1. Prudential Challenges in Financial Infrastructure Development in Hungary Levente Kovács Hungarian Banking Association „International Banking Competition: Theory and Practice” Conference Sumy, Ukraine, 24 May 2012 1

2. ACH milestones (in Hungary) 2 Second half of 19th century: Foundation of clearing houses (10 December 1893: Budapesti GIRO és Pénztáregylet Rt.) 1980s: First Automated Clearing Houses established (GIRO launches ACH operations on 18 November 1994) Turn of the Millennium: Clearing and settlement on the same day - RTGS system (3 September 1999 - VIBER) - Intraday settlements (2 July 2012)

3. Background of the Intergiro project Market need for same-day settlements Competitiveness Infrastructure lag Creating competition EU regulatory trends, SEPA 29 June 2005 - Monetary Council proposal 2006 - 2010 - PSF and PSC meetings 23 June 2010 - PSC majority decision 12 Oct 2010 - Central Bank decree Market needs + pressure from Central Bank 3

4. Intergiro project Participants: Central Bank, HFSA, Hungarian Banking Association, Clearing members, Hungarian SEPA Association - National project, supervised by central bank - Implementation time: 2 years Professional questions: Business needs Intraday and SEPA-compliant !!!??? Operational risks Costs ( approx: EUR 52 million) Timing + regulation by Central Bank 4

5. Intergiro: New financial infrastructure 5 SEPA standards, new processes, new functions Proposed cut-off times (Mon - Fri): 8 30 10 30 12 30 14 40 16 30 22 00 Full processing time < 1 hour. Frequency is a market need only up to a certain extent! From 2 July 2012 credit transfers will be received by the beneficiary in a matter of a few hours! Question: In which payment cycle? Will the customers be aware of and use the new opportunities?

6. T+1 day system 6 Two directions of credit transfers: „Planet - moon” structure of the customer base: Large companies pull their key customers to the bank Large banks with an established and closed customer base Lead-time excludes competition between banks Inhouse30%PromptFree Outbound70%GIRO T+1For a fee

7. Impacts of the intraday system 7 Outbound payments will become same-day payments! Advantage of a closed customer base ceases Competition in account management open again (lead-times) GIRO processing fee: EUR 0.06 / item Standard transaction fees: - paper 0.2% and a minimum EUR 1.7 - electronic0.12% and a minimum EUR 0.3 No float – more transparent pricing! Competition – lower transaction fees!

8. Float – money in transit 8 Float: the time between debiting the payer’s account and the payer bank’s account. „T+1”: Monday to Thursday: 1 day, Friday: 3 days Average: 1.4 days Float gain: the interest for 1.4 days Equal to: 0.027 % (transaction fee is around 0.1%-0.2%) On an average transaction item (EUR 911): EUR 0.2 / item At the banking sector level ( EUR 222 bn): EUR -60 mn / year Uneven distribution of payments within a month, concentration on certain dates (9th working day of the month) Float sensitivity (Friday 3 days) currently not measurable. Peak days will remain. Which payment cycle? - a question. Losing the float is a fee-increasing factor.

9. Impact on banks’ liabilities 9 Rough approach (float  C/A): Arriving amounts not transferred same day, but remain in the beneficiaries’ bank account, for an C/A interest (0 to 0,5%). No essential change in the bank’s liabilities Refined approach (float disappears): Households: - Current accounts: salary cycle shifts one day earlier, average A/C amount unchanged - Deposit accounts: one-day incremental income for monthly savers (float partly remains!) Businesses: - C/A: depending on payment activity - unchanged - Deposit accounts: no regular deposits. Decrease in the bank’s liabilities

10. Financial impacts: Corporate accounts 10 Classic inventory management  „Just in time” Number of transactions Current Account Balance (HUF thousand) 20406080100 1000 2000 3000 4000 5000 6000 7000 Faster, cheaper and more modern financial infrastructure  Decrease in the relative size of current account balances!

11. Use of float 11 Retail: Customers will use the 1-day advantage: consumption is expected to increase significantly in the month of introduction. Corporate: Earlier receipt of payments allows a more efficient cash management: - Current account balances can be further reduced: - Difference can be used for loan repayments, new investments, etc. Manageable loss for banks, slight stimulation for the economy! Number of transactions Current Account Balance (HUF thousand) 20406080100 1000 2000 3000 4000 5000 6000 7000

12. Impacts of same-day execution 12 Customers: Effective C/A management, C/A balances can be reduced Reduction of payments’ time to subcontractors Uniform payment and automated invoicing standards Banks: With same-day settlements closed customer bases may break the „Planet – moon” effect Competition in C/A services More transparent pricing Loss of float, decrease in liabilities Tighter treasury management ACH: Competitive environment due to SEPA Productivity/economic growth Elimination of non-productive jobs

13. 13 Thank you for your attention! Дякую за увагу! Köszönöm a figyelmet! 注意いただきありがとうございます Vielen Dank für Ihre Aufmersamkeit! Vi ringraziamo per l’attenzione! Dziękujemy za uwagę! 感谢您的关注 Спасибо за внимание! Tak for opmærksomheden! σας ευχαριστώ για την προσοχή! Děkujeme za pozornost! Kiitos huomiota! Tack för uppmärksamheten! Vă mulţumesc pentru atenţia ! Hvala na pozornosti! Je vous le merci de l’attencion!