REPORT

on Activities of the Hungarian Banking Association
4^st Quarter 2004

Budapest, February 2005

CONTENTS

I. PROFESSIONAL ISSUES *

II. LOAN SCHEMES *

III. INTERNATIONAL COOPERATION *

IV. ASSOCIATION EVENTS *

I. PROFESSIONAL ISSUES

1. Tax laws for 2005

Tax laws for 2005 and the Act on a special bank tax imposed for two years were promulgated in November 2004.

Apart from the special bank tax, credit institutions are also affected by the reporting requirements for interest payers, stipulated in Subsection (12) of Section 52 of Act XCII of 2003 on the Rules of Taxation.

Taxpayers subject to Act CII of 2004 on special tax for credit institutions and financial enterprises may choose between their interest margin or pre-tax profit to be the tax base. As a main rule, the Act provides interest margin to be the tax base; the taxpayer may depart from this under an announcement to the Tax Authority. The deadline for such announcement for 2005 was January 31, 2005. According to our information, eight banks decided to be taxed based on their interest margins, the rest opted for pre-tax profit to be the tax base. Banks missing the deadline will be taxed based on their interest margin in 2005.

Under the Act on the Rules of Taxation, EU interest income reporting requirements will be introduced from July 1, 2005. The first reports shall be submitted to the national Tax Authority by March 20, 2006. The Tax Authority will gather information on interest payments made to natural person residents of other member states, with the purpose of forwarding the data to the competent member state within the framework of an automatic information exchange within the European Union. A special form will be prepared for this purpose. The Association initiated cooperation with the regulators to allow banks to familiarise themselves with the contents of the form and prepare their IT systems for generating the information required.

2. Capital Market Act

At the request of the Ministry of Finance, the Association submitted its proposals for amendments to the Capital Market Act. Given that many of these proposals coincided with the proposals of other stakeholders (National Association of Securities Dealers, Hungarian Association of Investment Fund Managers, the Budapest Stock Exchange), we decided to coordinate actions with these organisations to enforce these proposals.

• Apart from some technical codification comments, we expressed our objection to the requirement of rating the customer's risk-taking capacity. We also proposed to reasonably limit the obligation of customer information. At the same time, we proposed to widen the scope of cases where the involvement of intermediaries is allowed.
• For collective deposits we proposed to provide that the customer's consent should not be required for a custodian to redeposit the securities it has accepted for custody with an investment firm providing securities custody services.
• We proposed that bank guarantees should be allowed to be accepted as collateral for securities lending.

1. Annual Percentage Rate for home loans

Pursuant to an earlier amendment to the Credit Institutions Act, APR should also be indicated for home loans, effective from January 1, 2005. The Association has consistently objected to this provision (for these products, the APR can only be calculated with over-simplifications and in a distorted manner). The new draft legislation was received from the Ministry for review in October.

Given that a number of our proposals were incorporated in the proposed legislation, in our comments we focused on those proposals which were not included in the draft. In the first place, we reasoned for third-party fees to be omitted from the calculation of APR. We explained that costs such as notary fees, appraisal fees or insurance premiums are largely dependent on the specific terms and conditions of the deal and the customer's circumstances. Consequently, it is impossible to estimate these costs in an advertisement (the primary place where the APR is to be used). The calculation of APR for direct offers or contracts, where much more details of the deal are known, is not any simpler. Notary fees (charged after concluding the contract and often depending on the notary's pricing policy) and insurance premiums (normally determined after the contract is concluded, insurance being a precondition for granting the loan) are always determined subsequently; consequently, the APR would lose its role as a guide helping the customer to choose between different offers.

In our comments we proposed an adjustment to the method for determining the exchange rate for foreign currency loans and provided a specific wording proposal for the method of calculating APR for credit cards. We expressed our objection to indicating the APR in banks' Business Rules and in loan contracts and pointed out that Business Rules are more of a general nature and should not contain product-specific terms and conditions, which are constantly changing.

After several rounds of consultations, a compromise was reached. The Ministry accepted our argument that most third-party fees cannot be specified in advance and consequently, cannot be included in the calculation of the APR. (Only appraisal fees and inspections fees were retained in the proposal). Nevertheless, fees known by the bank or a closer estimate of such fees should be made known to the customer at the time of concluding the contract.

In the APR requirements for foreign currency loans and credit cards, the Ministry followed the Association's proposals. However, the requirement for the APR to be indicated in the contract was retained in the proposal (it is true that to change it, an amendment to the Act would have been required); the regulation regarding the indication of APR in the Business Rules was only partly changed (it would not be required to indicate in the APR for home loans in the Business Rules). For consumer protection purposes, type-specific values and typical maturities were set for the different types of home loans to ensure that the APR is indicated as a specific figure rather than as a meaningless (from/to) range. In their List of Conditions and offers, banks should include a statement that exchange rate and interest rate risks are not reflected in the APR. In our opinion this provision is based on a complete misunderstanding of this indicator: APRs compare prices in the present time and cannot handle future risks at all.

Banks had one month to prepare themselves for implementing the new regulation from January 1, 2005.

2. Home loan schemes

After due preparations, the government decided to translate its new housing program into legislation by the end of 2004. A loan scheme involving government guarantees was introduced under a separate regulation to promote home building by young people and the regulation on housing subsidies was also changed significantly. The Association was actively involved in the drafting of both decrees.

