Civic Re­view, Vol. 15, Spe­cial Is­sue, 2019, 116–129, 10.24307/psz.2020.0206

Sum­mary

The two-tier bank­ing sys­tem was (newly) born in Hun­gary in 1987. The ad­vent of polit­ical changes ar­rived when the over-in­debted coun­try had been left without re­serves, and nearly went bank­rupt. From such a dif­fi­cult po­s­i­tion a func­tion­ing bank­ing sys­tem had to be built up after the first free elec­tions held in 1990. Dur­ing the second term, between 1994 and 1998, most of the Hun­garian banks were privat­ised (after con­sol­id­a­tion of the in­di­vidual banks dur­ing the first gov­ern­ment with the help of gov­ern­ment bonds.) In the third cycle there ap­peared to be too many banks in the coun­try, and most of them were be­low the op­timum. In the period between 2002 and 2010, banks flour­ished and cre­ated a credit boom based on for­eign cur­rency. Fol­low­ing the in­ter­na­tional fin­an­cial crisis this led to great troubles. The for­int was de­valu­ated against the Swiss franc, and nu­mer­ous cli­ents be­came in­solv­ent and lost their homes. The gov­ern­ment elec­ted in 2010 made ef­forts at resolv­ing the situ­ation to help cit­izens by pro­grammes in­clud­ing sev­eral steps. Banks were re­quired to take part in this ef­fort by pay­ing spe­cial taxes and for a time this cut back on their prof­it­ab­il­ity. The last three gov­ern­ments since 2010 mod­i­fied the de­con­cen­trated bank­ing struc­ture and re­pur­chased some of the pre­vi­ously privat­ised banks. In 2013 the gov­ern­ment set the goal of in­creas­ing the share of Hun­garian-owned banks to above 50%, which was achieved in 2019. The prof­it­ab­il­ity of banks has re­covered, and their cap­ital po­s­i­tion is now strong. The Na­tional Bank of Hun­gary ful­fils the su­per­vis­ory func­tion. Through its mon­et­ary policy, un­ortho­dox meas­ures and credit pro­grammes, it helps the smooth func­tion­ing of the sec­tor and thus the fin­an­cing of Hun­garian SME’s.

Journal of Eco­nomic Lit­er­at­ure (JEL) codes: G21, G28, E47
Keywords: bank­ing his­tory, bank­ing struc­ture, privat­isa­tion, state banks, crisis man­age­ment, cent­ral bank’s policy

In­tro­duc­tion

The two-tier bank­ing sys­tem was born in Hun­gary in 1987, a few years be­fore the 1989–1990 polit­ical change of re­gime led to a new, demo­cratic so­ci­ety and a mar­ket eco­nomy. The im­port­ance of fin­an­cial mat­ters be­came clear very soon. Short-term for­eign de­pos­its (which the Na­tional Bank of Hun­gary, MNB re­cog­nised as “re­serves”) left the coun­try in the spring of 1990, a few weeks be­fore the fi­nal elec­tions. The Na­tional Bank did not have a suf­fi­cient amount of for­eign cur­rency to fin­ance debt ser­vice to the coun­try’s cred­it­ors. The pub­lic prom­ise made by the re­form politi­cians of the Hun­garian Demo­cratic Forum on tele­vi­sion to ful­fill debt ser­vice if they were elec­ted fi­nally con­vinced in­vestors to re­turn the money.

Ini­tial years: 1990–1991

All this awakened Hun­gari­ans to the im­port­ance of the bank­ing sys­tem and mon­et­ary and fin­ances for the coun­try. Ex­per­i­enced in in­ter­na­tional bank­ing, Pál Tar, a friend and ad­viser of Prime Min­is­ter József An­t­all, con­vinced him to place em­phasis on this sec­tor. A Bank Privat­isa­tion Com­mit­tee was es­tab­lished with the task to con­sol­id­ate the ex­ist­ing sys­tem and pre­pare the privat­isa­tion of banks. (Ac­tu­ally, the Com­mit­tee was not en­gaged in privat­isa­tion, but cre­ated the legal frame­work for the genu­inely mar­ket-con­form func­tion­ing of com­mer­cial bank­ing in the coun­try.)

The sys­tem ex­ist­ing in 1990 com­prised the fol­low­ing mem­bers: three com­mer­cial banks de­tached from the MNB : the Hun­garian Credit Bank (Mag­yar Hitel­bank, MHB), the Na­tional Com­mer­cial and Credit Bank (Országos Keresk­edelmi és Hitel­bank, OKHB) and Bud­apest Bank (BB); com­pleted by the For­eign Trade Bank (Mag­yar Keresk­edelmi Bank, MKB), the Gen­eral Bank­ing and Trust Ltd. (Általános Értékfor­galmi Bank), OTP (the Na­tional Sav­ings Bank), the net­work of smal­ler sav­ing co-op­er­at­ives, and a few smal­ler joint ven­ture banks (Cit­ibank, CIB, Uni­cbank). Later on, new Hun­garian banks (e.g. Ybl Bank, the first private bank after 1990 in Hun­garian hands) were also es­tab­lished. At the be­gin­ning, the legal reg­u­la­tion of the sec­tor was very poor. The Bank­ing Act was only passed by the Hun­garian Na­tional As­sembly at the end of 1991.

Today it is dif­fi­cult to ima­gine how little idea the Hun­garian eco­nom­ists and fin­an­cial spe­cial­ist of the time had about the func­tion­ing of a genu­ine com­mer­cial bank in the 1980’s. Very few old ex­perts had still been liv­ing who had some prac­tice in bank­ing be­fore the na­tion­al­isa­tion of banks in Hun­gary (Act XXX of 1947). A few em­ploy­ees of the Na­tional Bank at the ar­bit­rage de­part­ment had some un­der­stand­ing of for­eign ex­change trans­ac­tions, but 40 years of a mono­lithic bank­ing sys­tem nearly killed all the simple routines which any clerk in an Aus­trian or French bank had. In the Fin­ance Re­search In­sti­tute young col­leagues stud­ied the spe­cial­ised lit­er­at­ure and they be­came mem­bers of the Com­mit­tee that es­tab­lished the two- tier bank­ing sys­tem re­com­men­ded by Fin­ance Min­is­ter István Hetényi. However, there was nowhere to learn the ne­ces­sary ex­pert­ise in every­day activ­ity from. Not to men­tion the meth­ods and prac­tices of sur­veil­lance and su­per­vi­sion. Board-mem­bers who were sup­posed to ful­fil the role of in­ternal con­trol at banks were also people without any spe­cific prac­tical bank­ing know­ledge. To be quite hon­est, it was a sur­prise for us when sim­ilar prob­lems turned out even in the most ad­vanced mar­ket eco­nom­ies later on. The in­vest­ig­a­tion after the col­lapse of the Leh­man Broth­ers made it clear that the ex­ternal board mem­bers did not have any use­ful know­ledge on bank­ing busi­ness at this big US bank.

