REPORT

on Activities of the Hungarian Banking Association

4^nd Quarter 2003

Budapest, February 2004

CONTENTS

I. PROFESSIONAL ACTIVITIES *

II. LOAN SCHEMES, AGRICULTURAL LOANS *

III. INTERNATIONAL COOPERATION - EUROPEAN BANKING FEDERATION *

IV. ASSOCIATION LIFE, EVENTS, *

1. PROFESSIONAL ACTIVITIES

The Association's activities in the 4^th quarter continued to be focused on the review of draft laws and regulations affecting the banking sector. One of the most important of these was Draft Law No. T/6236 (an omnibus legislation) aimed at increased investor and depositor protection.

1. Draft law on amendments to certain laws aimed at increased investor and depositor protection

The draft law contained amendments to the following laws:

• Act CXII of 1996 on Credit Institutions and Financial Enterprises
• Act CXX of 2001 on Capital Market,
• Act CXXIV of 1999 on the Hungarian Financial Supervisory Authority
• Act XV of 2003 on the Prevention and Impeding of Money Laundering
• Act on Co-Operatives
• Act XLI of 1991 on Notaries Public

In relation to the Act on Investor Protection, the Association's Presidium turned in a letter to the Minister of Finance and the Prime Minister. The Presidium expressed its opinion that the effectiveness of the Supervisory Authority should be improved and emphasised that consistent supervision is indispensable for ensuring secure financial services.

The Presidium found it imperative for laws related to the Hungarian Financial Supervisory Authority to fully guarantee the Supervisory Authority's operational and financial independence and the enforcement of the relevant international principles. To achieve this, the Presidium proposed certain amendments to some provisions of the draft law.

The President of the Republic did not sign the Act but sent it to the Constitutional Court for constitutional review. Accordingly, the Act has not been promulgated and therefore, cannot be applied.

1.1 Amendment to Act XV of 2003 on the Prevention and Impeding of Money Laundering

Based on practical experience, the Association drew attention to some important points concerning the proposed amendment to this Act, namely: the current legislation contains certain rules that are prejudicial to the economy as well as to banks' business interests.

We have been faced recently with a problem related the criminal liability of those tellers, clerks and other employees without decision making powers. Threatening these low-ranking employees with serious criminal punishment is also morally unjustifiable. We requested the Ministry of Finance to once again review the relevant laws (the Money Laundering Act, the Criminal Code, sample procedures and internal directives) so as to ensure that proceedings against tellers or account-keeping clerks may only be instituted in case of serious negligence or instrumentality to money laundering through deliberate collusion with the client. A possible solution would be to define objective criteria for the obligation of reporting.

We drew attention to the fact that the identification of business partners qualified as financial institutions was impossible according to the rules applied to general customers, where personal appearance is mandatory. Further lobbying will be required to convince regulators to recognise the current international client identification practices in banking.

At our request, the draft law offered an acceptable solution to the long debated rule that had provided that a foreign-based service provider should let the Hungarian service provider (otherwise its competitor) know the client's identity on receipt of the transaction order.

For old clients, in cases where the required identification data are not fully available, while the client is clearly identifiable, rejecting the transaction just because a particular detail is missing is a very serious sanction. We had some discussions with the regulators to determine an appropriate sanction.

The amendment provides that credits shall not be denied when receiving, within the framework of correspondent banking services, transfers that do not contain all the data required by law (name, address, bank account).

Since the President of the Republic did not sign the Act and therefore the Act has not been promulgated, most problems remained unresolved. As a "fire-fighting" solution, Act CXXII of 2003 was enacted, amending Section 16 (9) of the Money Laundering Act and extending the year-end deadline for client identification by another 3 months.

1.2 Proposed amendments to the Credit Institutions and Capital Market Acts, related to IT security requirements, Annual Percentage Rate and consolidated supervision.

1.2.1 IT systems

The law package would provide specific IT system security requirements under respective amendments to the Credit Institutions and Capital Market Acts. The secure operation of IT systems is a prerequisite for accurate and up-to-date banking and investment services. If improperly set up, managed, regulated or controlled, IT systems may be a source of serious risks such as loss of data, unauthorised access, etc. These issues are not regulated by the current legislation.

Based on banks' opinions we expressed serious criticism on several provisions of the proposed legislation and submitted a comprehensive proposal (with specific wording drafted by a professional team) to revise the system of definitions in the draft law.
Our proposal was rejected.

1.2.2 Credit institutions subject to consolidated supervision

The regulator's objective in extending the scope of consolidated supervision was to strengthen group-level supervision. Under the proposed regulation, the liability of supervisory boards of credit institutions subject to consolidated supervision would be extended to the proper functioning of internal audit systems at credit institutions, financial enterprises and investment firms under the dominant influence of such credit institutions.

1.2.3 Annual Percentage Rate

The proposed Act would introduce the calculation of Annual Percentage Rate for home loans (as is done for consumer loans). The APR would be required to be indicated in all advertisements and in the loan contract.

We pointed out that the APR provided in the current Government Decree is inapplicable to home loans. Nevertheless, the submitters maintained the proposal.

The regulation on APR (Government Decree No. 41/1997. (III.15.)/ was enacted within the framework of EU law harmonisation for consumer protection reasons. It follows from this that this index can only be used for comparison between fees effective at the time of concluding the loan contract. For comparability, the index implies several assumptions and simplifications (e.g., for overdraft); the actual fees/charges payable later by the customer may differ from the APR and therefore, the APR values indicated can only to a limited extent be used for analysis. The calculation of APR is inapplicable for home loans for the following reasons:

Some fees are not paid to the banks but to other parties, such as experts or notaries public (for example: appraisal fees, site inspection fees). Some of these fees cannot be calculated in advance. Some fees arise in the phases of credit rating, contracting or disbursement, others at later stages (e.g., expert fees for progress reviews of construction projects). The APR contains variable interest rates and handling charges, which cannot be foreseen for a long loan period of 25 to 35 years. The APR may significantly differ from the actual loan fee applied. Based on these arguments the Association pointed out that the formula provided in the Government Decree is unsuitable for computing any indicator that would enable the customer to compare the home loan products offered by different banks.

The indication of APR for home loans should be mandatory effective from Hungary's accession to the EU. The Association is now working together with the regulator to develop a suitable APR in line with the relevant EU practice.

1.3 Amendment to Act No. CXXIV on the Hungarian Financial supervisory Authority

The Association submitted several observations on the proposed legislation, aimed at improving the Supervisory Authority's efficiency and aligning its operations to the Basel Banking Supervision Committee's guidelines. We proposed that the current rule providing that the Supervisory Authority may not be instructed be retained in the new legislation. We also proposed that the Supervisory Authority's reporting obligation should only apply to concluded cases. We proposed for the Authority to put in place a more clear-cut management model and to provide a clearer sub-ordination in terms of scopes of competence between the Chairman of the Supervisory Council and the Director General (similar to that between Ministers and Administrative State Secretaries). Under our proposal (accepted and now included in the draft law), the Director General shall manage the Supervisory Authority's organisation under the direction of the Chairman of the Supervisory Council, in accordance with the relevant laws and professional requirements. Also, we proposed to extend the range of persons eligible to be nominated as Director General and Chair and members of the Supervisory Council.

