIs)

The objective of this Consultation Paper is to provide a consistent basis for member states for recognising external credit assessment institutions. The paper emphasises that recognition does not in any way constitute a form of regulation of ECAIs or a form of licensing of rating agencies. Two modes of supervisory recognition are set out: direct and indirect recognition. Direct recognition is where supervisors make their own evaluation of an ECAI's compliance with the recognition criteria. Indirect recognition is where supervisors recognise an ECAI based on recognition in another member state, without carrying out their own evaluation process. Where recognition is sought in more than one member state, it is proposed to adopt a joint assessment process. Supervisors will assess ECAIs' eligibility according to and based on the common understanding of the recognition criteria provided by the CRD and using information identified in a "common basis application pack". Concerning the "mapping" of external credit assessments to the CRD credit quality steps, CEBS considers the Basel Committee's guidance for supervisors set out in Annex 2 of the Basel II framework published in June 2004 as governing. Comments on the consultation paper are invited by September 30 and the CEBS expects to publish feedback on the responses received, along with the amended guidelines by early 2006

8. Consultation paper on the role and tasks of the CEBS (CP8)

Taking stock of its more than one year of operations, the CEBS found it expedient and useful to issue a consultation paper on its own role. Comments are invited latest by October 28. According to the consultation paper, the CEBS's main objective is to efficiently promote cross-border supervisory co-operation and the safety and soundness of the European financial system. The document discusses the tools to be used by the CEBS in carrying out the three task assigned to it (contributing to effective EU legislation, promoting a consistent approach to banking supervision and cooperation and information-sharing between banking supervisors).

9. Consultation paper on the guidelines for greater supervisory cooperation (CP9)

This consultation paper sets out guidelines for the consolidated supervision of European banking groups, comments are invited by November 8. These guidelines are intended to be the starting point for improvements in the supervision of cross-border groups through the creation of operational network mechanisms. The main objectives are: to promote the cost and resource-effective supervision of EU banking groups, to streamline the supervisory process by enhancing convergence of practice and standards and to develop operational network mechanisms supporting supervisory coordination and co-operation and to avoid an excessive burden of supervision on EU banking groups.

The supervisory review and evaluation process (SREP) should be based on the same principles, applying similar procedures. This should result in the coordination of supervisory actions and elimination of duplicate tasks, a proportionate and risk-based approach to supervisory co-operation and avoiding any unnecessary administrative burdens.

The supervision of a banking group on a consolidated basis should be carried out in a coordinated and efficient manner and the consolidating supervisor should be aware of the concerns, policies, strategies, and risk assessment methodologies of the host supervisors, especially in respect of important subsidiaries. The consolidating supervisor and the host supervisors may have different views on the degree of significance of the various subsidiaries. Significance and systemic relevance should be assessed on a case- by-case basis based on the complexity, potential impact, and size of the subsidiary. For the purposes of the supervision on a consolidated basis the assessment of the consolidating supervisor will be governing. It is important that the supervisors have a mutual and common understanding of the supervised group's internal strategies, business plans and processes. Consolidating supervisors and host supervisors should have bilateral or multilateral written arrangements (Memoranda of Understanding) specifying their respective roles and responsibilities in the supervisory cooperation. The cooperative framework should be neutral in the sense that it does not provide an incentive for groups to restructure. The role and responsibilities of a host supervisor, however, will differ depending of whether the entity being supervised is a branch or a subsidiary. The paper specifies the steps of cooperation between the consolidating supervisors and host supervisor in the case of subsidiaries and branches and in respect of the approval process of advanced measurement approaches (IRB, AMA).