In the 1980’s the World Bank as­sisted a due di­li­gence of Hun­garian banks. Un­der severe bank­ing con­fid­en­ti­al­ity, some of the mem­bers in the bank­ing su­per­vis­ory group at the Fin­ance Min­istry were ac­tu­ally aware of the amount of non-per­form­ing as­sets held by big Hun­garian com­mer­cial banks. Every­body was afraid of the pub­lic re­ac­tion when and if it were dis­closed that Hun­garian banks wer tech­nic­ally bank­rupt.

The causes of the dis­astrous short­age of cap­ital were rooted in the situ­ation in­her­ited from the so­cial­ist eco­nomy plan­ning mech­an­ism. The so-called New Eco­nomic Mech­an­ism ad­op­ted in 1968 was in­suf­fi­cient for either con­vert­ib­il­ity or the in­ternal cap­it­al­isa­tion of en­ter­prises. The firms no longer re­ceived suf­fi­cient work­ing cap­ital for their activ­it­ies from the state when they were de­clared to be autonom­ous. Only the MNB’s credit lines helped bridge the short­age of cap­ital. Firms were burdened by cred­its. In­ad­equate cap­ital rep­res­en­ted the leg­acy of the past. And the fu­ture was not rosy at all.

Par­al­lel to the cap­ital short­age of Hun­garian firms, their ex­port part­ners’ solvency abroad was also a big prob­lem. The buy­ers of Hun­garian in­dus­trial and ag­ri­cul­tural products were mostly firms in former so­cial­ist coun­tries, them­selves in­solv­ent as a res­ult of the polit­ical changes in their own coun­tries. They could not pay for the ex­por­ted Hun­garian goods, so our firms also be­came in­solv­ent. This led to the non­per­form­ing as­sets in our banks. Due to budget con­straints, the Fin­ance Min­istry did not al­low to cre­ate some re­serves for cov­er­ing the losses, ac­count­ing it as cost. So the pic­ture was very gloomy.

At the be­gin­ning of 1991, the gov­ern­ment com­mis­sioned a min­is­ter without port­fo­lio re­spons­ible for the bank­ing sec­tor, who, with the help of a team of Hun­garian ex­perts, draf­ted a mod­ern bank­ing reg­u­la­tion which was handed in and ac­cep­ted by the Par­lia­ment at the end of the year. This re­vealed the genu­ine port­fo­lios of big Hun­garian banks. The Bank­ing Su­per­vi­sion es­tab­lished by the Bank­ing Act star­ted to con­trol and sur­vey the activ­ity of the banks. It was not an easy task, be­cause of lack of pro­fes­sional em­ploy­ees, both in the Su­per­vi­sion and in the banks them­selves.

The pub­lic that time was not con­cerned with the pro­fes­sional is­sues of the con­duct­ing of bank­ing busi­ness but of the privat­isa­tion of the banks. This pro­cess was not in the com­pet­ence of the Su­per­vi­sion but in the hands of the Fin­ance Min­istry.

In 1991 the Bank­ing Com­mit­tee con­sul­ted a lot of Hun­garian and for­eign fin­an­cial ex­perts and the Bank­ing As­so­ci­ation rep­res­ent­at­ives about the amount of po­ten­tial losses, and the meth­ods and forms of the con­sol­id­a­tion of the Hun­garian banks. The Su­per­vi­sion had com­pleted its task by show­ing the real­istic cap­ital situ­ation of banks. It be­came clear that the state could not sell them in their cur­rent po­s­i­tion for any sig­ni­fic­ant amount of money al­though the budget and the debt situ­ation of the coun­try would have de­man­ded cap­ital in­come from privat­isa­tion, pos­sibly in for­eign cur­rency.

The Fin­ance Min­istry there­fore worked out dif­fer­ent steps for the con­sol­id­a­tion of banks’ cap­it­al­isa­tion. This in­cluded credit-con­sol­id­a­tion, cli­ent-con­sol­id­a­tion and bank-con­sol­id­a­tion, by re­mov­ing non-per­form­ing loans from banks’ port­fo­lios in ex­change of long-term gov­ern­ment bonds. In the first step a buy­out was per­formed, the second one in­cluded rais­ing the cap­ital of state banks by adding long-term state se­cur­it­ies to the ini­tial cap­ital, fol­lowed by writ­ing off non-per­form­ing loans. Cli­ent con­sol­id­a­tion was a dir­ect help offered by the state to the cli­ents of banks mak­ing them cap­able of debt ser­vice.

In the de­teri­or­at­ing situ­ation two main factors played a role: the col­lapse of East­ern-European mar­kets and the fun­da­mental ideo­logy of mar­ket eco­nomy. Both the rul­ing and the op­pos­i­tion parties based their policies on be­lief in the al­loc­at­ing func­tion of the mar­ket forces. (In this spirit some­times Hun­gary set stricter than ne­ces­sary rules; for in­stance in the Bank­ruptcy Act.) Most ex­perts pressed for privat­isa­tion. Lib­eral eco­nom­ists in the coun­try firmly be­lieved that the quicker state own­er­ship is re­placed by private the bet­ter. The other di­lemma was also de­cis­ive: Should we in­vite stra­tegic or port­fo­lio in­vestors as bank own­ers? Lib­eral politi­cians stressed that only stra­tegic for­eign in­vestors have the re­quired pro­fes­sion­al­ism at Hun­garian banks. (It was de­lib­er­ately dis­reg­arded that the real­ised seni­or­age through lend­ing and money gen­er­a­tion in­cluded in the fu­ture profit would then also be­long to the for­eign own­ers.)