1.5 Act on Co-Operatives

The amendment to the Co-Operatives Act tightened the conditions for extending member's loans to co-operatives. The condition for extending member's loan is that the member's financial contribution has been fully paid up and the aggregate value of loans extended by members with less than one-year membership may not exceed five times the co-operative's equity when concluding the loan contract. The Co-Operatives' self-government rules and its general meeting may provide for financial contributions other than subscription of shares and members may extend interest-based loans to the co-operative.

1.5 Issues related to notaries public

At the initiative of the Hungarian National Chamber of Notaries, on November 6, 2003, the Association held a meeting with Judit Bókay, President of the Hungarian National Chamber of Notaries Public on the proposed law amendments affecting home loans and notaries public. The meeting addressed several issues, including the revising of notarisation fees, omitting the reading procedure when notarising bank loan contracts and the proposal for bank loan contracts to be deemed as deeds and to be directly executable as was the case in the interwar period in Hungary.

The President of the Chamber of Notaries Public presented the professional arguments that justify the reading out procedure. She explained that notaries often help in interpreting the contract, inform the client and in many cases the original draft contracts are amended due to issues arising during the reading out process. In relation to notarisation fees the President explained that the figures published in the press were inaccurate and overstated. As for the proposal for unnotarised bank loan contracts to be qualified as deeds she said the proposal was unacceptable for a number of reasons.

Banks explained that notarisation fees should be stated under the principle of level playing field (in some cases there are significant differences in allowances given by notaries public based on the decree on notarisation fees). Banks would find it expedient to allow mortgaging based on a unilateral deed, thereby simplifying the process.

1.5.1 Proposed amendment to Act XLI of 1991 on Notaries Public

Draft Law No. T/6236 on amendments to certain Acts related to increased investor and depositor protection, passed by Parliament on December 15, 2003, contained an amendment to the Act on Notaries Public, reading as follows:

" Subsection 120. § (2) Except for any changes or additions to the draft, reading out aloud the deed prepared based on the written draft made available by the parties may be omitted, if the parties of legal entity acting through their legal counsels or all parties to a loan contract (mortgage deed) involving interest subsidies granted by the state as state support for housing purposes under a separate law, jointly declare before the notary public that they have fully familiarised themselves with the draft deed and therefore request the notary public to refrain from reading the deed. Reading shall not be omitted if any of the parties is a person specified in Subsections 124 a) to c)."

Although several comments were submitted by the Association during the drafting process, banks' intentions were only partly reflected in the approved version of the draft law. The original proposal submitted was revised by the Ministry of Justice under an amendatory motion; a number of our comments submitted on this revised version were accepted (adjustments to the provisions on mortgage deeds, narrowing the provision excluding the omission of reading). Unfortunately, the draft still provides that reading may only be omitted in the case of legal entities acting through legal counsels. In this context we pointed out that this is not what the practice shows: economic actors, including those without legal entity, attend the notarisation process through their representatives authorised to sign the contract and these are not necessarily their legal counsels. For home loan contracts, we expressed our opinion that narrowing the option to omit reading to contracts involving interest subsidies was unwarranted.

1.5.2 Amendment to the Ministry of Justice Decree on notarisation fees

Following the meeting with the President of the Chamber of Notaries Public, we received for review the draft of the proposed amendment to Justice Ministry Decree No. 14/1991./XI.26./IM. The draft was forwarded to our member banks and based on their opinions we submitted a number of comments on the proposal. The proposal would set standard fees for notarising home loan contracts affected by the Government Decree on housing support, irrespective of the lender's person. The fees would consist of two elements: an aggregate amount consisting of a service fee plus a lump sum for costs and a fixed amount for charges for office copies and other costs related to the process. Notarisation fees will be further reduced through an amendment to the new VAT: under the new legislation, notaries public are no longer subject to VAT.

In relation to the proposed amendment we pointed out that current banking practices do not warrant any higher fees or cost lump sums or any cost reimbursement or copy charges when notarisation takes place on the spot. on the spot. Namely: notarisation costs are much lower when notarisation is done on the spot at the bank. We proposed that the advance credit transactions specified in Section 5/A of the decree be treated in the same way as loan contracts eligible for interest subsidies. We also proposed to apply preferential fees for the notarisation of amendments to contracts. In addition, we submitted some tweaking proposals for the wording of the entry into force provision of the new decree. The Decree was gazetted under No. 39/2003./XII.19./IM. in Volume No. 149 of the Hungarian Gazette. As a result of this amendment, notarisation fees home loans affected associated with state subsidies were reduced substantially. The rate of decrease depends on the loan amount in question, but in certain categories, the fees have halved.

2. Amendment to Government Decree No. 12/2001. (I.31.) on housing support granted by the state

An instant meeting was summoned by the Ministry of Finance on December 10, 2003 in connection with the proposed amendment to the government's housing support scheme. Representatives from banks involved in home lending were also invited to the meeting. The draft text of the proposed amendment was handed out at the meeting. The proposal contained a significant and instant narrowing of existing preferences. The loan amount and the rate of preferences for loans provided against mortgage bonds were changed: preferences for the purchase, enlargement or renovation of second-hand apartments may not exceed HUF 5 million per apartment (the preference for the purchase of new apartments is invariably HUF 15 million). Interest and fees charged during the loan period may not exceed 110% of the government bond yield plus 4 percentage points minus the interest subsidy specified in Subsection 12 (3) of the decree. The rate of interest subsidies is 60% of the government bond yield for the construction or purchase of new apartments, 40% for second-hand apartments. The government bond yield is the previous three months' average published by the Government Debt Management Agency.

Banks attending the meeting submitted several observations to make the decree more specific and to facilitate implementation (computation of the government bond yield, methodological issues related to determining the rate of interest subsidies). Proposals were made for amending the entry into force provisions of the decree. The Head of Department chairing the meeting and his colleagues promised to forward the proposals and comments to the decision-makers. However, the Decree, issued under No. 221/2003.(XII.12.) already implied certain legal consequences effective from the date of issue if the Decree; namely: the provisions effective prior to the entry into force of the new decree were applicable to all those loan contracts received by the banks until the effective date of the new decree, if the purchase contract was signed by a lawyer or a notary public latest by the date of promulgation of the new decree. The entry into force provision of the decree was unclear in terms of the date by which the purchase contract had to be submitted to the Land Office. Following several media reports, the Ministry of Finance issued a ruling on this issue. Nevertheless, we still had to contact the Ministry on a number of other outstanding issues. The provision excluding the combined utilisation of interest subsidies on mortgage bonds and supplementary interest subsidies was no clear-cut. there were also some question concerning the computation of the rate of subsidies on mortgage bonds. We had several indications stating that after so many, often ill-prepared, amendments, the result is now a rather controversial and confused regulation, difficult to implement. It was also suggested that the decree should be entirely reviewed and revised.