10. Consultation paper on the implementation, validation and assessment of advanced measurement (AMA) and internal rating based (IRB) approaches (CP10)

This consultation paper provide a common understanding between supervisory authorities of the procedures to be used in assessing and making decisions on the application of an institution to use an Advanced Measurement (AMA) or an Internal Ratings Based (IRB) approach for regulatory purposes. It also provides guidance, based on a common understanding among the supervisory authorities, on the meaning and the implementation of the minimum requirements for using these approaches, as set out in the Capital Requirements Directive (CRD). The document provides that an approval to use advanced measurement approaches can be given only if the relevant requirements listed in the Capital Requirements Directive are met (IRB: Article 84, in accordance with Annex VII, Part 4 of the CRD; AMA: Article 105, in accordance with Annex X, Part 3 of the CRD). These guidelines are drafted as a guidance to supervisors, elaborating on the CRD Articles and Annexes and thus, also assist the institutions intending to use these approaches. Thus, CP10 is a key document for banks to prepare themselves for the implementation of the CRD. (Comments are invited by October 30). The 123-page paper consists of three main parts. The first part provides a description of supervisory cooperation procedures in the approval and post-approval processes. It also provides for the minimum formal and content requirements an institution applying for approval of advanced approaches must meet (cover letter; documentation of the rating systems and operational risk measurement systems, including the models used; the control environment, implementation procedures and IT infrastructure; implementation plan (including rollout) and details on permanent partial use; self-assessment).

The second part of the guidelines specifies the minimum requirements for using the IRB approach for regulatory purposes. These minimum requirements relate to the methodology used for assigning ratings, estimating risk parameters, and documenting them internally; the data used for estimation, the quantitative and qualitative validation of the estimated risk parameters; and internal governance. Special attention is given to the definitions, the estimation and validation of the risk parameters (PD, LGD, conversion factors) and to the adequacy of the parameters to the institution’s risk profile.

The third part provides the guidelines for operational risk. It focuses mainly on the AMA, but also deals with the simpler approaches for operational risk. The document highlights the differences in the approval of the IRB and AMA approaches and emphasises that the advanced approaches for credit risk and operational risk are used independently. The document also emphasises that the guidelines are neither comprehensive nor exhaustive and supervisors may impose stronger or more detailed requirements than those listed in the guidelines.

FBE response to the Consultation Paper on a Common Reporting Framework (CoRep) (CP04)

In its letter, the FBE emphasises the importance of uniform solvency ratio reporting in the ensuring the convergence of supervisory practices and a level playing field. Common reporting is particularly important for banking groups, as it reduces the administrative burdens caused by the various reporting requirements of different supervisory authorities. Accordingly, the FBE supports efforts aimed at developing a common reporting framework. Meanwhile it points out that:

• The CEBS proposal is too detailed and far-reaching. The proposal should only cover best practices, not all practices.
• The common report should be harmonised at the jurisdictions of different supervision, with the narrowest acceptable contents and at the highest possible level of aggregation.
• The new common reporting framework should be confined to Pillar 1 and focused on those essential elements of the institution's solvency ratio that are required for supervisory information. The report should relate to risk exposure, weighted assets and equity.
• CoRep proposals should be consistent with other proposals (e.g., FinRep, XBRL Working Group).
• The current proposal does not meet the CEBS' intention to reduce reporting burdens of the industry; on the contrary, it would lead to multiplied reporting obligation. Therefore, in revising the proposal the CEBS should be looking at three fundamental principles: proportionality, reducing banks' reporting obligations and a cost-benefit analysis.

The FBE requests the CEBS to clarify its plans concerning the timetable for the application of CoRep, given that some member countries will need at least 12 months for introducing the new framework after the CEBS's final proposal is issued.

The FBE's representatives met with CEBS professionals on June 29 in London. According to the information received, the contents of CoRep will be significantly simplified in the revised document and the number of forms substantially reduced (by one-third). The contents of the numerator will be simplified and clarified, the information on risk mitigation processes reduced and supervisory flexibility in determining the risk categories in the standardised approach increased. The reporting schemes for securitisation and market and operational risks calculated under the internal model have been improved. The CEBS would like to finalise the proposal in the fourth quarter of 2005; however, this date may be delayed depending on the different positions members may take.