On the other hand, some who ad­voc­ated “et­at­ist” views did not un­der­stand the pres­sure made by both private and in­ter­na­tional fin­an­cial in­sti­tu­tions. The lat­ter pre­ferred for­eign own­er­ship, in other words, selling the Hun­garian cap­ital for for­eign ex­change to in­crease the coun­try’s re­serves. Look­ing back, it seems a de­lib­er­ate ac­tion to get hold of this prof­it­able sec­tor in trans­ition eco­nom­ies for the be­ne­fit of for­eign own­ers. But one has to ac­know­ledge that it happened at the same in every CEE coun­try, partly be­cause of the in­her­ited so­cial­ist cap­ital short­age seen every­where, and partly due to the lack of pro­fes­sional bank­ing know­ledge. But the ra­tio of for­eign own­er­ship at banks in Hun­gary was even higher than in the other coun­tries of the re­gion. (Hun­gary has al­ways been a “trail­blazer” or a “good pu­pil” dur­ing Cent­ral and East­ern European trans­form­a­tion.)

The first gov­ern­ment after the change of re­gime would have pre­ferred Hun­garian own­er­ship, and if for­eign own­er­ship was a must, at best they should be port­fo­lio in­vestors. But this strategy was only suc­cess­ful at OTP, where the man­age­ment it­self had been work­ing ac­cord­ing to a strategy for privat­isa­tion. It must be ad­ded that OTP did not need a large amount of money in con­sol­id­a­tion, as it did not per­form sig­ni­fic­ant cor­por­ate lend­ing activ­ity and thus did not real­ise con­sid­er­able losses, and so the sale of its cap­ital was far easier. All the same OTP, too, re­ceived con­sol­id­a­tion bonds, and they may have used them for tech­nical de­vel­op­ment to get the ne­ces­sary im­prove­ment in mod­ern­isa­tion of the bank. It was ac­tu­ally a hid­den as­sist­ance to the big Hun­garian bank to be­come com­pet­it­ive.

OTP had a dif­fer­ent prob­lem: it had great many hous­ing cred­its at very low, state-guar­an­teed in­terest. This was a big bur­den, al­though not for the bank, but for the guar­antor, the State Treas­ury. The prob­lem had been solved by a stat­ute that al­lowed the re­pay­ment of loans at a large dis­count. This of­fer was ac­cep­ted by the large ma­jor­ity of the debt­ors. (The su­per­flu­ous nature of the formerly gran­ted gov­ern­ment-guar­an­teed loans at low in­terest rate be­came ob­vi­ous: most people ac­tu­ally had the money re­quired to buy their homes, and they simply en­joyed the cheap loans, as money in de­posit brought higher in­terest rates than the re­pay­ment of the sub­sid­ised loans.) As an in­ter­est­ing fact it is worth men­tion­ing that for those who were un­able to re­pay half of their loans, the in­terest rate was uni­lat­er­ally raised five times the ori­ginal. But the (few) who were aware of the legal pro­ceed­ings and went to court won the law­suits against the state. So the con­sol­id­a­tion made Hun­garian banks “mar­riage­able”, that is, ready for sale in the frame­work of privat­isa­tion.

When banks were of­ferd for sale, the im­ma­ter­ial part of the cap­ital was not taken into con­sid­er­a­tion in the price. (For in­stance in 1994, MKB’s sales price was 100%, which only in­cluded the cli­en­tele, and the ex­pert­ise of the man­age­ment was not at all in­cluded in the price. True, the buyer simply wanted a bank­ing li­cence.) The sale of Hun­garian banks to state-owned or in­ter­na­tional banks (e.g. the EIB) can hardly be con­sidered genu­ine privat­isa­tion. For ex­ample, the Landes­banks of Ger­many were in­sti­tu­tions based on pub­lic and not private law. The EIB is an in­sti­tu­tion based on in­ter­state con­tract. So why was this con­sidered “privat­isa­tion” and how does the mar-ket’s ma­gical “private” own­er­ship work through them?

Nev­er­the­less, privat­isa­tion and bank con­sol­id­a­tion are seen as suc­cess stor­ies both by Hun­garian lib­eral eco­nom­ists and in­ter­na­tional ex­perts. To eval­u­ate con­sol­id­a­tion, let us quote a Hun­garian re­searcher: “There are more than one an­swers to the ques­tion of whether the fi­nal bill for the ma­jor state bank res­cue pro­gramme was too much, at around USD 4 bil­lion or 10% of Hun­gary’s an­nual GDP. If we con­sider that this amoun­ted to al­most one tenth of the coun­try’s an­nual gross na­tional product, then the bur­den seems con­sid­er­able. If, on the other hand, we con­sider that without the state’s res­cue plan the bank­ing sys­tem would have col­lapsed, and would have dragged along the en­tire eco­nomy, then we can safely say that the gov­ern­ment chose the lesser of two evils” (Várhegyi, 2019, p. 47).

Privat­isa­tion: 1994–1997

Bank privat­isa­tion only ac­cel­er­ated after 1994 and had nearly been com­pleted by 1997. By the mil­len­nium there had been 42 credit in­sti­tu­tions, with for­eign­ers hold­ing ma­jor­ity in 33 banks. In ad­di­tion to com­mer­cial banks, there were nearly 200 small Hun­garian sav­ings and credit co-op­er­at­ives with lim­ited li­cences. Their mar­ket share was fairly small up to 2019.

The period between 1994 and 1997 can be char­ac­ter­ized by for­eign own­er­ship of the Hun­garian bank­ing sys­tem.

How can the role and im­port­ance of for­eign own­er­ship in banks be eval­u­ated? In the 2000’s one could of­ten read praises of for­eign-owned banks, claim­ing that they de­fen­ded the coun­try from the ef­fects of the 1998 in­ter­na­tional emer­ging-mar­ket crisis. But the pros and cons show a dif­fer­ent pic­ture.