The government's "nest-making" program is aimed at helping young people who are not able to raise the 40% to 50% in own resources required under current lending practices. The state provides a guarantee for the part of the loan replacing the required own resources, thereby promoting the creditworthiness of the borrowers. With additional government subsidies provided for the remaining 10% of the loan amount (such as social policy supports), in a lucky case one may be able to purchase an apartment without a single penny of own resource. Higher borrowing of course means higher instalments, which not everybody can afford (the legislators targeted young couples with higher income). The regulator tried not to tie banks' hands, the loans can be made available under the most diverse loan facilities (including foreign currency loans).

Unlike in previous cases, this time banks were allowed enough time to develop, in cooperation with the regulator, a workable loan scheme with the least possible implementation problems. As a result of this joint effort is was possible to ensure that:

- the scope of eligible borrowers is not reduced substantially (involvement of a co-debtor for better risk management; income status is the only decisive factor in credit rating; children moving together with the borrowers be eligible for acquiring title - often a precondition for grandparent supports),

- the part of the loan covered by state guarantee – originally envisaged to be repaid before all other debts - will be treated equally to other parts of the loan and the risk-sharing between the government and the bank will be maintained until the end of the loan period.

- the state guarantee fees shall not be paid by the banks (however inapplicable, the idea did arise in earnest in the course of preparing the legislation; it will be for the customer to decide whether he will pay the fee in advance or ask the bank to provide a loan for the fee).

- to ensure level playing field for all banks, the regulation will also allow banks other than mortgage banks to put those state-approved collateral rating rules in place which are prerequisite for the provision of state guarantee;

- with the introduction of expected collateral value, the loan facility may now be extended for the construction of new apartments.

Some of our proposals were just partly taken into account or not at all:

- to ensure wider access to the loan we proposed that the age limit of 30 years be increased to 35 years (the proposal was rejected due to budget constraints; however, the new president of the National Housing and Construction Office did not rule out that this, rigid, rule will be amended in the near future);

- the state guarantee does not extend to late interest for default on the guaranteed part of the loan;

- despite all previous promises, banks were given less than a month to develop this complex loan facility.

The extremely short deadlines in drafting the proposed amendment to the government decree on home subsidies (Government Decree No. 12/2001), the method of consultations, organised by the Ministry of Finance with the involvement of certain banks selected by the Ministry and the method of negotiations, conducted at top level (between the Minister and bank leaders) and only focusing on strategic issues, narrowed banks' ability to efficiently enforce their interests.

Nevertheless, the negotiations were successful in that:

- the regulator accepted our point regarding the problematic nature of a key element in the proposed amendment that was aimed to prevent black economy and would have required banks to have all construction invoices verified by the Tax Authority before payment. The regulator agreed that this would impose disproportionate and unnecessary burdens on banks. The purpose can be achieved by the bank checking the taxpayer against the Tax Authority's list, with a verification to only be performed for 70% of the bills concerned;

- we managed to convince the regulator that the handling fee payable by the budget to banks for the administration of state subsidies was commensurate with the costs involved and the government's intent to reduce these fees was unjustified;

- divorces caused problems for banks in handling subsidised loans, since the legislation did not have any provisions for such cases. This issue was also tackled in the proposed regulation.

Not all our proposals were accepted though during the review of the proposed regulation. At the request of the Budapest Bar Association, in October 2004 a consultation was organised between representatives of the Bar Association and specialists from banks involved in home lending. The Bar Association complained about banks' inconsistent lending procedures and requested us to review the procedures for home lending. Reviewing the issues raised, we established that the procedural rules in question partly derived from the relevant provisions of the Act on Mortgage Banks and partly from the rules provided by Government Decree No. 12/2001 (I 26) on subsidies for apartment purchases. Working together with the Bar Association, we submitted to the Ministry of Finance a proposal for amending the challenged provision of Government Decree No. 12/2001. (I 26). The proposal was aimed at solving the practical situation where the customer targeted with the support may not receive a loan for buying the desired apartment because, temporarily, he still owns (for pure technical reasons, so he is not left without a home) the old apartment which he wants to sell. Our proposal, developed jointly with the Budapest Bar Association, was rejected.

Both Government Decrees were introduced on February 1, 2005.

3. Accounting Act

In relation to changes in the Accounting Act, the Ministry of Finance submitted a proposal for amendments to Government Decree No. 250/2000 (XII 24) on Special Provisions regarding the Annual Reporting and Book-Keeping Obligations of Credit Institutions and Financial Enterprises.

Reviewing the Decree, the Association drew attention to some other provisions closely related to the Decree and significantly affecting banks' operation, with a view to ensuring consistent legislation.

• In relation to supervisory reporting we pointed out that current discrepancies between international accounting standard and the relevant Hungarian regulations should be eliminated as soon as possible. In the consolidated supervisory reports to be compiled pursuant to the Credit Institutions Act, consolidated data are to be reported based on Hungarian accounting rules, not based on international accounting standards. This provision causes bank substantial extra work. This extra work particularly affects banks quoted on European stock exchanges, which, from January 1, 2005, are required to disclose their annual consolidated reports compiled according to IAS.
• Regarding the Act on special bank tax we requested for interest-type revenues and interest-type expenses to be precisely defined in the regulation.
• In relation to Government Decree 232/2003 (XII 16) on conditions and detailed rules for the provision of tied aid loans disbursable by Eximbank and the amendment to Act XLII of 1994 on Hungarian Export-Import Bank Ltd. and Hungarian Export Credit Insurance Ltd., promulgated on November 15, 2004, we requested that these regulations be harmonised to ensure consistency.