FBE response to the Consultation Paper on Supervisory Disclosure (CP05)

The FBE welcomes the supervisory disclosure framework developed by the CEBS, as an important tool for the convergence of supervisory practices and for creating the conditions for a level playing field. The FBE has been proposing the developing of rules for supervisory disclosure throughout and is satisfied with the proposal and general framework proposed by the CEBS. The FBE made the following comments:

• The proposed framework allows easy access to the information disclosed.
• The scope of information to be disclosed is appropriate and user-friendly.
• All websites should be available in English.
• The FBE considers the convergence of supervisory practices as a key objective; therefore it deems it necessary to develop pages containing the different interpretations and practices applied by national supervisors.
• Later, the CEBS might consider comparing EU and non-EU countries.
• On the technical side it should be ensured that the reports are available in Excel format and to have an e-mail notice system in place.
• Given that supervisory disclosure is a new element, the framework should be reviewed after a certain time.

1.3 European Commission Green Paper on Financial Services Policy ⁴

This paper provides a summary of the objectives of the Commission’s financial services policy for the next 5 years. These are:

• "to consolidate progress towards an integrated, open, competitive, and economically efficient European financial market and to remove the remaining economically significant barriers,
• to foster a market where financial services and capital can circulate freely at the lowest possible cost throughout the EU - with adequate and effective levels of prudential control,

• to implement, enforce and continuously evaluate the existing legislative framework, to deploy rigorously the better regulation agenda for any future initiatives, to enhance supervisory convergence and strengthen European influence in global financial markets."

The chapters of the Green Paper address the main directions of development, the possibilities for improving and enforcing regulation, the various steps of rulemaking affecting financial services between 2005 and 2010 and potential new initiatives. The document has seven annexes, addressing the following issues:

- Economic benefits from financial integration

- Better regulation, transposition, enforcement and continuous evaluation

- Efficient and effective supervision

- Barriers to cross-border consolidation (mergers).

- External dimensions

- Asset management

- Retail financial services.

The FBE finds the contents of the Green Paper unsatisfactory, especially in respect of supervision on a consolidated basis. In its letter to the European Commission the FBE emphasises that the supervision of banking groups active in several member states requires supervision on a fully consolidated basis (with clear roles of home and host country supervisors). The fragmented supervisory system in the EU is a main barrier to cross-border consolidation. The letter points out that the Commission's paper does not reflect the results achieved in the consultations between the Commission and industry representatives in respect of the CRD and fails to provide clear information as to what the Commission aims to achieve in the area of banking supervision in the period in question. The FBE urges the Commission to draw up a roadmap, including objectives and actions and their timetable.

2. 100^th Meeting of the FBE's Legal Committee

The FBE's legal Committee held its 100^th meeting in April 2005 in Brussels. The Committee has a new chair (Gérard Gardella) and a new Head of Department (Robert Priester). As an item outside the agenda, the need to improve efficiency of the Committee's work was raised (few meetings, with too many agenda items, objectives too general concerning the issues addressed, many issues referred to the Legal Committee from other committees, etc.).

The following issues were reviewed at the meeting:

1. Corporate governance and corporate law: the Secretariat presented a report on the progress of initiatives of the European Commission and the FBE's responses. The secretariat briefed participants on the publication of the report of the Commission's corporate governance expert group (professionals from the FBE's corporate governance and corporate law working group were involved in the group). Participants received briefing on activities of the Corporate Governance Working Group of the International Banking Federation.

2. Securitisation laws:

a) The Hague Convention on securities held with an intermediary. The Secretariat presented a report on the status of signature. At the EU level, the Commission's proposal on signature is now pending with the Council. In its position published on March 25 the ECB proposed that an impact study be undertaken. The French member informed the Committee that the French Ministry of Finance had submitted an impact study to the European Commission and offered the FBE the opportunity to have consultations on this study.

b) UNIDROIT Draft Agreement on harmonised substantive rules regarding intermediated securities: after lengthy debate, the FBE developed its position on the draft convention and sent it to the UNIDROIT Secretariat before the inter-governmental expert meeting held in May in Rome. Members' attention was drawn to the close interrelation between the Hague Convention and the UNIDROIT Convention. The colleague from Spain presented the position of his Association. They would like the Convention to be confined to indirect participation, direct forms of securities holding are properly protected by international laws. Finally reports were presented on activities of the Legal Certainty Group and the G30 Sub-Committee.