As an ECB doc­u­ment reads: “For­eign own­er­ship may have also been one of the im­port­ant factors that re­cently helped shel­ter ac­ces­sion coun­tries’ bank­ing and fin­an­cial sec­tors from spill-overs from the crises in other emer­ging mar­kets. However, for­eign own­er­ship was not en­tirely without draw­backs. For ex­ample, in many of the for­eignowned banks, trad­ing and other key activ­it­ies were shif­ted to the headquar­ters, so that the sub­si­di­ar­ies in the ac­ces­sion coun­tries lost some of their im­port­ant func­tions. Moreover, the sta­bil­ity of the sys­tem would now de­pend largely on the sta­bil­ity of the home in­sti­tu­tions as well as the home reg­u­lat­ors. It was also poin­ted out that the pres­ence of for­eign-owned banks would in it­self not guar­an­tee sta­bil­ity in the bank­ing sys­tem, as evid­enced by the fact that a re­l­at­ively high level of non-per­form­ing loans had per­sisted even in for­eign-owned banks. Fi­nally, for­eign own­er­ship should also not be seen as ne­ces­sar­ily per­petual as dis­in­vest­ment – for ex­ample, as a res­ult of a do­mestic crisis or a change in the com­mer­cial strategy of the owner – al­ways re­mains a pos­sib­il­ity, and in­deed dis­in­vest­ment in ac­ces­sion coun­tries by a stra­tegic for­eign owner had already oc­curred” (ECB, 2002, p. 10).

The role of the man­age­ment is al­ways crit­ical. Some­times for­eign stra­tegic own­ers did not send the most qual­i­fied per­sons to the banks they had pur­chased, and changed them too of­ten. Meas­ured by achieve­ment and the eco­nomic suc­cesses of bank CEO’s, it turns out that Hun­garian CEO’s were of­ten bet­ter than the for­eign dir­ect­ors.

The sys­tem also in­cluded a few newly es­tab­lished (“green grass”) banks. At around the turn of the mil­len­nium, spe­cial­ized in­sti­tu­tions also ex­is­ted in the Hun­garian bank­ing sec­tor. The activ­it­ies and per­form­ance of the state-owned Land Credit and Mort­gage Bank and the Hun­garian De­vel­op­ment Bank were primar­ily driven by gov­ern­ment pro­grammes, which con­trib­uted to high growth in their bal­ance sheet total. Nev­er­the­less, the mar­ket share of spe­cial­ised credit in­sti­tu­tions was still re­l­at­ively mod­est, amount­ing to only 6% in 2001.

The year 2001 wit­nessed only minor changes in the own­er­ship struc­ture in the Hun­garian bank­ing sys­tem. The share of state own­er­ship within res­id­ents’ do­mestic equity hold­ings rose at the ex­pense of credit in­sti­tu­tions, en­ter­prises and in­di­vidu­als. For­eign own­er­ship, in the middle of 1990’s de­creased to 63%, but it was still very high. Ex­clud­ing the Hun­garian De­vel­op­ment Bank, a spe­cial-pur­pose state de­vel­op­ment in­sti­tu­tion, and only in­clud­ing com­mer­cial banks, for­eign own­er­ship amoun­ted to 76% (ECB, 2002).

Bank fail­ures

In the early stages of build­ing the com­mer­cial bank­ing sys­tem in Hun­gary in the 1990’s, only a very few banks went bank­rupt. Such cases (Ybl Bank, West LB, Gyomaendrőd Sav­ings Co­oper­at­ive) were due to the ab­sence of pro­fes­sion­al­ism, and fraud also played a role. Ybl Bank was es­tab­lished for the pur­poses of the planned World Expo, which ul­ti­mately did not take place in 1992. The debt­ors could not re­pay the loans taken for build­ing new ho­tels and sim­ilar in­vest­ment pro­jects. The bank’s port­fo­lio de­teri­or­ated, and its cap­ital was shrink­ing. To re­store li­quid­ity, the lead­er­ship of the bank used bogus con­tracts with vari­ous min­is­tries and state in­sti­tu­tions to use their tem­por­ar­ily dis­pos­able money for buy­ing state bonds. For their “cli­ents”, i.e. min­is­tries, it was not al­lowed to de­posit their tem­por­ar­ily dis­pos­able money in com­mer­cial bank de­pos­its, but it was legal to com­mis­sion a bank to buy gov­ern­ment bonds for them. This was a legal loop­hole, but only bogus con­tracts. Min­is­tries should have known that there were no gov­ern­ment bonds for sale in the mar­ket. But in such con­tracts there was a para­graph guar­an­tee­ing mar­ket in­terest rates for the com­mis­sioned bank in any case. In­terest rates were very high be­cause of peak­ing in­fla­tion. It was ab­so­lutely flag­rant that even the Fin­ance Min­istry had been in­volved in such tricky busi­nesses to get some ex­tra money. They used it to com­pensate the over­burdened staff for over­work. In their de­fence they claimed that it was very dif­fi­cult to re­tain the work­force for the ad­min­is­trat­ive staff in the min­istry. Any­one with some fin­an­cial know­ledge went to work for bet­ter pay­ing, newly cre­ated banks and other fin­an­cial in­sti­tu­tions (Bo­tos, 1996). Bank crashes chal­lenged the cent­ral budget, which had already been over­stretched. It was clear that the gov­ern­ment would not al­low ma­jor losses in the de­pos­it­ors’ money, as that would “go against” the re­cent polit­ical changes. People had no prac­tice in a func­tion­ing mar­ket eco­nomy, and were un­able to as­sess the pos­sible risks at banks. They were grown up in a cli­mate with huge posters on the walls of OTP read­ing: “De­pos­its are guar­an­teed by the state.” So bank crashes urged the es­tab­lish­ment of a De­posit In­sur­ance Fund, which was any­how fore­seen in the Bank­ing Act of 1991. (“The main re­spons­ib­il­ity of the De­posit In­sur­ance Fund is to com­pensate de­pos­it­ors if the Au­thor­ity has de­livered its de­cision ad­op­ted un­der Sec­tion 33(1) of the Credit In­sti­tu­tions Act”.) The fee for de­posit in­sur­ance came from the bank­ing com­munity, so any sub­sequent prob­lems re­mained to be solved at the tax­pay­ers’ cost.

After 1993, cer­tain amend­ments were made (e.g. the op­er­at­ive func­tions of the In­vest­ment In­sur­ance Fund were taken over), but since then a bank fail­ure may not cause huge losses to an or­din­ary de­pos­itor. (Small in­vestors are now also pro­tec­ted by the In­vest­ment In­sur­ance Fund.)