Our proposals related to Eximbank were duly taken into account by the Ministry of Finance in the final version of the proposed Government Decree. As for supervisory reporting, the Ministry said the issue would be addressed at the level of Acts (Credit Institutions Act, Capital Market Act), now under drafting.

In November the Ministry of Finance sent us for review the proposed Government Decree on Special Provisions Regarding the Annual Reporting and Book-Keeping Obligations of Stock Exchanges and Organisations Performing Clearing House Activities. In our comments we indicated that the description of secured repo transactions in the proposal did not agree with that provided in the decree on accounting rules for banks.

1. Central Bank Reporting

The National Bank of Hungary (NBH) in the third quarter compiled a guide for monetary statistical reporting for 2005. The Guide was issued as an NBH Ordinance in the fourth quarter. Proposals made by the banking community were duly taken into account in the Ordinance.

In November we received for review a proposed Ordinance of the Governor of NBH on titling obligations related to the central bank information system. This Ordinance will replace the current Government Decree No. 256/2001 (XII 18). When making international payments, customers are required to indicate the title of payment for statistical purposes. Title codes are ranged by purpose (goods trade, services, investments, etc.) and serve as guides for the central bank in compiling the balance sheet lines in the balance of payments. Member banks submitted a number of proposals for adjustments to the text of the proposed Ordinance and certain technical problems encountered in practice were also communicated to the central bank. We requested that the responsibilities of banks be clearly specified in the regulation, given that at present banks do not have the means that would enable them to require customers to provide reliable and logically correct information.

The Ordinance has not been finalised as yet. The NBH said constructive proposals would be taken into account in the final version of the Ordinance. The regulation is expected to be issued in the first quarter of 2005.

The Guide for Supervisory Reporting for 2005 was published on the Hungarian Financial Supervisory Authority's website in mid-December. The time allowed for commenting was very short, institutions were requested to send their comments directly to the Authority.

2. Data Protection Act

The Ministry of Justice published on its website the proposed amendment to the Data Protection Act in November (the amendment was necessary pursuant to a Constitutional Court decision). The amendment was related to the transfer of data to third countries and contained amendments to the provisions on the right of access to data of public interest; it also contained provisions to make the definition of the Data Protection Ombudsman's scope of authority more specific. In our comments, in relation to the transfer of personal data to a data manager or a data processor in a third country we proposed that the legislation be further adjusted to the EU Data Protection Directive. We also proposed that the Ombudsman's right to issue recommendations be defined more specifically.

3. Central credit information system

At the request of the Ministry of Justice, we prepared a proposal for improvements to the central credit information system. The amendatory proposal provides the rules for the current five databases of the system and the related data protection rules and remedies in an integral form under a separate chapter. Some provisions of the current regulation are not clear enough and give rise to different interpretations; the proposal aims to clarify these provisions and to make them unambiguous. The proposal provides detailed regulations concerning customer information and customer inquiries and a special court procedure under which customers may initiate modifications to or cancellation of the credit information maintained on them. The concept and the draft text of the new regulation are now under review.

4. Concepts for the new Companies Act and Company Registration Act

In October 2004 the Ministry of Justice sent us for review the concepts for the new Companies Act and Company Registration Act. In our comments, based on opinions from member banks, we expressed our objection to abolishing the HUF 3 million share capital requirement for limited liability companies. We made comments concerning the criteria for the separation of open vs. closed operations and expressed our objection to the plan to abolish the mandatory dematerialisation of publicly issued shares. Pursuant to the Capital Market Act, publicly issued printed shares were required to be dematerialised latest by the end of 2004. Accordingly, it would be completely unwarranted to provide for the option of rematerialisation. In addition to some other conceptual issues, we submitted two proposals for amendments to the current Companies Act, aimed at law harmonisation.

The consultation held at the Ministry of Justice in November was also attended by those banks submitted comments on the concept. The concept is planned to be reviewed by the government in early 2005 and the draft law would be presented to Parliament in the second half of 2005. Our proposal for amendments to the current Companies Act was declined with the explanation that the proposals related to the operations of credit institutions will be presented under a proposed amendment to the Credit Institutions Act and the proposal concerning acquisitions will be included in an amendment to the Capital Market Act.

5. Insolvency Act

The task of preparing a concept and developing a proposal for the new Insolvency Act was transferred to the Ministry of Justice in the autumn. A revised draft concept was sent to the summary working group in November 2004 and reviewed by the Codification Committee in December. The revised concept was a major shift compared to the previous versions. As also reflected in the opinions provided by banks, creditor protection aspects were given more emphasis and were formulated in a more clear-cut manner in the new concept. In our comments we supported the objective that the regulations related to creditors holding material collateral should be developed in such a manner that they do not prejudice the substance of the collateral in question. The Ministry promised to conduct another review and that the concept of the Insolvency Act will be submitted to the government concurrently with the concepts of the Companies Act and the Company Registration Act. According to current information, the drafting of the Insolvency Act may be carried over to the next parliamentary cycle; it was also mentioned that urgent issues might be tackled under a brief amendment to the current legislation.

6. Private debts

Under Government Decree No. 1048/2004 (V.14.) on reducing indebtedness by households, the Ministry of Justice was tasked to develop a legal concept for a special procedure to settle private debts. The consultation invited by the Ministry in drafting the concept was attended by the Association and experts from several commercial banks. At the consultation we emphasised the importance of preventing massive indebtedness by households and that setting up a positive list private debtor database would be of fundamental importance in this regard. We pointed out that in developing a debt management system, care should be taken that creditors are not burdened with the costs of debt management. We proposed that the issue of debt management be addressed through an amendment to the Social Act, by extending the scope of debt management support granted by municipalities. Our detailed proposal compiled based on consultations with member banks was submitted to Ministry of Justice in November, together with the concept for a positive list private debtor database. The Ministry of Justice promised to review the constitutionality aspects of the concept.