3. Cross-border blockage of bank accounts: while endorsing the Secretariat's report, members said it was premature to take position.
4. "The 26^th Regime" - this project is aimed at developing Pan-European financial and banking products, independent of national rules. Under this project, the FBE had previously furnished members with a proposal for a pension fund model. Participants were invited to give their comments on the proposal at the meeting. Members of the Committee voiced reservations over the proposal:

1. the proposed new model does not simplify the current situation: in addition to the current 25 national regimes it creates a new, 26^th regime. Members say the further harmonisation of national laws would be more useful;
2. some participants said the proposal was sketchy and were reluctant to give their endorsement; however, they said they would revisit the proposal later on;
3. taxation would be difficult to manage under the proposed model and the relationship with national laws is unclear;
4. utmost care should be exercised due to the lack of adequate consumer protection and supervisory provisions; these are fundamental aspects in the area of pension services.

In conclusion, the Legal Committee established that there was a general skepticism among members over the proposal; however, taking into account the optimism of European institutions and organisations, the issue will continue to be followed closely. In the lunch break, Dirk Staudenmayer, Head of Department of the Health and Consumer Protection DG gave a brief presentation of the concept.

5. European Master Agreement for financial transactions (EMA). The EMA was initiated by the FBE, the European Savings Banks Group and Association of European Association of Co-Operative Banks in 2001. In the meantime, the agreement has been complemented with a clause on derivatives. The participation of the Legal Working Committee in the work of the EMA Working Committee is desirable. The Secretariat gave a briefing on joining the EMA and on cooperation between the EMA working committees. The list of national legal positions will be sent again to members. Some members said they refrain from applying the EMA due to the specifics of their domestic markets. The Legal Committee established that there was no consensus over the application of the EMA and will take a neutral position on the issue.
6. European Contract Law: the Legal Committee intends to follow this work only as an observer, because, except the French and Italian Banking Association, which have been involved in several working groups, members are not in a position to commit professionals to this issue and FBE does not intend to exercise any major influence over this issue.
7. Cross-border mergers and acquisitions in the European banking sector: the Secretariat gave a report on the document sent by the FBE to the European Commission and on activities performed in the various FBE committees and working groups in relation to this issue. The Legal Committee compiled a report on legal barriers to cross-border mergers and acquisitions. The report will be presented to the FBE Executive Committee after receipt of members' comments.
8. European Payment Council, Legal Committee: the Secretariat presented a report on the status of preparations for a new legal framework for payments in the single market. Version 6 of the proposal was under preparation to be presented to the European Parliament in September 2005.
9. Iceland Building Society: in accordance with the earlier decision of its Executive Committee, at the request of the Bankers' Association of Iceland the FBE intervened in the lawsuit before the EFTA Court. Details were presented by the Secretariat.
10. Class Action: the FBE Secretariat collected solutions applied in members' national legislation in respect of collective litigation, where social organisations and legal entities may institute litigation in consumer protection, environment protection or other issues on behalf of private persons.
11. Other: at the request of the French member, the Secretariat asked for information from members on the treatment of loan transactions of government agencies and municipalities under public procurement procedures, given that the relevant EU Directive fails to provide clear rules on this issue. An open tendering system is applied in Belgium, Germany, Ireland and Italy; however, the legal rules are not clear-cut.

3. Accounts Committee

3.1 Global Accounting Rules: EU-SEC Agreement

The European Commission and the U.S. Securities & Exchange Commission (SEC) in a press release in April announced their agreement a roadmap to harmonise the IFRS and the USGAAP.