One of the ma­jor bank­ruptcies in the second half of the 1990s was the case of Postabank (SAO, 1999; 2003). The ac­cu­mu­lated losses in this bank were so grea that spe­cial state in­ter­ven­tion was re­quired. The audit per­formed by the State Audit Of­fice (SAO) after the col­lapse of Postabank shed light on a lot of moral, reg­u­lat­ing and polit­ical prob­lems. The su­per­vi­sion and reg­u­la­tion of banks have al­ways been based on the law-abid­ing be­ha­viour of the mar­ket act­ors. As Ger­ald Cor­rigan, dir­ector at the New York Fed, once said: if the lead­er­ship in a bank wants to mis­lead the su­per­vi­sion, it can al­ways eas­ily do it (Bo­tos, 1996). This is why the moral stand­ard of the man­age­ment is so im­port­ant. In the case of Postabank, a large num­ber of mis­takes were trace­able to the man­age­ment be­ha­viour. (The ex­tremely le­ni­ent pun­ish­ment im­posed on the CO of the bank after the tri­als and the in­vest­ig­a­tion by the State Audit Of­fice were ab­so­lutely shock­ing.) In ad­di­tion to the bank’s man­age­ment, politi­cians also played a role in pre­vent­ing the Su­per­vi­sion’s activ­ity when they wanted to per­forme on-site in­spec­tion. It was against the law to in­ter­vene in the Bank­ing Su­per­vi­sion’s activ­ity by any ex­ternal au­thor­ity or per­son, but as the Su­per­vi­sion was de­pend­ant on the gov­ern­ment, it did not have suf­fi­cient power to com­bat pres­sure. It may be cred­ited to the lead­er­ship of the Su­per­vi­sion that they re­mained firm dur­ing the dis­clos­ure of the “own­er­ship struc­ture”. The man­age­ment wanted to con­ceal the in­vestors of the bank who would strengthen the cap­ital po­s­i­tion of the in­sti­tu­tion. There was a sus­pi­cion that the man­age­ment wanted to help them by us­ing a man of straw, and per­form a kind of “baron Mun­chausen” es­cape, who pulled him­self out of the situ­ation by his own hair. The bank made a lot of sim­ilar other tricks, e.g. of­fer­ing cheap and higher amounts of loans than re­ques­ted by cli­ents, even to par­ish clerks, if they de­pos­ited the money above the loan amount as sub­or­din­ated cap­ital. This was to raise cap­ital from de­pos­its made by the cli­ents. Many other pro­ced­ural prob­lems were dis­covered dur­ing the audit. The bail-out cost for the pub­lic more than HUF 150 bil­lion (and the CO’s legal pun­ish­ment was only HUF 3 mil­lion, ab­so­lutely ab­hor­ring.)

A change in the legal status of the bank­ing su­per­vi­sion and its in­cor­por­a­tion in the Na­tional Bank has strengthened its po­s­i­tion against every­day polit­ical in­flu­ences.

The 1990’s and the fol­low­ing dec­ade was a period of il­lu­sions. The firm be­lief in mar­ket eco­nomy, the be­lief that the West would help us ad­apt to the mar­ket chal­lenges, and per­haps re­duce our debt in re­turn for the Pan­european Pic­nic turned into dis­ap­point­ment. Part of the tal­en­ted lib­eral eco­nom­ists con­tin­ued to in­sist on their be­lief that the best solu­tion for all our prob­lems was the “mar­ket­isa­tion” of all as­pects of life and first of all, the eco­nomy. The less the state in­ter­ven­tion, the bet­ter, they claimed. In bank­ing the clearest sign of that ideo­logy was re­flec­ted in giv­ing in­creas­ing ground to for­eign banks in the in­ternal mar­ket and in min­im­ising state own­er­ship.

The other scen­ario: 1998–2002

A more con­ser­vat­ive, pat­ri­ot­ist eco­nomic policy was im­ple­men­ted in the period un­der the Fidesz gov­ern­ment between 1998 and 2002. This gov­ern­ment had a scen­ario that differed from that of lib­eral eco­nom­ists. Without a com­plex eval­u­ation of the eco­nomic situ­ation of that period, only one as­pect, which de­serves spe­cial at­ten­tion, is dis­cussed here: eco­nomic de­vel­op­ment based on do­mestic factors.

Al­though the ex­port-ca­pa­city of the coun­try was as im­port­ant as be­fore, the gov­ern­ment also stressed the role of the in­ternal mar­ket. A glimpse at the macro-eco­nomic data of the time re­veals that the coun­try had not reached the pre-trans­ition levels by 1998 in many re­spects. Only GDP had reached the level of 1990 by 1999, but wages had only in 2002, and pen­sions in 2004. Thus there was in­suf­fi­cient de­mand be­cause of the low level of per­sonal in­comes. There was only one op­tion to boost in­ternal de­mand: by of­fer­ing sub­sidies to home-build­ing. Fam­il­ies were plan­ning new houses and buy­ing new flats. The con­struc­tion in­dustry flour­ished. (It is re­mark­able that this was also the method ap­plied in the US, in the form of low-in­terest rate lons to sup­port home-build­ing.) The growth-rate was sur­pris­ingly high; the ex­port sur­plus con­sol­id­ated the ex­ternal bal­ance, so the in­debted­ness of the coun­try de­creased in re­l­at­ive terms. No won­der the polit­ical lead­ers were con­vinced they would be re-elec­ted in 2002. But as men­tioned earlier, wages and pen­sions were still lag­ging be­hind, and this ex­plains the lost elec­tion of 2002. In their liv­ing stand­ards, voters did not feel the gov­ern­ment’s un­deni­able mac­roe­co­nomic achieve­ments.

Re­peat­ied lib­eral line: 2002–2010

After the con­ser­vat­ives’ lost 2002 elec­tions the coun­try re­turned to the lib­eral mar­ket eco­nom­ists’ tra­ject­ory.

