No. 26, 1994 - The development of the Hungarian Banking System

At present there are 42 universal commercial banks in Hungary, 8 of which are joint venture banks with foreign participation. In addition, there are also 260 savings cooperatives, which have less capital, and specialize in retail banking.
Hungary also has a stock exchange and a commodity exchange. (The above figures on the financial sector do not include over four dozen brokerage firms). The Hungarian regulatory system does not allow banks to engage in stock exchange operations, therefore almost every bank has established its own brokerage firm; in addition, there are many other such firms not founded by banks, often in private hands. The paper also does not deal with insurance companies. These are not included in the scope of the authority of the general banking supervision.
In the Eastern European environment the Hungarian financial system can be considered well developed. There is a wide selection of banking products. For instance, each bank now has a licence for issuing foreign exchange debt; credit cards have appeared, even if they are not yet widely used; banks engage in forward operations, factoring services exist; and there is a wide range, even if not a substantial volume, of open market operations.
As we will see later, the regulatory environment is gradually approaching Western European standards (e.g. in terms of capital adequacy requirements, the debt classification system, and most importantly, in the audit requirements of financial statements).
These welcome signs, however do not mean that the Hungarian banking system does not a have number of serious problems, and is not a great distance from the standard of conduct of highly developed Western banks. As it is widely recognized, the most serious problem is the technical insolvency of a number of financial institutions (among them, unfortunately, the majority of large banks), which emerged after 1991. Some banks have lost several times over their equity if we take into consideration their credit exposure (or rather certain loss in many cases). Of course this is not to say that at the moment they would be unable to meet their current obligations. However, they cannot generate adequate provisions for their classified exposure, and therefore any loss of confidence, or even an unexpectedly deepening recession, could endanger their liquidity position.
Unfortunately, this is not the only problem of the Hungarian banking system. (This section on the present operational and regulatory environment of the banking system will discuss other problems in great detail).
At this point we need to highlight only one, unfortunately typical problem, that of the lack of capital markets. Though companies have the right to issue bonds and shares, only a few companies are actually able to do so. Therefore, the lack of a suitable capital market forces Hungarian banks to act as a substitute, and companies are compelled to finance their major development projects as well as their minor investments from debt, rather than from the capital market.
The paper is available here.