The objective of the agreement is for the SEC to take steps to harmonise the two accounting standards possibly by 2007, but no later than 2009. Currently, companies entering the U.S. stock exchange are required to reconcile their IFRS reports to USGAAP.

Mr. Charlie McCreevy, the EU Commissioner on internal market and services pays close attention to the process. He emphasised that it is the common interest of Europe and the United States to reduce regulatory barriers and related costs on businesses. The objective is to develop, by working closely together, high-quality global accounting standards, which the European Union strongly supports.

3.2 Practical application of the IFRS

The Polish Banking Association drew attention to inconsistencies in the definition of transaction charges that can be taken into account in calculating the effective interest rates for retail loans (mortgage and consumer loans).

According to Polish banks the charges that can be taken into account are not the same in the IAS 39 and IAS 18: IAS 39 mentions "transaction costs", while IAS 18 mentions "related direct costs", the contents of the two terms are different. Due to the differences in recognition, revenue and cost items periodically accounted for during the life of the product cannot be properly matched; thus, the profit and loss account is distorted.

Polish accounting experts say the solution is to improve the IFRS. One option would be to extend the definition of transaction costs, in convergence to the USGAAP; another option could be to develop a definition for fees for retail products.

The Hungarian Banking Association agrees that inconsistencies in the IFRS should to be rectified and also supports convergence between IFRS and USGAAP. Broadening the definition of transaction costs is consistent with the general principles in the IFRS and points to a global accounting standard.

3.3 FBE response to the consultation paper on the proposed common consolidated European financial reporting (FINREP - CP06)

The FBE provided critical comments on the draft proposal for a consolidated European financial reporting framework presented by the CEBS. The following were the main objections:

• The FBE welcomes the initiative to harmonise financial reporting in Europe; however, the fact that national supervisors may require further information supply in addition to that provided within the common reporting framework is a barrier to creating a single European internal market of financial services.
• Due to differing data requirements, significant differences will remain between member states and the burden due to differences in reporting requirements will not be reduced.
• The proposal is inconsistent with the disclosure requirements in the IFRS: its sets extensive data requirements for the various products and sectors and limits the options provided in the accounting rules. In providing reporting requirements the proposal often refers to Common Practice, a term not defined in the IFRS.
• Differing national reporting requirements will cause particular problems to groups operating in several countries: consolidation will become impossible if national regulators have the discretion to decide on the data contents of the financial reports.

4. Fiscal Committee

The Fiscal Committee continues to give special attention to issues and tasks related to the taxation of interest income in the EU and the reporting requirements introduced from July 1. At the Committee's meeting on April 15, members pointed out that there were a number of unclear issues regarding the technical management of interest income reporting and some members (those countries applying an interest income tax and Sweden) would have liked the starting date of July 1 to be postponed.

• There are problems with the customer identification codes, given that tax numbers are not registered by banks in all countries. For example, Germany indicated that according to German law, the place and date of birth are the data to be registered; an official list of tax numbers would be useful.
• It was also raised that it would be useful to have a list on those companies, income from which has been voluntarily excluded from the definition of interest by a member state (for example, residual entities).
• As for standard certificates to be used within the EU, the validity of the certificates in some is cases unclear. The FBE proposed three years for validity instead of one year.

Due to the high number of issues to be resolved the FBE turned in a letter to the European Commission, asking for a moratorium on penalties for incorrect reporting.

The FBE Fiscal Committee urges for a revision of the 6^th VAT Directive. Due to the activity-based exemption of banking from VAT, banks cannot deduct VAT. This is an enormous cost item in the banking sector. The current VAT legislation is a main barrier to the integration of financial markets in Europe. The FBE wrote a letter to László Kovács, EU Commissioner for Taxation, seeking an early remedy to this situation.

The FBE's VAT Working Group made a proposal for setting up a working group on transfer pricing. This working group would be a forum where, in addition to theoretical work, practices and tax administration methods used in the different member states could be presented. Through an exchange of information, a methodology to be used by banks within the EU could be developed.