In the years after 1990, a de­creas­ing con­cen­tra­tion was seen in bank­ing. By the end of the nineties, sev­eral ac­quis­i­tions and mer­gers had taken place and res­ul­ted in con­cen­tra­tion in­crease as some sav­ing co-op­er­at­ives had ceased their op­er­a­tion, had merged or had trans­formed into banks. Based on a study by McKin­sey and Com­pany, in 2005 the mar­ket share of the three biggest banks was 43.8% in Hun­gary, while the HHI for the whole sec­tor was 1007. What con­cerns the bank­ing in­dustry’s own­er­ship struc­ture, state own­er­ship in the banks was be­low 20%. State banks’ share was about 10%

Balázs Zsámboki as­sess the situ­ation in the pre-ac­ces­sion stage of the bank­ing sec­tor as fol­lows: “With re­gard to the cur­rent level of bal­ance sheet total, there ap­pear to be too many banks, im­ply­ing that the av­er­age size of banks is be­low the op­timum level. However, look­ing at the dens­ity of branches, Hun­gary is not over-banked, al­though tech­no­lo­gical de­vel­op­ment will cer­tainly make a few branches re­dund­ant” (ECB, 2002, p. 113). We may agree with the other state­ment of Zsámboki that the re­la­tion between the level of con­cen­tra­tion in the bank­ing sec­tor and its vul­ner­ab­il­ity in the case of shocks and crises has not been ad­equately as­sessed in Hun­gary so far.

In ad­di­tion to the struc­ture of the bank­ing sec­tor, grow­ing for­eign cur­rency lend­ing cre­ated great prob­lems. This has not been given suf­fi­cient em­phasis in con­tem­por­ary or cur­rent pro­fes­sional su­per­visors’ pub­lic­a­tions. Few au­thors draw at­ten­tion to this dan­ger­ous phe­nomenon, des­pite the fact that ret­ro­spect­ive ana­lyses re­veal its im­port­ance (Lent­ner, 2015). As an ex­cep­tion, Bo­tos and Hal­mosi gave an eval­u­ation on the risk cli­mate in the second half of the 2000’s: “In­fla­tion­ary ex­pect­a­tions ... will bring fur­ther de­pre­ci­ation. It is hard to pre­cisely es­tab­lish trends, but we may de­clare that this will bring great suprises for housholds run­ning up huge for­eign cur­rency loans” (Bo­tos and Hal­mosi, 2009, p. 109, it­alicised by the au­thor). The subprime crisis came as a sur­prise and also hit Hun­garian bank­ing, des­pite the fact that Hun­garian banks were not in­volved in the so called toxic as­sets busi­ness. But lend­ing in for­eign cur­rency and the com­ing over­valu­ation of the Swiss frank made this type of busi­ness very costly, con­cern­ing re­demp­tion for the cli­ents of banks. Many were un­able to re­pay their debts. This raised the port­fo­lios of non-per­form­ing loans at banks. But the prob­lem which was emer­ging in the so­ci­ety was even greater. Cit­izens who thought that they had found a cheap fin­an­cing for their hous­ing were di­vested from their home own­er­ships and fallen into deep poverty. Dis­con­tent was grow­ing and the banks were blamed along with the gov­ern­ment.

Why did such a very quick growth in lend­ing based on for­eign cur­rency hap­pen?

As was men­tioned be­fore, the first Orbán gov­ern­ment sup­por­ted hous­ing from the budget. Fam­il­ies with chil­dren in­tend­ing to buy flats or houses, were given sub­sidies. This idea matched the policy of the in­cum­bent polit­ical party, namely that they in­ten­ded to base the so­ci­ety on fam­il­ies in­stead of the full in­di­vidu­al­ism. (The gov­ern­ment in­ten­ded not only to stim­u­late growth, but also par­ent­ing, as the birth rate was ex­tremely low in Hun­gary. Pop­u­la­tion de­cline has been threat­en­ing the coun­try.) But after 2002 the lib­eral gov­ern­ment ter­min­ated this type of budget sub­sidy. Those who wanted a new flat had no ac­cess to any­thing else than bank loans. It came in handy to of­fer low in­terest rate­loans from abroad to Hun­garian banks, so they star­ted lend­ing based on Swiss francs. This did not mean that the debtor ac­tu­ally re­ceived Swiss francs, only the lend­ing trans­ac­tion was based on Swiss franc credit lines taken by the banks (Lent­ner, 2015). That way they real­ized an ex­tra mar­gin and an ex­tra profit. Prof­it­ab­il­ity of the bank­ing sec­tor was soar­ing.

But the coun­try’s macro-eco­nomic situ­ation de­teri­or­ated year by year in this period. In re­l­at­ive terms, state in­debted­ness strated to rise again to the pre-1990 levels, and de­fi­cits were high. Vul­ner­ab­il­ity to ex­ternal fin­an­cing was in­tens­ive. Des­pite all of that, the bank­ing sec­tor had flour­ished up to the erup­tion of the crisis. Due to in­ter­na­tional fin­an­cial prob­lems, the coun­try had to turn to the IMF again to be able to ful­fil its ob­lig­a­tions to the rest of the world. (The first Orbán Gov­ern­ment ter­min­ated the con­tract.) People’s liv­ing stand­ard failed to im­prove and hous­ing prob­lems were chal­len­ging. This is why 2010 brought changes in the polit­ical lead­er­ship of the coun­try.

After 2010

After the erup­tion of the crisis re­late to the Swiss franc star­ted to re­valu­ate and the Hun­garian for­int was de­valu­ated. The loans de­nom­in­ated in Swiss franc be­came very costly, and nev­er­the­less, Swiss franc loans ex­pan­ded even in the couple of months after the out­break of the lend­ing crisis. Only the elec­tions brought rad­ical stop.

The new gov­ern­ment very soon banned forex-based lend­ing, and the IMF-con­tract, in­tro­duced ex­tra taxes on banks, start­ing to con­sol­id­ate the gov­ern­ment’s un­sound budget. The bank­ing tax was un­der heavy cri­ti­cism by lib­eral eco­nom­ists in­side and out­side the coun­try. (While nobody cri­ti­cised the un­healthy lend­ing activ­ity of for­eign-owned banks in Hun­gary.)

The gov­ern­ment de­cided to con­sol­id­ate the bank­ing sec­tor, elim­in­ate the too much banks, cre­ate a healthy con­cen­tra­tion in the sav­ings co-op­er­ate sec­tor, raise a bit – maybe only for tem­por­ar­ily – the share of the state-owned banks.

The gov­ern­ment set a goal in 2013 to raise the share of Hun­garian-owned banks above 50%. Some for­eign banks left the coun­try, as a con­sequence of de­teri­or­at­ing prof­it­ab­il­ity (caused by bank taxes) and Hun­garian-con­trolled (or owned) banks gained ground.