7. Payments regulations

Professional consultations continued in the 4^th quarter within the framework of a process aimed at a general review of payments regulations. In addition to the number and complexity of the issues involved, some important new elements also contributed to the delay in drafting the legislation. The central bank has to consult with the European Central Bank and the Ministry of Finance, the organisation responsible for drafting the Government Decree, has to take into account proposed new EU regulations on payments.

The consultations were attended by representatives from the Ministry of Finance, the National bank of Hungary, the Ministry of Justice, the Hungarian Financial Supervisory Authority, specialists from member banks. (A wider circle of banks was involved in developing the regulations for certain areas through a written survey). The followings were accomplished during the consultation:

- The main elements in domestic collections in foreign currency were clarified: the payee has the right to receive the amount in foreign currency and this issues should be handled in the payment form; the payer's bank may not convert the collection order into HUF (the bank is even obliged to convert the payer's HUF deposits into foreign currency, if necessary); the order of collection of the payer's invoices will be regulated as well as the sharing of costs between the parties. (Given that currently our Giro system is only able to perform HUF transfers, SWIFT will be used as a transfer channel).

- Progress was made in the area of electronic money regulations. The key issue here is that the current regulation had originally been designed for bank card payments; in the meantime, a number of other, remote banking, instruments, different from bank cards in nature, risks and security parameters have been developed (including internet, mobile and office banking). We have reviewed the current regulation with the competent staff of the Ministry of Finance and made a concrete proposal, specifying those rules that should only be applied to bankcards and those that should be applied to other electronic payment instruments.

- Based on a preliminary survey with banks, the issue of liability was addressed. We drew the regulator's attention to the fact that the amount of a payment performed through a remote banking instrument may be a hundred times (!) that of an average bank card transaction amount (HUF 27,000). We proposed that this difference, at least partly, appear in the customer's risk (thereby, the incentive for fraud could also be reduced). In our letter to the Ministry of Finance we specifically emphasised that the current consumer protection provisions, dimensioned for bank cards, are completely inadequate for remote banking transactions performed by major companies: a transfer order in the case of these companies may be in the range of several hundred millions of forints and in case of a dispute, these companies are backed by strong professional legal teams. Finally, the issue was resolved by the EU: the consumer protection provisions in question will not apply to major companies under the proposed new Directive of payments.

- We also referred to the proposed EU Directive regarding the resolution of disputes between bank and customer when proposing that the burden of proof should be mutually with the bank and the customer, as opposed to the current regulation where the burden of proof is solely with the bank. (Here, it should be mentioned that interest enforcement works two ways: after preliminary consultations with the involvement of bank specialists we achieved that Hungarian bank's position that is the bank card-focused regulations in the proposal should be revised and adjusted to the specifics of other electronic payment instruments is included in the Hungarian position on the proposed new EU Payments Directive).

- Progress was made in some key technical issues as well: the term "value date", which has caused several misunderstandings was tied to the international interpretation (linked to interest); for bank accounts, the term "debit date" was introduced, meaning the date specified by the customer in advance for debiting the account.

Of course, there are a number of issues where we have not been able to enforce the bank's interests:

- There was little receptiveness on the regulator's side for our proposal for postal payment vouchers to be allowed to be paid at bank cash desks (of course, pending agreement with the bank); in the case of savings co-operatives this could substantially reduce the current postal processing time (several days), especially in the provinces.

- The proposed changes will, by definition, require new payment forms to be introduced, although some banks say current forms could be used until stocks run out. (The regulators think disturbances could only be avoided if new forms are used).

In addition to payments specialists from member banks, members of the legal working group of the Payment System Forum were also involved in the review of the proposed regulation, including consultations with the Ministry of Finance and the National Bank of Hungary. In the course of the inter-ministerial review preceding the issue of the regulation, banks will have the opportunity to check on how their aspects are reflected in the proposal to be adopted by the government.

1. Qualification requirements

The Ministry of Finance sent us for review the draft of the Government Decree on qualification requirements for persons performing investment and auxiliary investment activities. In our comments sent to the Ministry we expressed our view that it was unwarranted to require all persons working in product sales to acquire a product salesperson qualification. For those staff members who are engaged in selling simple and standardised mass products, a lower qualification should suffice. In turn, a number of those qualifications the proposal accepts for a salesperson neither qualified as a higher education qualification nor as an OKJ (National Qualifications Register) certified qualification. We also made a number of specific comments on the draft decree: we proposed that legal diplomas be recognised; we also urged for distinguishing between sales representatives and banking product salespersons. We also proposed that EFFAS diploma holders should not be required to pass a separate legal exam.

The proposed amendment to Ministry of Finance Decree No. 2/1995. (II 22.) on professional qualifications falling within the scope of authority of the Minister of Finance provided professional and examination requirements for bank clerks and banking/investment product salespersons. In our comments we repeated our opinion that new OKJ training category: product sales assistant, should be established, with a simplified curriculum. In our specific comments we proposed that the entry into force of the decree be set more specifically and similar qualifications and professional higher education diplomas be recognised in the rules for exemptions. A conference on the proposed decrees was held by the International Training Centre for Bankers on November 26. The Hungarian Banking Association, the National Association of Securities Dealers and several commercial banks attended the conference.