3. Data protection

Based on banks' comments, the Association compiled a document in connection with the amendment enacted as of January 2004 to Act No LXIII of 1992 on Protection of Personal Data and concerning the interpretation of Act LXVIII of 2003. Jointly with the National Federation of Savings Co-Operatives, Association of Fund Management Companies in Hungary (BAMOSZ) and the National Association of Securities Dealers, a request was filed with the Ministry of Finance and the Data Protection Ombudsman, seeking their position and ruling on the issues raised.

A number of interpretation issues were raised in relation to the ombudsman's right of preliminary review, the appointment of internal data protection officers at financial organisations, data protection and data security manuals, the definition of database, connecting various forms of data processing, automated individual decisions, transfer of data to third countries, and powers of the Data Protection Ombudsman. We submitted that Hungarian data protection laws are in a number of issues much tighter than the relevant EC Directive (Directive No. 95/46/EC) and therefore, more difficult to implement.

Upon our request, a consultation was held on December 3, 2003. Involved in the consultation were the Data Protection Ombudsman and some of his colleagues, the competent Deputy Head of Department of the Ministry of Justice, the Banking Association and representatives from the National Federation of Savings Co-Operatives (OTSZ) and National Association of Securities Dealers (BSZSZ). The Ombudsman said there were no more amendments to the Data Protection Act expected during this election cycle. Also, he was most strongly opposed to the proposed positive list database and expressed his objections to the proposal to set up a voluntary database.

Most questions raised by the Association and the interest-representation organisations involved were answered; certain interpretations favourable to banks were also supported by the Ombudsman. It is clear that all financial institutions falling within the scope of the Hungarian Financial Supervisory Authority will be required to appoint an internal data protection officer and to draw up an internal data protection manual effective from the beginning of 2004. As for the form of employment of data protection officers, flexible solutions are acceptable (part-time, assignment contract, etc.). In respect of the definition of database, all data stored in a financial institution's database will be treated as a single database. According to the provisions of the law, data processing may not be assigned to businesses which in any form are interested in the financial organisation's activities (meaning: competitors). Customers shall be notified on automated individual decisions; for this purpose, a summary information will suffice. As for transfer of data to third countries, two relevant EU Directives may be applied already before May 1, 2004. The Ombudsman proposed further discussions concerning the blacklisting provision of the Credit Institutions Act.

The Data Protection Ombudsman found the data management of financial organisations (and primarily, banks) acceptable and offered the possibility of regular consultations. Following the meeting, a written answer was also received form the Ministry of Justice; the letter was forwarded to the fellow organisations involved and to our member banks.

4. Interpretation of the Act on Local Taxes

The amendment to the Act on local taxes enacted in November contained a change prejudicial to banks. When determining the net tax base, gains on the original transactions (hedged items) are specifically mentioned among the elements to be taken into account, whereas these items are included in the lines Revenues from Other Financial Services or Revenues from Investment Services. If literally interpreted, this means double taxation, certainly not intended by the regulator. We requested the Finance Ministry's ruling on the issue.

A more serious problem is that the above provision institutionalises the fundamentally wrong approach applied in the Act to hedge and hedged transactions for the purpose of trade tax; namely: it is not the net (fixed) income from hedged transactions that is considered as the taxbase but certain "selected", volatile and unprojectable income contents of certain transaction components. Thus, instead of taxing a "fixed revenue" (in terms of economic contents), the business's assets are taxed, at an unrealistically high rate, based on a parameter that is independent from the profit generating capacity of the business.

We expressed our general objection to the discriminative provisions on determining the tax base for credit institutions and investment firms, namely: for certain activities, expenses may not be deducted from revenues when determining the tax base. In this matter, we submitted a motion to the Constitutional Court.

5. Draft law on electronic money institutions

Within the framework of law harmonisation, the Ministry of Finance drafted and sent us for review the proposed legislation on electronic money institutions, based on EU Directive No. 2000/46/EC. We forwarded the draft law to our member banks for review. In November, a meeting was held on the issue with the participation of the Ministry of Finance, credit institutions and representatives from the Payment System and Currency Issue Policy Department of the National Bank of Hungary. A revised version of the draft law was received on December 17. Having reviewed the new version we opined that further consultations were required.

6. Regulation on client accounts

The Association, BSZSZ and the Budapest Stock Exchange turned in a joint letter to the Minister of Finance, drawing attention to caveats in the regulations on client accounts that hinder the practical operation of client accounts. The amendment to the Capital Market Act in force from January divides client account activities into two categories: account keeping (i.e.: registering credits and debits), considered as auxiliary financial services and transfers from the client account, regarded as payment services falling under the Credit Institutions Act. The two activities were previously considered as one activity and service providers are licensed accordingly. However, according to the Hungarian Financial Supervisory Authority's ruling issued in September, a new licence should be acquired for transfers from client accounts (the criteria for such operations were also made public in September). Firstly, it is questionable whether the need for re-licensing can be derived from the regulations, and secondly, this approach would imply that payments in the period between September and January may only have been effected in cash. It is also controversial that advance payments received for unrealised capital market operations may only be repaid to the client in cash.

7. Customs account

In accordance with the resolution adopted by the Council for Payment System (FRF) on September 19, the Council's Co-Chairs (Henrik Auth and Tamás Erdei) turned in a letter to the Minister of Finance with a request for the Customs Authority to develop a practice for handling customs accounts, taking into consideration the cost aspects of the banking system. Also, a proposal was made by Giro Ltd. for a payment method which fits in with the existing payment methods, unlike the on-line PC network proposed by the Customs Authority to be installed at credit institutions (which is also questionable from security points of view). During the review of the Draft Law submitted by the Ministry of Finance on the Implementation of Community Customs Laws, we challenged the introduction of the definition of Customs Account. We also turned to the Prime Minister's Office, requesting that the draft law to be modified. As a result of these actions, the definition of Customs Account was omitted from the law passed by Parliament.

8. Measures aimed at developing financial markets

The adoption of the European Master Agreement (EMA) ensuring the standard management of repo and securities lending transactions commenced, as part of the measures aimed ad developing financial markets in Hungary. To deepen the financial markets it is necessary to develop a standard legal framework for repo and securities lending transactions and to formulate the clauses on risk mitigation in a clear, internationally acceptable and legally enforceable manner.

The proposed Master Agreement is aimed at transposing the parts of the European Banking Federation's "Master Agreement for Financial Transactions" relevant to repo and securities lending transactions. Cross-border transactions are also treated in a standardised manner in the European Master Agreement. The EMA has been approved by the European Central Bank (furthermore, it is specifically recommended by the ECB and is also used by the ECB in its central banking operations).