In 2012, MFB was ordered by the state to buy out the stake of Ger­many’s DZ Bank in the um­brella bank of the sav­ings co-op­er­at­ives, so that it could act as an “in­teg­rator” of sav­ing co-op­er­at­ives. The gov­ern­ment in­ten­ded to unite sav­ings co-op­er­at­ives into a “com­mer­cial bank” with a na­tion­wide net­work (which was ac­tu­ally per­formed in 2019).

In 2014 the state pur­chased MKB Bank from its Bav­arian owner. In 2015, Bud­apest Bank was also bought by state-owned MFB on be­half of the Hun­garian gov­ern­ment from its Amer­ican owner GE (which was plan­ning its fur­ther privat­isa­tion).

The state agreed with the own­ers of Er­ste Bank to pur­chase a stake in the bank, through the Corvinus In­vest­ment Zrt., par­al­lel with EBRD (each hav­ing a 15% share). The gov­ern­ment prom­ised by an agree­ment with the EBRD to stop in­tro­du­cing un­fa­vor­able meas­ures against bank­ing activ­ity in Hun­gary. Based on the bal­ance sheets share of the banks un­der Hun­garian man­age­ment, the ra­tio was raised in seven years from 13.55 to 55.7%. So the gov­ern­ment has achieved the aim to bring the share of Hun­garian-owned banks above 50%.

Some crit­ics were re­cently pub­lished against the banks hav­ing Hun­garian own­ers (and man­age­ment), that they are un­der con­troll of eco­nomic forces close to the gov­ern­ment. “From the per­spect­ive of the fu­ture sta­bil­ity of the bank­ing sys­tem, two cru­cial ques­tions arise: first, whether the newly na­tion­al­ised credit in­sti­tu­tions have suf­fi­ciently well-cap­it­al­ised own­ers to stand firm should the need arise; and second, what is the im­pact on prudent bank op­er­a­tions of close in­ter­lock­ing with the centre of polit­ical power, and how much has the moral haz­ard been ex­acer­bated” (Várhegyi, 2019, p. 59). It looks as if the con­cerns were ex­ag­ger­ated.

The most re­cent de­vel­op­ments

Let us sum­mar­ize the situ­ation in the Hun­garian bank­ing sec­tor based on the re­port made for the European Bank­ing Fed­er­a­tion: “The Hun­garian bank­ing sec­tor con­sists of 69 in­sti­tu­tions. Among them are 26 com­mer­cial banks, nine for­eign bank branches, five mort­gage banks, four build­ing so­ci­et­ies, three spe­cial­ized banks and –as a res­ult of massive con­sol­id­a­tion – 22 credit or sav­ing co­oper­at­ives. At the end of 2017, 50.5% of the bank­ing sec­tor’s share­hold­ing was kept by do­mestic en­tit­ies with al­most two-thirds of that in the hands of the state.​The bank­ing sec­tor has 2,420 branches and em­ploys around 39,000 people (0.88% of the total em­ploy­ment in Hun­gary). For the coun­try’s pop­u­la­tion of 9.8 mil­lion in 2017, there are 10.5 mil­lion bank ac­counts, 9.1 mil­lion pay­ment cards (of which 72% are con­tact­less), 5,100 ATMs and 136,400 POS ter­min­als. Elec­tronic pay­ments in­creased dy­nam­ic­ally in 2017. The pay­ment card ac­cept­ing net­work grew sig­ni­fic­antly by 25% which also means that 83% of the POS ter­min­als sup­port con­tact­less card ac­cept­ance. In 2017, two-thirds of re­tail pay­ments were made by con­tact­less cards. The rate of ac­cess to pay­ment ac­counts by in­ter­net and mo­bile bank­ing ser­vices in­creased by 2.5% which means that 82% of the pay­ment ac­counts can be ac­cessed by one of them. The Na­tional Bank of Hun­gary has launched a pro­ject to im­ple­ment a do­mestic (de­nom­in­ated in HUF) in­stant pay­ment (IP) solu­tion. The new pay­ment sys­tem will be avail­able to make pay­ments between Hun­garian pay­ment ac­counts within seconds, on a 24/7/365 basis. It will also be pos­sible for mar­ket par­ti­cipants to provide a range of ad­di­tional ser­vices. The IP ser­vice will start on 1 July 2019. The new ba­sic in­fra­struc­ture sup­ports in­nov­at­ive pay­ment ser­vices. One-third of the bank­ing sec­tor’s total loan port­fo­lio is provided to non-fin­an­cial cor­por­ates, one-third to house­holds and or­gan­isa­tions closely linked to house­holds and one-sixth to the for­eign sec­tor (half of it to for­eign cor­por­ate sec­tor). In 2017, cor­por­ate lend­ing grew at a rate un­seen since the crisis, ex­pand­ing by more than 13% in an­nual terms, while re­tail lend­ing al­most stag­nated with an in­crease slightly over 1%.The de­posit value of the bank­ing sec­tor re­mark­ably in­creased in 2017 (by 7.7%) in total, each ma­jor sec­tor (local state, cor­por­ate and house­hold as well as for­eign) con­trib­uted positively.​The cap­ital po­s­i­tion of the Hun­garian bank­ing sec­tor is stable. The Tier 1 cap­ital ad­equacy ra­tio (CAR) is over 18%, while the total CAR is a bit over 20%. In 2017 profits reached a new high in nom­inal terms, mainly due to ex­traordin­ary or ex­ternal factors, be­fore tax ROE re­mained over 14.5%. Ma­jor ex­tra con­trib­ut­ors to the un­ex­pec­tedly good per­form­ances are the good prof­it­ab­il­ity of local banks’ for­eign af­fil­i­ates and re­leas­ing impair­ments. The bank­ing sec­tor has a re­l­at­ively high con­tri­bu­tion to the cent­ral budget in Hun­gary. It provides al­most 4% of the total budget rev­enue (ap­prox­im­ately 1.5% of the GDP), half of it com­ing from sec­torial taxes” (Vass, 2018).

The above long list shows that the Hun­garian bank­ing sec­tor is for today in a well­bal­anced situ­ation, con­cern­ing for­ein and Hun­garian own­er­ship. Banks work prof­it­ably, have strong cap­ital base. Hope­fully the sec­tor will help fur­ther on the smoose fin­an­cing the de­vel­op­ment in our coun­try. The latest data on the activ­ity of the Hun­garian bank­ing sec­tor are also prom­ising. The most im­port­ant is how led­ing was de­vel­op­ing.