2. Financial services contracts concluded within the framework of remote sales

Regarding the draft law received from the Ministry of Finance for review we repeatedly drew attention to the inconsistency between identification requirements, which presume personal contacts, and the conclusion of contracts by remote parties. Further, we objected to allowing a subsequent rescission of the contract by the customer in the case of contracts concluded via mail.

II. LOAN SCHEMES

1 Agricultural loans

Hungarian Development Bank (HDB) initiated with the Ministry of Agriculture the developing of a HUF 40 billion Agricultural Development Loan Scheme for SMEs. The loans would be disbursed by credit institutions participating in the scheme and the funds would be secured by HDB from borrowings abroad, covered by an exchange rate guarantee provided by the government. As a result of all this, the loan would be made available at an interest rate substantially lower than the market rate (approx. 6.5%).

Banks were actively involved in developing the loan scheme and the relevant government resolution. Due to the higher risks involved (to be assumed by the banks) we proposed for the interest rate to be EURIBOR + 4.5% instead of the EURIBOR + 4% set as a maximum in the government resolution.

The loan scheme has not been introduced to date (the reason is unknown).

Bank specialists were involved in the drafting of the Agriculture Ministry Decree on subsidies for quality wines. This Decree is aimed at providing appropriate storage facilities for large stocks of quality wine produced in 2004.

The Agriculture Ministry approached the Association to clarify credit institutions' practice of applying a 3-month BUBOR for their loan schemes. The issue came up upon a Tax Authority objection to some banks' applying their own calculations rather than the figure published by the National Bank of Hungary.

After consultations with member banks we advised the Ministry of Agriculture that there exists no regulation to require banks to apply the National Bank of Hungary's figure. Accordingly, we proposed that if the Tax Authority wishes to check on the 3-month BUBOR, it should look at the loan contracts concluded with the customers.

The Ministry of Agriculture would like to substantially increase the number of those agricultural businesses for whom banks would advance subsidies - and primarily - land-based grants payable in the following year. Leaders of the Agriculture Ministry supported the solution proposed by bank specialists, according to which the current rules for changing bank accounts designated to receive subsidies should be amended. Under current rules, accounts designated for subsidies can be changed without any restriction; they can be terminated at one bank and opened with another bank, the only requirement being that the changes should be announced to the Ministry of Agriculture. The parties agreed, this means a substantial risk for banks, if the account changes, the collateral is also removed.

There is a disagreement between the Agriculture Ministry and the Association (based on bank specialists' proposals) regarding the solution. The Agriculture Ministry wants the banks' consent to be stipulated as a requirement in the loan contract to be concluded with the customer, whereas the Association would like for such consent to be stipulated by the Ministry by decree.

The drafting of the decree is now underway, no decision has been made on the debated issue yet.

2. SME loans

The Ministry of Economy and Transport initiated setting up a loan scheme for SMES (ECONOVA Loan Scheme) to be funded by borrowings abroad by the National Development Bank.

With the government's exchange rate guarantee for the loans to be granted, the maximum interest rate may be EURIBOR + 4%, which is substantially lower than the market rate.

Banks interested in the scheme were actively involved in developing the procedures for the loan scheme.

According to the information received, there has been little interest shown in this loan scheme and the rate of utilisation is also low.

III. INTERNATIONAL COOPERATION

1. Banking Supervision Committee - Capital Adequacy Working Group

1. Activities in the European Council's working group, the Commission's compromise proposal for the Capital Requirements Directive

After discussions within the Council's working group, the Presidency of the EU Council in December submitted a compromise proposal for amendments to the Capital Requirements Directive (CRD). The proposal was supported by most member states, but Ireland, Poland, Latvia, Hungary and Slovenia objected to the provision of Article 129 according to which in case the home and host country supervisors fail to agree on approving the IRB approach for six months, the home country supervisor will make the decision. The objecting countries are of the view that approval must in all cases be based on agreement between the supervisors. Furthermore, the Hungarian representative tried to achieve that in the period of joining the Euro-zone, euro-denominated government debts be weighted at a preferential zero per cent weight, as domestic currency-denominated debts are.

The compromise proposal for amendments to the Capital Requirements Directive, consistent with the June Basel Accord, was endorsed by ECOFIN on December 7. As previously agreed, the dates of introduction will be January 1, 2007 for the standardised and foundation IRB approaches and January 1, 2008 for the advanced IRB approach. ECOFIN requested the Presidency to liaise with MEPs in order to ensure that the Capital Requirements Directive is possibly passed in first reading. The issue of weighting euro-denominated governments debts will be decided on in the course of the Commission procedure.

2. FBE position on the Capital Requirements Directive

The FBE summarised its position on the Capital Requirements Directive in a lobby package. The purpose of the package is to allow the FBE's staff and member organisations to explain and enforce the FBE's position at the various decision making levels of European institutions and member states (regulators, ministries, MEPs). The lobby package summarises the key priorities addressed by the FBE. The objective of the FBE's communications is to promote an early adoption of a flexible European capital requirements directive, consistent with the Basel framework and promoting convergent implementation within the EU. The FBE continues to urge for reducing national discretions, particularly in the levels of application of the capital requirements, the levels of application of operational risk in the AMA approach, the treatment of intra-group exposures, the weighting of institutions in the standardised approach, and maturity adjustment. It stresses the importance of consolidated supervision and emphasises that the supervisory review process and the third pillar would only work if applied at consolidated group level. The FBE supports the introduction of mandatory supervisory disclosure requirements and the recognition of diversification. The FBE tries to ease concerns over procyclicality effects of the new regulation and emphasises the need to monitor potential procyclicality effects. In the spirit of the Basel Accord, the FBE would abolish certain provisions of the Directive restricting the waiver on an individual application to within national boundaries. The FBE urges for abolishing the rules for the treatment of equity exposures, as unnecessarily restrictive and going beyond the Basel Framework. The lobby package addresses impacts of the directive on small credit institutions and SMEs and the application of operational risk to investment firms.