The above documents are important from the point of view of developing capital markets in Hungary and virtually indispensable for the smooth integration of the Hungarian financial sector into European money and capital markets.

In this, the Association works closely together with the Association of Investment Firms and the Government Debt Management Agency. The general part of the Master Agreement and the chapter on repo transactions have been completed recently. Based on these, government securities repo transactions with primary dealers have been launched. The chapter on securities transactions are to be submitted for review by the banking community soon.

The new Hungarian EMA will be applicable to all financial market players in Hungary. Implementation is also welcomed and supported by the European Banking Federation and the European Central Bank. The Hungarian version of the European Master Agreement will be published on the FBE's website.

9. Structural Funds Coordinating Forum

At the joint initiative of the Office for National Development Plan and EU Supports (NFH) and the Hungarian Banking Association, a forum was set up to coordinate application procedures under the EU Structural Funds. The purpose of this forum is to develop, with the involvement of the Operative Programmes Managing Authority, a standard system for managing banking tasks related to application and paying processes under the various Operative Programmes.

The Association represented itself in the conference on EU supports organised by the Office for National Development Plan and EU Supports in Siófok with the participation of the OP Managing Authority, the Paying Authority and international experts.

Within the framework of the Co-Ordinating Forum, a questionnaire was compiled for the OP Managing Authority, with the following four groups of questions related to the managing banking tasks in application procedures: a) general procedural issues; b) own resource requirements; c) resources and loan commitments; d) guarantees and collaterals.

Our proposals for banking procedures will be presented in the form of recommendations to the OP Managing Authority. These recommendations will be prepared by working groups made up of banking professionals, based on experience gathered in the course of managing applications under the pre-accession funds.

At the December meeting of the Coordinating Forum attended by the working groups and OP Managing Authorities, the questionnaires for OP Managing Authorities and the draft of banking recommendations were discussed.

10. European legislation

The drafts of the directives on the implementation of the European Parliament and Council Directive on Market Abuse, the directive on the contents of offering prospectuses, and the Transparency Directive, aimed at ensuring transparent capital markets and standard information services, and the directive on investment services and recognised markets were reviewed with the Ministry of Finance, the Hungarian Financial Supervisory Authority, the Budapest Stock Exchange, the National Bank of Hungary and fellow professional associations.

11. Loans denied for old age

The Citizen Rights Ombudsman and the Hungarian Financial Supervisory Authority have earlier expressed their opinions concerning complaints filed by clients who were denied loans due to their old age.

After obtaining banks' opinions and reviewing lending policies at some banks, the Association developed its own stance as follows:

General experience in the banking sector shows that banks seek to enforce the principle of equal human dignity at all times in their lending policies; however, differences in personal and financial circumstances are rated in a normative way, in accordance with the rules for debtor rating provided by the Credit Institutions Act; equal differences are rated equally.

It is a fundamental prudential criterion for banks (placing depositors' deposits as loans) to carefully assess all credit risks and to identify the tools required to manage such risks. If any of those risks is not covered, then, in protection of its depositors, its is not only the right but also the obligation of the bank to deny the loan.

Human age is a significant risk factor from the point of view of repayment of the loan. It is also a fundamental requirement in lending that the loan be repaid from the debtor's own income, to avoid the need to enforce the collateral provided. Naturally, age is not an exclusive factor: the risk should be covered by proper collateral.

Human age is a special risk not only for banks but also for insurance companies: to offset age risks, insurance companies apply higher premiums or refuse to conclude insurance contracts over a certain age.

The financial assessment of age is present in other legal areas as well, for example when assessing the value of usufruct versus the age of the usufructuary; or, under the Civil Code a bank is entitled to terminate the loan contract with immediate effect if the debtor becomes insolvent.

Creditworthiness is assessed by evaluating all elements of a set of criteria, not only a single criterion. Rating age is not discriminative in itself: it just means managing a valid risk.

II. LOAN SCHEMES, AGRICULTURAL LOANS

1. Evolution loans

The evolution loan scheme was launched in 2000 and concluded at the end of 2003. The 2,492 applications awarded were associated with loans worth HUF 84 billion in total, of which HUF 37 billion was converted into evolution loans.

Under this loans scheme, if the applicant has accomplished the tasks it has committed to over three years, then the loan is repaid in the form of state support.

As of the end of 2003 there were still 2,280 loans under this loan scheme. Based on the appraisal of the applications, over the three-year period applicants received a total of HUF 37.3 billion in state support, including interest subsidies.

Bank clerks worked hard during the three years of the loan scheme, reviewing applicants' self-assessments and often correcting errors in the applications submitted. They had a great contribution to the fact that dropout over the three-year period was less than 10%.

2. Provision of bank guarantees for agricultural exports and imports from May 1, 2004.

The Association's comments on the relevant Government Decree have been duly taken into account; disagreement has remained, however, over the draft text of the sample bank guarantee attached to the Government Decree.

The Government Decree has not been issued to this date. The Ministry of Agriculture contacted us for another discussion at the end of the year, to develop the procedures required.

3. EU Accession Agricultural Loan Scheme

The resolution on the Accession Loan Scheme was adopted by the government on January 5, 2004. The main elements of this loan scheme are as follows:

• HUF 50 billion from bank resources
• HUF 50 billion refinanced by the Hungarian Development Bank (HDB) at EURIBOR-based interest rate, with exchange rate guarantee provided by the state (only available for SMEs)
• HUF 50 billion under 100% suretyship provided through the National Development Bank (state suretyship). (From both resources, exclusively for agricultural investment projects).

Banking conditions:

• For bank resources: the 3-month BUBOR effective as of interest date + 2%;
• HDB refinance: EURIBOR + 4% / of which 2 % for HDB, 2 % for the banks/
• HDB guarantee: the 3-month BUBOR + 0.3 %
• HDB refinance and guarantee: EURIBOR + 2.75% /of which 1 % is for the banks/
• Commitment fee, late interest and potential costs related to claim enforcement may be charged after concluding the loan contract.

Implementation of the loan scheme (submission of applications to the banks) commenced as of February 1, 2004, loan and guarantee contracts are to be concluded latest by April 30, 2004.

Banks reviewed in several rounds the related government submission and draft resolution and the Agriculture Ministry's draft decree and, with their comments and proposals, provided substantial assistance in drafting the relevant Government Decree and Government Resolution. With their contribution, professional and clear documents were produced.

At the same time, the unfavourable banking terms and conditions and most importantly, interest premiums, did not improve. The 2% interest premium introduced (versus the 4% applied in the previous years) will probably be a precedent for other loans schemes associated with government support. Therefore, it will be imperative to change the Financial and Agricultural Ministries' approach that banks may not charge any costs other than interest. Finally, after a lengthy debate, only those costs that arise after conclusion of the loan contract were regulated in the Government Decree

Implementation of the loan program in time will require special efforts from all banks involved in the scheme.