The representative of the Italian Banking Association informed that the European Court of Justice was examining the Italian business tax (IRAP) in respect of its nature of a turnover tax other than VAT, which is prohibited in the EU. IRAP generates more than EUR 33 billion in tax revenues in Italy; therefore, Italian banks are concerned that if IRAP is found illegal, then tax a much more "painful" would be introduced in Italy.

5. 28^th Meeting of the Communications Committee, Rome

Research and experience on the image of banks is a central agenda item of the meetings of the Communications Committee.

At the Rome meeting, Heiner Herkenhof gave a presentation on the German experience. Economic growth in Germany is below 1% and banks are criticised for not financing the economy. The performance of the banking sector in Germany is low and falls behind that of other sectors in growth. Notwithstanding the poor performance, people have a different opinion and are dissatisfied with the information provided by banks. There are several thousand small banks in Germany, which are uncompetitive and cannot be consolidated. At the same time there are no resources for campaigns to change the opinion of the general public.

Changing the image of banks is a time-consuming task (a situation caused by one bad news takes half a year to rectify); therefore, banks have decided to improve their communications with the society. Banks are primarily communicating the positive news, keeping regular contact with the press, and start familiarising students with the economic conditions already in the school: regular information on the state of the economy is distributed by e-mail to teachers, who then forward this information to the students.

A successful program in Italy, PattiChiari, is aimed at providing high-quality customer information. Under this program, marketing is done not through the media but through bank branches. Customers are provided with maps showing the nearest ATMs, lists of low-risk bonds and information on the time and documents required for credit approval by loan amount at the various banks. Substantial funding (EUR 20 million) has been committed to the project and a special unit with a staff of 20 was set up in 2003 to manage the program. The program has been welcomed by the general public and has been running successfully ever since.

6. FBE Payments Committee - discussion of the European Commission paper on the future of SEPA

The FBE Payments Committee held its meeting for the first time in a new member state. The Prague meeting's agenda was basically determined by the paper published by the European Commission on the uncertain future of the European payment system, a paper of a surprising tone and full of dilemmas. The document shares with the public the Commission's concerns to what extent it can promote through regulatory measures the creation of a single European payment area. The Commission's main concern is that despite the important steps it has made to help create a common payment system (the introduction of a single currency, application of equal fees for international and domestic transactions within the EU), there is little progress in establishing the conditions required. While the fees for international transfers and domestic transfers are now the same, transfers between two member countries still take 3 to 5 days. (The customers' funds are sitting at the banks during that period - the Commission says). Due to the different rules and IT systems banks or service provider from other countries cannot link up to the national payment systems, no competition of prices and services is generated. This - the study says - is detrimental to customers, who are not able to put any pressure on banks. This is the fact that provides the professional and moral grounds for the EU to intervene into these processes at the administrative level.

However, the Commission is cautious: first, banks now have an EU-level organisation to tackle the issue (the EPC) and secondly, the Commission knows that replacing existing efficient domestic payment systems (transacting 98% (!) of all payments in the EU) with an uncertain - although a pan-European level - new system is rather risky. Partly that is why the Commission has reservations over the self-regulatory EPC: the concern is how this organisation can convince eight thousand banks and two million businesses on the profitability of the new systems. (Ultimately, proven domestic systems would have to be given up for the sake of international transactions representing only 2% of the turnover).

The Committee has chosen a peculiar way to resolve this contradiction. On the one hand, it provides a set of arguments in favour of the single European payment system (huge market, uniform rules to promote the movement of money, same-time payments at low costs through automatically interconnected consumer terminals and the introduction of related value-added banking services). On the other hand, it floats the option of forcing, through regulatory means, the changes it deems necessary (communication between/inter-connectivity of the domestic systems, standardisation of consumer interfaces with connectivity to any bank, uniform transfer execution time, price influencing)

7. Social Affairs Committee

At the invitation of the Association, the FBE Social Affairs Committee held its 21^st meeting in Budapest. With 20 members present, the Committee reviewed demography concerns of banking in Europe and the problems of ageing bank staff. The European Banking Federation launched a project aimed at cooperation between old and new member states through a bilateral dialogue. Under this project, the Hungarian Banking Association and employer and employee representatives from Hungary will be hosted by Austria on October 3 to exchange experience on social dialogue.