The package contains a drafting proposal for amendments to the directive in accordance with to the above.

At the hearing held by the Committee on Economic and Monetary Affairs of the European Parliament (ECON) on November 22, the FBE's representative emphasised the importance of enacting the Capital Requirements Directive as soon as possible. The FBE's representative tried to refute concerns that the Directive would make the retail and SME borrowings more difficult and would adversely impact on small credit institutions. Summarising the contents of the FBE's lobby letter he highlighted the banking industry's most important amendment proposals to the Directive, stressing that changes in the rules for trading book items should also be incorporated in the Directive.

Considering the provisions on consolidated supervision as crucial, ahead of the ECOFIN's meeting the FBE wrote a letter to the Finance Ministers of member states asking for Article 129 to be retained in an unchanged form. The letter emphasises that Article 129 is the first step towards the application of all three pillars on consolidated level; abolishing it would be an unwarranted retrograde step in the process of building a single European market. Deciding on the application of advanced approaches within six months will be crucial for efficient implementation.

In its press release issued after the ECOFIN meeting, the FBE welcomed ECOFIN's general approach to the CRD. However, the press release also emphasises there was still significant work to be done before European banks could enjoy a coherent supervisory framework within the EU. The press release cites the comment of the Chairman of the Banking Supervision Committee that the requirement to apply the rules on an individual (subsidiary) level is not prudentially justified, is not in line with the Basel Accord and would significantly disadvantage internationally active European banking groups. The FBE also expressed disappointment that the EuropeanParliament’s work, and consequently, a timely implementation of the new capital adequacy framework, could be threatened by delays in translation of the Commission’s proposal.

Based on its lobbying with MEPs and competent persons at the Commission, the FBE' Secretariat concluded that there was not much chance for the proposals developed by the FBE's working group and adopted by the Banking Supervision Committee to be passed. Accordingly, a decision concerning the FBE's future CRD strategy and actions will be made at the beginning of 2005. The FBE's position regarding the need to apply the requirements at a consolidated level is unlikely to be enforced in the text of the Directive; therefore, as a minimum target, the FBE will work to have the issue taken up publicly as an objective on the European Commission's agenda for the coming years.

3. European Parliament reactions to the CRD

According to Alexander Radwan, the EP Rapporteur on the CRD, the pace set by the Dutch Presidency was too fast. He says passing the Directive in first reading would only be possible if the points made by the European Parliament are reflected in the amendments. In his opinion, the workability of the Directive is more important than speed. The Rapporteur is particularly concerned over the impacts of the Directive on SMEs and small credit institutions and thinks a distinction between domestic and internationally active banks would be warranted. He is concerned that small banks will not be able to finance the costs of implementation. Also, it should be ensured that SMEs are familiarised with and understand the factors and reasons behind banks' lending decisions.

As time progresses, translation is becoming a growing problem. Translations into the main languages are expected to be ready by end-January, without the annexes. Pursuant to the relevant regulations, Mr Radwan may only submit his report to the Commission after the Directive has been translated into all languages and submitted to the European Parliament. According to the information available it is not sure this will happen until the summer.

4. FBE letter to the President of the CEBS

On the first anniversary of the Committee of European Banking Supervisors, the FBE expressed its appreciation for the efforts the CEBS has made for strengthening cooperation between supervisory authorities and promoting consultations with the industry. The FBE supports the CEBS's intention of treating the implementation of the CRD as a top priority. The FBE believes that the model of consolidated supervision is an essential element in developing a proper supervisory framework. The FBE expressed its appreciation for the work done by the CEBS in streamlining communications between supervisors, standardising validation principles and promoting the common recognition of rating agencies. Reducing national discretions is crucial for creating level playing field in a single European market. The FBE stresses that CEBS's scarce resources should be focused on these key issues.

Close consultation with the industry and taking into consideration industry best practices are particularly important in the CEBS's standard-setting activities. Overly-prescriptive procedures, ignoring the practice, changing the market and interfering in contractual relationships should be avoided. The FBE finds it necessary that the CEBS consult with banks before publishing its draft-procedures for the validation of models and recognition of rating agencies. The FBE also proposes consultations on supervisory cooperation: bank groups that are active in several countries have a local view of the key difficulties in cooperation.

Finally, the FBE stresses the importance of public hearings and proposes for the CEBS to hold a public hearing before publishing its revised document on the application of the Supervisory Review and Evaluation Process.

5. Review of capital requirements for trading book items

The FBE, jointly with other organisations (IIF, ISDA, LIBA, TBMA), in December turned in a letter to the Presidents of the Basel Committee and the IOSCO Technical Committee. In their letter the parties point out that issues related to the regulations on trading book items can be ranged into two groups. The first group includes issues related to credit risk in trading book (counterparty risk, double default, short-term credit risk, unsettled transactions, commodity collateral, etc.), which the regulators and the profession have addressed for quite some time (including during the reform of the Capital Accord). The second group includes issues related to the treatment of market risk, such as less liquid assets, and the classification of banking/trading book items. The letter proposes that the two groups be treated separately. Issues in the first group should be resolved as soon as possible and the new rules should be introduced concurrently with all the other elements of the Basel II Accord. Issues in the second group need further in-depth analyses; knowledge of the survey launched on the issue and broad discussion of the issue would be warranted. An in-depth review of these issues, however, should not delay the resolution of those issues in the first group and the implementation of the solutions.