III. INTERNATIONAL COOPERATION - EUROPEAN BANKING FEDERATION

1. Full membership in the European Banking Federation

In January 2004, the Association's Presidium, availing itself of the FBE's offer, wrote a letter to Maurizio Sella, President of the FBE, and Nikolaus Bömcke, Secretary General, applying for a full membership for the Hungarian Banking Association in the European Banking Federation, effective from January 1, 2004. This step was the concluding step of a two-year process, during which the Association received a lot of useful and valuable information as an associate member of the BFE. The admission process is more of a formal procedure requiring the votes of the Executive Committee and General Meeting of the FBE. The procedure is now in progress.

2. Basel II

October decisions of the Basel Committee:

Important decisions adopted at the October 11-12 meeting of the Basel Committee in Madrid were made public in the Committee's press release titled "Significant Progress on Major Issues". www.bis.org/press/p031011.htm.

According to the press release, with more than 200 comments received on CP3, the Committee will not be able to finalise the new capital accord by the end of 2003 and has given itself more time until mid-2004 to resolve the yet outstanding issues. Although the press release does not mention any possible delay in implementing the new Accord by the end of 2006 (Jaime Coruna, the new Chair of the Banking Supervision Committee, in an Article published in Financial Times in October, also denied that implementation would be postponed), many experts believe that a postponement will be inevitable.

The principal areas in which the Committee has identified opportunities to improve the proposed framework include the following:

• changing the overall treatment of expected versus unexpected credit losses;
• simplifying the treatment of asset securitisation, including eliminating the "Supervisory Formula" and replacing it by a less complex approach;
• revisiting the treatment of credit card commitments and related issues; and
• revisiting the treatment of certain credit risk mitigation techniques.

The most significant change compared to CP3 and the Technical Guide to QIS3 is the new proposal on the treatment of expected and unexpected losses. The previous approach represented a practical compromise to address differences in national accounting practices and supervisory authority regarding provisioning. However, in light of the public comments received on CP3 and subsequent research undertaken by its working groups, the Committee decided to revisit the issue and to adopt an approach based on unexpected losses. The proposed change does not affect the standardised approach. Interested parties were invited to comment on this proposal by year-end 2003. It was decided that at its January 2004 meeting the Committee will evaluate the outcome of the consultation on the expected/unexpected loss issue, review the progress made in resolving the other technical issues and assess further related work on the calibration of the IRB approach.

The proposed change would put into place a separate treatment of expected losses within the IRB approach. The IRB capital requirement would be based solely on the unexpected loss portion of the IRB calculations. Accordingly, certain offsets within the IRB framework, in particular future margin income, would no longer be necessary. It is important, however, that banks provision properly against expected losses. Under this modified approach, banks will compare the IRB measurement of expected losses with the total amount of provisions that they have made, including both general and specific provisions. If the expected loss amount exceeds the total provision amount, the shortfall would be deducted from capital: 50% from Tier 1 capital and 50% from Tier 2 capital. Excess provision amounts, if any, are proposed to be eligible as an element of Tier 2 capital. The Tier 2 eligibility of such excess amounts is proposed to be subject to limitation at supervisory discretion but may not exceed 20% of Tier 2 capital of a bank.

The incorporation of this new approach into the IRB framework may require some re-calibration of the framework to ensure that the overall impact of this proposals is consistent with the Committee's objective of maintaining the capital requirement on the banking system level unchanged.

The Basel process in the US

The October decisions of the Basel Committee were largely prompted by recent developments in the United States. The draft of the proposed regulation (Advanced Notice of Proposed Rulemaking, ANPR) was published by the competent U.S. regulators following the respective Senate committee meetings. Comments were to be submitted until November 3. U.S. regulators may only approve the final capital accord after a consultative period and following an assessment of the comments received. U.S. regulators may only approve the final capital accord after a consultative period and following an assessment of the comments received. For final approval, the agreement of a committee set up for this purpose is required. The U.S. Financial Policy Committee is chaired by the Secretary of the Treasury, its members are the Chairman of the Board of Governors of the Federal Reserve, the Comptroller of the Currency and the Chairperson of the FDIC and the savings co-operatives supervisory office. At the Basel meetings the U.S. participants must adhere to the position of this Committee (positions are taken by consensus or, failing that, the position of the Secretary of the Treasury is determinative). U.S. regulators maintain their standpoint to only implement advanced measurement approaches for credit and operational risks in the U.S. (AIRB and AMA) and then, only for a limited number of internationally active large banks. As a result of consultations regulators want to simplify the admittedly complex framework (while maintaining risk sensitiveness). It was also stated that the U.S. regulators would conduct at least one more quantitative impact study.

The European directive-making process

The delay in the Basel II process (six months at best) will of course impact the European capital adequacy legislation process. Thus far, the drafting of the new Capital Adequacy Directive CAD3 has been closely adjusted to the Basel process. Theoretically, it is possible that the European Commission will stick to its own legislation schedule and will not wait for the final Basel documents but will go on working on CAD3 based on CP3.

The FBE's position is that a 6-month delay in the Basel II Accord, with a review focused on key issues, would still be acceptable. In this case, the EU directive-making process should be postponed for such period to avoid any inconsistencies with the Accord. In practice this would mean a year delay in implementing the Directive. This period can be used for additional consultations on certain details of the regulation. The FBE, the European Savings Bank Group and the European Association of Co-Operative Banks jointly requested the European Commission to postpone the directive-making process to ensure consistency with Basel II.

At the end of November the European Commission issued a consultative note in which it basically supported the proposal on the treatment of expected and unexpected losses and that the new proposal would not affect the standardised approach, as this would be a strong incentive to use the advanced measurement approaches. However, it emphasised that its is not possible to form well-founded opinion without knowing the details. The EC is of the opinion that the proposed treatment of unexpected losses does not prejudice level playing field, as differences in national taxation and accounting practices will be offset by the proposed capital adjustment requirements. While accepting the postponement, the EC would like to achieve that an agreement is reached in Basel by mid-2004. Comments on the proposed treatment of expected and unexpected losses were invited by the EC to be submitted latest by December 31.

FBE Comments on the October decisions of the Basel Committee

In its letter to the European Commission and the Basel Committee the FBE raised a number of issues it felt should be resolved concerning the treatment of expected and unexpected losses before conclusion of the consultation process in December 2003. The FBE would like the Basel Committee to confirm the objectives of the modifications proposed and to have the Committee's position as to how the modification will impact the calibration of the New Accord (any need for re-calibration). The definition and measurement of expected and unexpected losses should be also be specified in a clear-cut manner, especially in respect of specialised lending, equity exposures and securitisation, and interaction with different national accounting standards and provisioning rules should be clarified. The letter draws attention to the fact that, contrary to the Committee's intention, the Committee's proposal may generate disincentives for banks to create provisions (accounting rules required banks to charge provisions as expenses to the profit and loss account, which flow through as a reduction to Tier 1 capital. However, if provisions fell short of expected losses, the Committee’s proposal would allow the shortfall to be deducted 50% from Tier 1 capital and 50% from Tier 2. The FBE is concerned and would like to understand how this will interact with the provisioning rules in IAS39). Another issue: a 90 days past due loan will be subject to a 45% LGD under the Foundation IRB Approach, even if a bank considers that the default will be rapidly reversed and does not, therefore, create a provision. The FBE would like to have the Committee's view on how banks should reconcile expected losses and provisions in this scenario.