We may out­line the situ­ation based on the latest In­fla­tion Re­port by the Na­tional Bank of Hun­gary (MNB, 2019).

In 2019 par­al­lel with out­put and in­vest­ment, the out­stand­ing loans of the private sec­tor ex­hib­ited a re­mark­able ex­pan­sion dur­ing the year – just as we have seen in 2017 – both in his­tor­ical and in­ter­na­tional com­par­ison. There was a rapid growth to be seen on the de­mand side, both in cor­por­ate and house­hold lend­ing. The sup­ply side was char­ac­ter­ised by loosen­ing of credit con­di­tions and price com­pet­i­tion. This credit ex­pan­sion was really un­pre­ced­en­ted since the crisis already in the pre­ced­ing year, but it strengthened in 2019 fur­ther on.

The MNB over­viewed the struc­ture of changes in loan port­fo­lios. Over the past 12 months, the out­stand­ing loans of non-fin­an­cial cor­por­a­tions vis-a-vis the Hun­garian fin­an­cial in­ter­me­di­ary sys­tem have in­creased rap­idly, by al­most 17 per­cent. By in­ter­na­tional com­par­ison, this is re­mark­able. Credit ex­pan­sion primar­ily oc­curred in longer term loans, with had a ma­tur­ity of over 1 year. They gave more than two thirds of the growth in the credit volume. And the ma­jor­ity of the credit-growth (2/3) was offered in HUF. This is fa­vour­able from a sta­bil­ity stand­point...

Last year’s con­tri­bu­tion of gross fixed cap­ital form­a­tion to GDP growth was con­sid­er­ably higher in Hun­gary than in the other Visegrád coun­tries. Busi­ness cycles and cor­por­ate lend­ing in the Visegrád coun­tries have typ­ic­ally been in sync in the past dec­ades. This is ex­plained by the fact that there must be coun­try-spe­cific factors be­hind the ex­tremely rapid in­crease in lend­ing seen in Hun­gary at present com­pared to other coun­tries of the re­gion.

Growth in cor­por­ate credit is broad-based in all sec­tors of the eco­nomy. Loans for the man­u­fac­tur­ing sec­tor has shown the largest in­crease. Ex­pan­sion in land­ing in the man­u­fac­tur­ing happened first of all by the bor­row­ing of sev­eral in­ter­na­tional cor­por­a­tions in Hun­gary, linked to their Hun­garian pro­jects. The second sec­tor in­cluded the firms provid­ing fin­an­cial and in­sur­ance ser­vices. The credit de­mand of the ag­ri­cul­tural sec­tor was also sup­por­ted by the sup­ple­ment­ary fin­an­cing of EU trans­fers. The ro­bust activ­ity in con­struc­tion and the real es­tate sec­tor raised the credit port­fo­lio of these sec­tors too, but a lesser de­gree. This was the con­sequence of the in­vest­ment activ­ity of real es­tate funds. De­vel­op­ments in the CRE mar­ket also af­fect the func­tion­ing of the fin­an­cial sys­tem. This is primar­ily due to the fact that most banks’ cor­por­ate loan port­fo­lios are CRE-col­lat­er­al­ised loans, ac­count­ing for al­most 40 per cent of the port­fo­lios in Hun­gary in 2018. The Hun­garian cor­por­ate sec­tor’s low ag­greg­ate in­debted­ness provides fur­ther room for rapid credit ex­pan­sion.

In the house­hold sec­tor the port­fo­lio had not in­creased un­til 2017, as re­pay­ments con­sist­ently ex­ceeded dis­burse­ments. This is be­cause these loans were an­nu­ity loans: as the ma­tur­ity of loans dis­bursed be­fore the crisis pro­gresses – ac­count­ing for a sub­stan­tial pro­por­tion of ex­ist­ing debt – the share of prin­cipal re­pay­ments grow pro­gress­ively in the monthly in­stal­ments paid by debt­ors. From mid-2017, however, the new credit out­flows already ex­ceed the re­pay­ments of ex­ist­ing con­tracts, and the out­stand­ing bor­row­ing of house­holds began to grow. It should be em­phas­ised that lend­ing tends to ex­ert its im­pact primar­ily in house­hold in­vest­ment rather than con­sump­tion.

The cur­rent growth is driven by the double-di­git in­crease in new hous­ing and per­sonal loans. In ad­di­tion to the low in­terest en­vir­on­ment, de­mand is sup­por­ted by the fam­ily policy pro­grammes of the gov­ern­ment, such as the Fam­ily Hous­ing Al­low­ance (CSOK) avail­able since 2016 – and the ex­ten­sion thereof – and the Pren­atal Baby Sup­port avail­able since July 2019. The num­ber of home pur­chases from credit in­creased over the past few years, al­though still less than one half of all home pur­chases are fin­anced with credit. However, not only hous­ing loans, but also per­sonal loans can fin­ance hous­ing in­vest­ment, des­pite the fact that the cost as­so­ci­ated with per­sonal loans is still three times higher than that of mort­gage loans. But fast loan as­sess­ment and dis­burse­ment en­cour­age house­holds to take out per­sonal loans for lower-value hous­ing pur­poses as well. The nearly 7% ex­pan­sion in house­hold lend­ing is driven by de­mand: sup­ply con­di­tions have not eased sig­ni­fic­antly since the crisis.

The over-in­debted­ness is con­trolled by the debt cap rules in­tro­duced in 2015 which have been re­cal­ib­rated sev­eral times since. This pre­vents ex­cess­ive in­debted­ness.

Due to the re­l­at­ively high share of vari­able-rate loans, debt­ors in both the house­hold and the cor­por­ate sec­tor are sens­it­ive to in­terest rate fluc­tu­ations. The con­sumer cred­its­takers are of­ten not aware enough of the risk. The MNB is­sued there­fore a re­com­mend­a­tion to fin­an­cial in­sti­tu­tions, try­ing to sug­gest them to con­vince the most af­fected cus­tom­ers who have vari­able-rate mort­gage loans, to change a trans­ition to a fixed-rate scheme with an amend­ment to the already ex­ist­ing con­tract.

On the whole, thanks to the fa­vour­able fin­an­cing en­vir­on­ment and buoy­ant in­vest­ment de­mand, rapid ex­pan­sion may be ex­pec­ted to con­tinue both in the cor­por­ate and in the house­hold sec­tor in Hun­gary in the com­ing period.