2. FBE Fiscal Committee

The FBE Fiscal Committee reviewed the reporting requirements provided in the Directive on taxation of savings income in the form of interest payments (Directive 2003/48/EC) and the issue of VAT on financial services.

• Technical details related to the taxation of savings are addressed by a special working group within the FBE Fiscal Committee. With the contribution of this working group, a report has been compiled on official IDs and codes used for client identification in EU member states and in some non-EU countries (third European countries). The report is intended to serve as an aide for interest income payers in meeting their reporting requirements effective from July 1, 2005. Apart from this summary report, providing a list of the IDs required, in response to requests from member states the FBE solicited information on measures related to the taxation of savings in member states. The legal framework for keeping track of interest income and for the transfer of information is in place in most member states and the relevant guides are now under preparation. A summary report on the status in member states was sent by the FBE to all members. We forwarded the report to the Ministry of Finance.

• The FBE offered a presentation at the conference on VAT on financial services, held in December in Dublin. The conference was attended by national tax authorities, government representatives and business experts. In its presentation, the FBE emphasised that increasing competition inside and outside Europe poses the need for quality and efficiency improvements and cost reduction in the financial services market. Traditional banking services are increasingly replaced by hi-tech electronic products and services. Non-deductable VAT charged on parent company-to-branch, branch-to-branch and cross-border services are a huge cost factor, reducing profits. The time has come for the Sixth VAT Directive of 1997 to be recast. The definition of financial services in the Directive is obsolete and does not satisfy today's requirements: the distinction between taxable and non-taxable income is not clear-cut enough and the deductable input VAT method, applicable within the EU, is missing. The legislation in its present form is complicated and causes legal uncertainties, its implementation involves high costs and it distorts competition. VAT has become a major barrier to the integration of activities aimed at efficiency improvement. The FBE urges a revision of the Sixth VAT Directive.

3. FBE Accounts Committee

3.1 IAS 39

In relation to a partially adopted IAS 39, the FBE Accounts Committee reviewed tasks required for the adoption of the missing parts, i.e., the fair value option and hedge accounting. (A full adoption of IAS 39 had failed mainly due to objections by regulators and the European Central Bank; the European banking industry also proposed some additions to the standard). The FBE set up a working group to address pending issues related to the fair value option and to carry out the necessary consultations with the IASB. As for applicability of the fair value option, opinions vary. Regulators are against applying the fair value option to own debts, saying that this might result in a profit increase even though the company's creditworthiness deteriorates. This "advantage", however, is unlikely in banking, given that the Basel Committee has already decided that valuation gains or losses cannot be recognised in determining the regulatory capital. Regulators also raised that the fair value option prejudices the comparability and reliability of accounting figures, because it allows a subjective valuation, making Profit and Loss Accounts volatile due to short-term money market volatility.

The FBE's interest margin hedge proposal was once again declined by the IASB.

The financial sector regards the fair value option and hedge accounting as important instruments. The FBE aims to find an early solution that is acceptable for all parties and to finalise all pending issues by end-2005 at the latest.

3.2 XBRL

The FBE supports the implementation and a uniform application of the XBRL reporting system within the EU. XBRL would primarily support the compilation of annual financial reports in a uniform structure and will allow a more standardised, efficient and cost-saving way of information collecting and processing and faster information flows.

The XBRL system is now being assessed in several European countries, some have launched development projects for its implementation. The XBRL system would support annual reporting according to international financial reporting standards (IFRS) and local reporting standards in a uniform structure. Although there are no coordinated development activities between EU member states as yet, the issue is already being addressed by EUROSTAT and the CEBS. In addition to standardising business reporting, the system would also support information collection by regulators.

The FBE sets up a working group to coordinate XBRL tasks. According to the report submitted by the working group, switching over to the new system at the individual bank level is untimely and a gradual and slow transition is recommended. The working group proposes that the system should be presented to market players and then XBRL jurisdictions should be set up in the individual countries or by certain reporting units.

At the CEBS's initiative, a project was launched at the beginning of 2005 to compile a Basel II capital requirements reporting system based on XBRL. The project is managed by the Central Bank of Spain, supervisors as well as banking specialists are involved in the work.

3.3 EFRAG

According to our information, a financial products working group was set up within EFRAG. The FBE is represented by two persons in the working group and Ágnes Tardos, Director of PricewaterhouseCoopers Hungary was also elected member of the group.

4. European Committee for Banking Standards (ECBS)

At the beginning of December 2004, EPC's OITC group and the ECBS Technical Steering Committee (with the Association represented in the latter) held a joint workshop in Brussels. The participants were split into five groups to work on developing the working process and organisation for standardisation. The workshop was led by J-Y Garnier, President of the ECBS, and A. Rodriguez, Head of the EPC/OITS. Our representative participated in the working group addressing the issues of cooperation between standardisation organisations and developing the ECBS/ECP organisational structure. Mr. Garnier és Mr. Rodriguez expressed their appreciation for the work accomplished by the five working groups, showing how standardisation can be efficiently organised in support of creating a single European payment area. It was agreed that based on the workshop, the OITS will draft its operational rules by the beginning of 2005 and provide specific ideas for the future role of ECBS and for the standardisation process. During the workshop it was also concluded that ECBS TSC's tasks will later be taken over by the EPC OITS Support Group. (At present, Hungary is not represented in the EPC OITS Support Group).