A requirement to disclose to market participants that provisions were insufficient to cover expected losses would have reputational consequences, even where provisions are fully compliant with local accounting requirements. The FBE expressed its concern over the proposal to remove the recognition of Future Margin Income for portfolios, where it is an accepted practice to cover expected losses with provisions and margin income. The FBE would like the Committee to explain why it is proposed to recognise excess provision amounts only as an element of Tier 2 capital and why recognition is limited to 20% of Tier 2 capital.

The FBE also finds it problematic that the new definition of capital only applies to IRB banks and the Committee’s proposed approach would, in practice, require banks using both the Standardised Approach to credit risk and the IRB Approach to apply two different definitions of regulatory capital. A dual definition of capital would make regulatory reporting more complex and have implications for the partial use of IRB during roll-out, the operation of consolidation requirements, and the cross-border supervision of complex groups.

The FBE continues to support the inclusion of an operational risk charge in Pillar 1 of the New Accord and that the treatment of expected operational risk losses remains as outlined in CP 3.

A FDIC (Federal Deposit Insurance Corporation) Report on impacts of Basel II on the capital of banks operating in the United States

The FDIC's Report of December 8 establishes that notwithstanding the Basel Committee's objective to keep overall capital requirements unchanged, risk-based capital requirement would entail a significant reduction in overall capital requirements and the capital requirement for banks applying Basel II would sink below the level required by current U.S. regulations (Prompt Corrective Action). Accordingly, U.S. regulators have two options: ignore Basel II or significantly weaken the current PCA requirements. The report envisages a great cyclicity in capital requirements in corporate lending.

According to the FDIC, one may choose between the following alternatives:

• Changing the weights to push up and flatten the risk weight curve. This would mitigate potential cyclical effects and would better be suited to the objective of maintaining overall capital adequacy requirements and mitigating imbalances.
• Ignoring current U.S. regulations and applying the risk (model)-based capital requirements. The FDIC does not support this option.
• Setting an explicit floor value for international regulatory capital. This is the option the FDIC prefers. This option would allow for the new Capital Accord to be less prescriptive in some other areas.

John Hawke's speech

John Hawke, Comptroller of the Currency, in his speech of December 15 expressed scepticism over the finalisation Basel II by mid-2004 and its implementation by end-2006. He also seemed to give up the previous agreement for U.S. regulators to represent a uniform position. He pointed out that the while the U.S. will do its utmost to have an agreement by mid-2004, it cannot ignore fundamental issues and cannot sweep them under the carpet just to meet the original deadline. Getting a good capital accord is much more important than keeping the envisaged schedule. Apart from the treatment of expected and unexpected losses, a number of other issues also remained unresolved at the Madrid meeting (retail loans, securitisation, mitigation of credit risk).

According to John Hawke, QIS 3 has serious shortcomings and its results are unsuitable for assessing the level of regulatory capital required. He expressed hope that the Basel Committee will conduct another quantitative impact study; if not, U.S. regulators will do so. Should the impact study show any major swings in the capital requirements for banks in either direction, then the issue will be raised again with the Basle Committee.

The above U.S. opinions are not very good signs from the point of view of having an early agreement on Basel II. Remarks on QIS4 also project that U.S. regulators do not rule out the possibility of conducting another review and re-calibration of the New Accord before implementation.

Review of Pillar 2

The FBE is of the view that there is a lack of clarity in the scope and purpose of Pillar 2, including a blurring of the relationship between Pillars 1 and 2. To clarify the purpose of Pillar 2, the FBE, jointly with the ISDA and LIBA, turned in a letter to the Chairmen of the Basel Committee and the Accord Implementation Group (AIG). The letter calls for a review of the eight high-level principles and for the introduction of a supervisory disclosure régime to ensure uniform practical implementation. On the EU level, the three associations wrote a similar letter to the Chairman of the Group de Contact, members of the Financial Services Committee, the Banking Advisory Committee and key members of the Economic and Financial Committee of the European Parliament.

3. Accounts Committee

IAS 32 és IAS 39 Exposure Drafts

As a result of the March round-table discussions and other consultations, the IASB revised its standpoint on the treatment of macro hedging and prepared new Exposure Draft, titled "Fair Value Hedge Accounting for a Portfolio Hedge of Interest Rate Risk". Comments on the new Exposure Draft were invited latest by November 14. In order to ensure that the technical debate over macro hedging does not hinder the preparations of institutions seeking to implement IAS from 2005, in mid-December the IASB disclosed the new IAS 32 and IAS 39 standards (these do not contain the proposed solutions for macro hedging, which are expected to be adopted in the first half of 2004). The FBE still does not find the IASB's proposal for macro hedging acceptable as it does not allow for the recognition of sight deposits and does not define properly the criteria of effectiveness.

The new President of the ECB turned in a letter to the President of the IASB, drawing attention to problems related to the proposed new standards. In the ECB President's opinion the new standards would adversely impact financial stability. Extending Fair Value Accounting to all instruments will have a procyclical impact and a premature reporting of unrealised value changes would just deepen the shock effects. Average maturity of financial assets may decrease, liquidity and interest risks would shift from banks to customers and the financial system would loose its shock-mitigating ability. It should also be noted that up until now no analysis has yet been conducted on how Fair Value Accounting will affect financial conglomerates. The application of Fair Value Accounting for instruments that have no market is also questionable. Extending the application of Fair Value Accounting to all instruments would make comparison between the various institutions more difficult and is not in conformity with the US GAAP. Based on the above, it should be reconsidered whether the optional choice of Fair Value Accounting should be adopted in the European standards.

The letter emphasises the importance of consistency between prudential and accounting aspects. From prudential points of view, it is unacceptable for depreciation of bank debts (deterioration of reliability) to be reported as profit in the Balance Sheet. The ECB would support proactive provisioning (as opposed to the current practice). The President of the ECB is of the opinion that the IAS standards should not be rushed before agreement is reached in Basel. Although the new proposal on the treatment of macro hedging is a progress compared to the previous versions, it is still inconsistent with banks' accepted risk management practice of recognising the difference between contractual and actual maturities. Accounting standards should be consistent with the best banking practices; however, it should be avoided that the standards interfere with banks' liquidity management, for which the relevant guidelines of the Basel Banking Supervision Committee are governing.