The Committee addressed issues related to bank mergers and the EU Directive on working time.

8. Meeting of the FBE Executive Committee in Budapest

At the invitation of the Association, the FBE Executive Committee held its 222^nd Meeting and the 20^th meeting of Associate Members in Budapest (this was the first meeting the Executive Committee held in a new member state).

At the meeting of Associate Members, held on the day before day before the Executive Committee meeting, the Director General of the Hungarian Financial Supervisory Authority offered a presentation on the adoption of the Capital Adequacy Directive in Hungary and on the main features of financial supervision in Hungary. The presentation was received with great interest.

The agenda of the FBE Executive Committee meeting included, inter alia, a review of the FBE's decision-making mechanism, rulemaking related to the Capital Requirements Directive, and a survey on members' satisfaction. The FBE's management received briefings on the Money-Laundering Directive, the European Payment System and other current issues.

9. Meetings of the FBE Physical Security Working Group and the Anti-Fraud and Money-Laundering Committee

At the invitation of the Association, the FBE Physical Security Working Group and the Anti-Fraud and Money-Laundering Committee held their meetings in Budapest on June 13 and 14, with 30 delegates from 23 countries.

According to statistics, although the number of bank robberies in member states fell by 18%, the rates by country vary. In some countries, the number of bank robberies increased significantly, at a much higher rate than in Hungary. Some countries with large networks, such as Germany, Austria and Switzerland did not present data on bank robberies. It also deserves mentioning that although the situation has deteriorated in Hungary, Hungarian bank branches are still in the mid-field in Europe in terms of risk, with a risk rate roughly identical with that of branches in the U.K.

Branches are more secure in Scandinavia and in the Baltic states (with a lower number of branches in the latter). As for Hungary, a positive fact in terms of equipment is that the rate of failed attempts is 52% as opposed to the 12% on average in Europe and the average loss per robbery is EUR 8,333 against the EUR 60,070 in Europe.

V. INTERNATIONAL COOPERATION, ASSOCIATION EVENTS

1. Meeting of Banking Associations of the Visegrád countries, Warsaw

Poland initiated closer cooperation between the banking associations of the Visegrád countries, including a review from time to time of common issues of interest, the coordination of professional views and occasionally, acting jointly within the FBE according to the group's particular interests. Participants in the Warsaw meeting (the colleague from the Czech Republic cancelled his attendance at the last moment) gave brief presentations of their economies and banking sectors and outlines of the main issues to be tackled. They addressed in details issues related to the implementation of the Basel II Capital Accord, supervisory cooperation and accountancy issues, with special regard to anomalies in the calculation of effective interest rates in the IFRS, mergers and acquisitions affecting the European banking industry, social dialogue, the Single European Payment Area, data protection, credit information systems and corporate governance. The participants found the experience of the Polish credit information system very instructive.

2. Worldcompliance and Tonbeller IT product presentations

In the wake of recent terrorist attacks in Europe, anti-money laundering and anti-terrorism has been given more emphasis at the European level and the Third Directive, regulating these issues, is about to be finalised. To help banks implement their related tasks, the Association organised a product presentation in April, with the participation of Worldcompliance (U.S.) and Tonbeller (Germany).

3. Meeting for compliance officers

The Association organised a meeting for banks' compliance officers with Ms Erika Marsi, General Director of the Hungarian Financial Supervisory Authority, to review current tasks and cooperation with the supervisory authority.

4. ISDA conference

At this conference, organised by the Association, Dr. Zoltán Lengyel lawyer and his associates (Hegedűs Law Office in cooperation with Allen & Overy LLP-vel) reviewed documentations of the International Swaps and Derivatives Association (ISDA) and practical issues related to their use in Hungary.

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