5. EU Directive on consumer credit

The EU Consumer Credit Directive has undergone several reviews, the last version was sent back by the European Parliament to the Commission for revision.

The revised version offered the reviewers the conflicting texts of the EP and the Commission as alternatives to choose between. The Association received the draft for review in mid-December. The Association's position, based on member banks' comments, included the following:

- We challenged the personal and material scopes of the draft: we found the credit amount of HUF 25 million too high, the scope of beneficiaries not defined clearly enough and the definition of consumer credit inadequate (real estate loans could be construed as included).

- We challenged the provision that would have entirely exposed the financing bank to the customer, dealer or servicing company in case of goods under complaint. Namely, with its joint and several liability, the bank would be faced with the risk of being out of control if the customer or the dealer refuse to cooperate with it or with each other.

- We challenged the 14 day period allowed for the customer to rescind the contract, as too long. In our opinion, since customers have chance to study the product or services in advance (it is not about remote sales!) it would be unwarranted to treat the deal as pending for another two weeks (posing extra risks for the bank as well as for the dealer).

- Based on Hungarian practical experience, we expressed our objection to including insurance premium in the APR. We explained that insurance premiums depend on many factors (the customer's personal condition, the insurance company's pricing policy, etc.) and, therefore, it is impossible to give a correct APR in advertisements or announcements.

- The provision requiring creditors to query the various European credit information systems was a omitted from the proposal. We welcomed this change, as it would not make sense to interconnect, at high costs, different systems with different data contents. We proposed that the regulators first develop and implement a standard data requirement and then provide for the interconnection of the national systems on a mandatory basis.

We requested the Ministry of Finance, as the organisation responsible for the issue to represent our proposals in the Hungarian position.

IV. ASSOCIATION EVENTS

1. Payment System Forum

The supreme management body of the Payment System Forum, the Payment System Council, held its second meeting on November 19, 2004. At this meeting, a presentation titled "Some Key Issues of the Road to the Single Euro Payments (and Securities) Area (SEPA) for the Hungarian Payment System Forum" was offered by the President of the European Payment Council (EPC).

Following the presentation, Ágnes Lázár, Managing Director of Hungarian Foreign Trade Bank, a newly elected member of the Payment System Council and the Hungarian representative of the EPC Coordination Group gave a summary of the EPC's plenary meeting of October 6, 2004 and requested the Forum's support in her EPC activities.

A submission is being prepared for the next meeting of the Payment System Forum (March 25, 2005) on professional support to be provided for the EPC representative and Hungarian members of the EPC's Electronic Credit Transfer, Card and Cash working groups and financial support for activities of the Payment System Forum's working groups.

2. Joint event of the John von Neumann Computer Society's Hungarian Smart Card Forum and the Hungarian Banking Association

The professional day organised by the John von Neumann Computer Society Smart Card Forum and the Hungarian Banking Association on December 15 was attended by more than fifty professionals. Presentations were offered on progress and accomplishments in the various smart card application areas. Zsolt Sikolya from the Ministry of Informatics and Communication gave a presentation on a standard eID specification, developed for the public sphere. A presentation on a national public transport card was offered by Dr János Monigl from the Ministry of Economy and Transport, followed by a presentation by Zoltán Majó from Diák-Bónusz Kht on a uniform school ID and on student ID card migration. Kálmán Fejes, Technology Manager of Mastercard Hungary gave a presentation on EMV developments and contactless smart card applications. Pekka Mattila, EMV Products Manager of Visa Europe presented new EMV product application areas. Presentations were followed by a roundtable discussion, where participant questions were answered by representatives from the Ministry of Informatics and Communication, GKI Economic Research Co., the Ministry of Education, the National Bank of Hungary, the Hungarian Academy of Sciences, Matercard and VISA.

3. Association working groups

3.1. TARGET2 Working Group

The TARGET2 Working Group, led by Hungary's representative in the ECB TARGET2 Working Group, Anna Aradi Morvay (National Bank of Hungary), held a meeting on October 28. The working group received a briefing on the TARGET2 system, followed by a discussion on what date would be the best for Hungary to join the system (TARGET2 will be introduced in 2007). With a number of undecided questions regarding the implementation of the system and uncertainties about pricing, banks' representatives said more information was needed for developing a position on when to joint the system. In view of the fact that Hungary is expected to join the Euro-zone around 2010, banks said it would be premature for them to commit themselves on when to join TARGET2.

3.2 Information Security Working Group

At their meeting of November 24, security officers reviewed tasks arising from Section 13/B of Act XXII of 2004, Section 7 of Government Decree 283/2001 and Recommendation No. 10/2001, based on the guidelines provided by the IT Supervision Department of the Hungarian Financial Supervisory Authority. At the end of the meeting, the ECBS TC4 Security Working Group's questionnaire was filled in and sent back to the Working Group.

3.3 EPC

At the request of Ágnes Lázár, the Hungarian representative on the EPC Coordination-Committee, a meeting took place at the Association on December 27. Ms Lázár briefed the participants on the last plenary meeting of the EPC and informed the Association that Hungary will have to submit its report to be used by the EPC for the purpose of SEPA Indicators Version 5 by January 6, 2005.

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