The ECB Governing Council firmly believes that the above arguments are legitimate reasons for taking a cautious approach to the proposed changes in recognition and disclosure rules and their incorporation in European legislation. Such major changes should only be carried out in consensus with regulators and central banks, with special regard to the criteria of financial stability.

Impacts of the IAS on regulatory capital

The Accounts Committee decided to set up an ad hoc working group to assess the potential impacts of the new accounting standards on regulatory capital. At its first meeting, the working group mapped those areas where the issue whether regulatory capital and accounting capital should be determined in the same way or differently may arise (for example: intangible assets, cash-flow hedge, valuation of assets kept for sale, optional use of fair value accounting, treatment of own credit risk, equity/liability classification, trading in own shares, recognition of minority participations, treatment of participations in insurance companies, securitisation, contractual netting, provisioning, disclosure requirements, etc.).

EFRAG

The need for strengthening representation of European interests in the international standard-setting process, and, in this context, enhancing EFRAG's role, emerged markedly during debates over the new IAS standards. At the request of the European Commission and EFRAG's founders, EFRAG drew up a consultation proposal for the enhancement of the role and working process of EFRAG. Comments on the proposal were invited to be submitted latest by January 12.

According to the proposal, the role of EFRAG's supervisory board should be strengthened in defining EFRAG's strategy and objectives and analysing the political and economic implications of its proposals (for this latter purpose and Advisory Forum should be set up). Decisions made by TEG (Technical Experts Group) should rely on a simple majority and dissenting views should be documented and published. Cooperation should be enhanced between EFRAG and the EU National Standard Setters. The European Commission should formally acknowledge EFRAG as the Technical Expert Group set out in the Regulation. EFRAG'S working relationship with the IASB should be improved, transparency should be increased. To accomplish the objectives set, EFRAG's resources should be extended.

The FBE Accounts Committee unequivocally agreed that EFRAG has justified its existence and has an important role to play in enforcing European interest in international standard-setting. At the same time, they did not find it reasonable to maintain the current two-thirds majority required for TEG decision-making.

Exposure Draft on insurance contract standards (ED5)

The IASB 2003 published its Exposure Draft on Insurance Contracts (ED5) in July 2003. ED5 is the first phase of setting accounting standards for insurance contract. The proposed standards will apply to all types of insurance contract; therefore, it is particularly important that bank assurance aspects be taken into account and consistency with IAS39 is ensured. The FBE and the European Savings Bank Group drew in a joint letter IASB's attention to the importance of consistency of the new standards with internal rules and other standards as and to problems arising from the different recognition of assets and liabilities.

CAD 3 - Market Discipline (Disclosure requirements)

FBE is of the view that the dominant part of the disclosure requirements in the Directive are tighter than those provided in Basel II Pillar 3, which is against the objective to ensure level playing field worldwide. The FBE can only endorse deviations from Basel II where such deviations are required due to the special European legal framework. Likewise, at the national level, deviations may only be allowed in those issues, where deviation is specifically allowed for by the Directive itself. CAD provides for disclosure requirements on individual, institutional and subgroup levels. The FBE opposes this, because the market would not receive any new information on risks affecting the group. In addition, the FBE disagrees to unnecessary deviations from Basel II in the language of certain provisions of the Directive.

Ad hoc working group for the implementation of IAS

The Accounts Committee decided to set up an ad hoc working group to address issues related to the implementation of IFRS (International Financial Reporting Standards). The working group shall map the status of preparations for the implementation of IFRS in EU member states (whether implementation in 2005 will be compulsory for all banks, or those using the US GAAP will postpone implementation until 2007; has there been any project set up for implementation?; if so, at who's initiative?; have central banks been involved?; are there any special rules for the transaction period?). The working group shall also identify problems related to first application and the main concerns on IAS 39 and other IAS standards.

Directive on Transparency Obligations

No progress was made in the adoption of the directive on transparency obligations for securities issuers. Certain issues (frequency, methods and deadlines for disclosure) are still being debated and there is no political will for adopting the directive.

In its opinion provided in November on the directive the FBE pointed out, iner alia, the following :

• the directive may only be implemented after adoption of the new IAS standards,
• consistency between the directive and other FSAP directives should be ensured,
• there is no clarity on home and host country obligations,
• custodians should explicitly be exempted from disclosure obligations.

Statutes of the IASC Foundation

The Board of Trustees of the IASC Foundation is reviewing the Foundation's Constitution and, in this context, has offered the opportunity for public consultations. Comments may be provided on any provision of the Constitution and are specifically requested concerning the following questions:

• Should there be a specific objective to address the special challenges facing small and medium-sized enterprises?
• Should the number of trustees be increased to accommodate a broader range of views, or would this make meetings more cumbersome and less effective?
• The trustees have a largely fixed geographical distribution. Is such a fixed distribution appropriate or does the current distribution need review?
• Are the criteria for the professional backgrounds of the trustees appropriate?
• Does there need to be a specific requirement for the trustees to review the strategy and procedures of the IASB at intervals?
• Should the Constitution be changed to require a review of the Constitution at least every ten years rather than every five years?
• Should the number of IASB members reduced from the current 14 to make the Board more workable?
• Should the two part-time positions on the IASB be eliminated?
• Should the requirement for the professional distribution of backgrounds for IASB members be changed? (a minimum of five practising auditors, a minimum of three preparers, a minimum of three users of financial statements and a minimum of one with an academic background); should the involvement of the analyst and investment community be encouraged to be increased?;
• Is the formal liaison relationship with national standard-setters (Canada, France, Japan, New-Zealand, UK, USA) deemed as important and should such formal liasion relationships be extended to the emerging countries?
• What should be added to the IASB procedures laid out in the Constitution to improve efficiency?
• Are the current procedures and composition, in terms of numbers and professional backgrounds, of the Standards Advisory Council satisfactory? Is the manner of selection of the SAC Chairman appropriate?

Comments submitted are to be received by February 11.

4. Financial Markets Committee

The 39th plenary meeting for the FBE Financial Markets Committee's was held in Dublin (with a view to Ireland taking over EU Presidency). The Hungarian Banking Association attended the meeting as an observer (the only accession country to attend). Our presence is always highly appreciated. Attending these meetings enables us to prepare for working as full member and to develop personal contacts.

The plenary meeting reviewed activities and accomplishments of the Financial Markets Committee and its working groups in 2003.

The Committee will be actively involved in Phase II of the European Financial Services Action Plan (FSAP II), working closely together with the European Commission. A conference on the results of FSAP I is planned to be held in 2004.

The legislative and decision-making process aimed at enhancing the integration of capital markets (the Lámfalussy Process) was reviewed by an inter-institutional monitoring group. The Lámfalussy Process will be extended to banking legislation and supervision.

The committee will to hold two regular meetings in 2004. New member countries are expected to attend the October meeting. The introduction of new members will be an agenda item of the meeting.

The Committee is involved in drafting the legislation on the following issues:

• Drafting implementation rules for the Prospectus Directive; review of the relevant proposals;

• Review of the transparency directive, developing implementation rules;

• Consultations with the ECB and the European Commission on Banking Supervision, on developing uniform rules for securities settlements;

• Review of the European Commission study on hedge funds;

• Review of Level 2 regulations on market abuse,

• Review of the European Commission's November Report on financial analysts;

• Review of the European Parliament study on credit rating companies.

• Review with the European Commission of the draft text of the directive on investment firms;

• Legislation on investment and pension funds.

The Committee attaches great importance to lobbying. Therefore, it holds its sessions in the country holding the EU presidency. This allows the Committee to talk to those government officials who are responsible for financial market regulations and to obtain information on the main directions of legislation the presiding country aims to follow, the main priorities and the relevant timetables.

IV. ASSOCIATION LIFE, EVENTS,

1. German bankers' delegation

Arranged by Hypothekenbank, Essen, a delegation of 31 bankers from Germany visited the Association on October 3. The purpose of the visit was to acquire information on capital investment opportunities in Hungary. The Association's Secretary-General gave an overview of Hungary's economy and growth prospects. Questions were asked about consistency between central bank and budget policies and about Hungary' inflation outlooks.

2. Transformation of subsidiaries into branches

A seminar on the transformation of subsidiaries into branches and on the relevant taxation and legal framework was held jointly by the Association and Réczicza Law Office, the Hungarian cooperating partner of the White Case International Law Office, on October 30, 2003. Presentations were offered by Dr. Károly Fóti, lawyer (Réczicza Law Office, White and Case LLP partner) and Botond Rencz, Partner, Ernst and Young Ltd.

In his presentation titled "EU Legislation on Branches of Financial Institutions and Transformation of Subsidiaries into Branches in Hungary", Dr. Károly Fóti gave an overview of Hungarian legislation on branches of foreign companies in Hungary. Act CXXXI of 1997 on Branches and Trade Representations of Foreign-Based Companies in Hungary and the relevant provisions of the Credit Institutions Act did not prefer the setting up of branches. The licensing process, capital requirements and operating procedures for branches were the same as those for subsidiaries, but the asset maintenance ratio requirement for branches limited the ability of credit institutions operating as branches in their ability to assume commitments. Therefore, no credit institution chose this form of operation. Pursuant to provisions of the Credit Institutions Act, taking effect on Hungary's accession to the EU (provisions based on Directive 2000/12/EC), the founding and commencement of operations of branches of EU-based credit institutions in Hungary will not be subject to supervisory authority licensing and there will be no minimum capital or asset maintenance ratio requirements.

EU-based credit institutions will be allowed to provide cross-border services in Hungary and will not be required to join the National Deposit Insurance Fund if they are members of the deposit insurance fund specified in Directive 94/19/EEC. The Hungarian Financial Supervisory Authority's powers in respect of branches will be limited: it will not perform prudential inspections and its inspection powers will be limited to consumer protection and liquidity. Prudential inspection will be the responsibility of the home country supervisory authority. Additional supervisory tasks will be performed by the Hungarian Financial Supervisory Authority in co-operation with the home country supervisory authority.

Branches will have several advantages compared to subsidiaries: they will be easier to set up, management will be more simple; no tasks related to the operation of separate joint stock companies, no dotation capital requirements, therefore higher commitments and lending limits can be realised (the legal framework of this is not in place yet).

Pursuant to the relevant legislation, these advantages will, of course, only be enjoyed by branches of EU-based credit institutions; tighter regulations will continue to apply to branches of credit institutions based in third countries.

Existing subsidiaries may not be directly transformed into branches and there will be no joint and several legal succession: a branch will have to be set up, the subsidiary wound up and existing contractual liabilities will have to be transferred by assignment to the branch under a license from the Hungarian Financial Supervisory Authority. Staff, IT and other systems, liabilities and other commitments will also have to be transferred. At the concluding part of the presentation Dr Fóti reviewed other possible cross-border operations in the EU.

In relation to taxation issues related to the transformation of credit institutions into branches, Botond Rencz gave an analysis on expected changes in business after accession to the EU. In their taxation plans, multinational companies aim to achieve the best taxation conditions possible in the long-term; accordingly certain operations are transferred to other countries and regions. The presenter drew attention to the fact that the high rate of trade tax makes Hungary taxation-wise less attractive (despite a recent reduction of corporate tax, due to the high trade tax the effective profit tax rate is still around 30%; trade tax revenues probably exceeded corporate tax revenues in 2003.). Upon accession to the EU, these discrepancies between Hungarian and EU tax laws will have to be eliminated and preparations will have to be made for the direct application of the relevant community laws in Hungary.

In relation to branching, the presenter pointed out that while operations can be transferred exempt of VAT, fixed assets cannot. The transfer of operations will probably be resolved through an amendment to the VAT Act. Other taxation issues related to the transfer of assets were addressed in details (trade tax, fees, withholding tax) and taxation implications of the subsidiary's winding up.

Both lectures were followed with great interest and a number of questions were raised.

3. Internet Banking seminar

The second session of this seminar was held on November 11, 2003. Presentations were offered on legal issues related to e-commerce (including law harmonisation with regard to Hungary's accession to the EU). Issues related to the developing of national IT security and certification schemes, electronic banking services, EU law harmonisation, e-Government, data protection over the Internet, handling and protection of personal data, electronic administration, technical and business opportunities offered by the Internet in banking, future prospects, risk related to client identification, changes in Internet use in Hungary.

4. Payment System Forum

A Payment System Forum was set up on June 11, 2003, with an organisational set-up similar to that of the European Payment Council (EPC). Three out of the six technical committees of the Forum held their founding meetings in the fourth quarter of 2003.

• The Technical Committee for the Development of Cashless Payment Methods set up three working groups: the Direct Debit group, responsible for further developing and publicising multiple collections (introduced in 1997), and the List Payments and OCR (Optical Character Reader) working groups, to develop these two new methods of payment.

• the Technical Committee for Cash Transport and Processing also identified the main areas where working groups should be set up.

• The Cards Technical Committee has one working group, to prepare the chip migration of magnetic cards.

The Technical Committees for VIBER (Real-time Gross Settlement System)/RTGS, KELER and GIRO and the Standardisation Technical Committee are expected to be set up in early 2004.

A Coordination Group made up of the Association, the National Interest-Representation Association of Savings Co-Operatives (TÉSZ) and the National Federation of Savings Co-Operative (OTSZ) is expected to submit the documents to be compiled by the working groups for review by credit institutions and savings co-operative in March 2004. The Association will be represented by two colleagues in the meetings of the technical committees and working groups.

At the request of Inter-Europa Bank, supported by eight other banks, we initiated that the Technical Committee for the Development of Cashless Payment Methods set up a working group to address liability issues in electronic banking and adoption of the relevant EU rules and guidelines in the Hungarian legislation.

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