$Unique_ID{COW01621}
$Pretitle{365}
$Title{Hungary
Banking System}
$Subtitle{}
$Author{Hungarian Stock Exchange Courier}
$Affiliation{Embassy of Hungary, Washington DC}
$Subject{bank
banks
banking
capital
foreign
hungary
hungarian
financial
system
companies}
$Date{1990}
$Log{}
Country:     Hungary
Book:        Foreign Policy Basics
Author:      Hungarian Stock Exchange Courier
Affiliation: Embassy of Hungary, Washington DC
Date:        1990

Banking System

     At present 21 commercial banks function in Hungary (including INVESTRADE
BANK Ltd) and the following banks will start operation in the near future:
LEUMI BANK Ltd, the EAST-WEST BANK Ltd, and FIRST AMERICAN BANK IN HUNGARY
Ltd. Out of the banks, nine are jointly owned with foreign equity
participation. The number of specialized financial institutions is seven at
present.

     In respect of their numbers, savings cooperatives play an important role
in the banking system, their number being 260, the number of savings
cooperative members is 2 million, and their networks have 1800 units.

     The principal amount of the balance sheets of the business banking system
(excluding savings cooperatives) was 893 thousand million forints on January
1, 1987, and this increased by the end of 1989 to 1271 thousand million
forints (by 42%). At the start 60% of the principal amount of the balance
sheets was accounted for by the commercial banks, and by the end of last year
the share of the commercial banks was 83% since in the meantime the majority
of the former specialized financial institutions have also been changed into
commercial banks.

     In their resources, the most significant rise arose in the foundation and
accumulated assets: from 38 thousand million forints to 86 thousand million.
The increase of deposits was also significant, apporoximately 160 thousand
million forints, and that of profits 30 thousand million forints. The stock of
refinancing credits expiring at more than one year agrees with that of January
1, 1987, in which a role was played primarily by the doubling of the number
and target amounts of the World Bank programs, and the capital-substituting
credit actions granted to agriculture. The stock of short term refinancing
credits fell in three years by nearly 20 thousand million forints.

     The stock of the risk reserve fund was 8 thousand million forints at the
end of 1989. Approximately one half of the placements of the banking system
are for more than one year, approximately 40% expire within one year, and the
proportion of other receivables is approximately 10%. The largest share in
the over one year placements is represented by company credits, population
credits, and housing bonds, but the sum of capital investments (nearly 30
thousand million forints) is also an important sum. In short-term
placements the company sector is decisive, as well as the balance of foreign
exchange operations, placements in foreign currencies, forint and foreign
exchange cash.

     At present the picture is rather complex within the banking system in
respect of authorized activities. The large banks dispose of a full scope of
commercial banking authorization, which is complemented by foreign exchange
entitlements linked to trade as well as by entitlements to carry out banking
operations for the population. Although the medium-sized banks also keep
accounts, few of them are entitled to foreign exchange operations (General
Banking and Trust Co. Ltd., Post Bank and Savings Bank Cooperation Ltd., and
the joint venture banks) and they also handle banking operations for the
population to a different extent (the joint venture banks have no such
authorization with the exception of the CA).

     The standing of the OTP National Savings Bank is singular and particular,
since it incorporates the functions of a traditional and a modern savings
bank, a building savings bank, a superannuation bank, a credit bank, a
mortgage bank, a life insurance company, a buyer and seller of securities,
the organizer of lotteries, the buyer and seller of coins, etc.

     The authorized scope of activity of INVESTRADE Ltd. is also mixed
(commercial bank, trading house, investment bank).

     The specialized financial institutions form a special category within the
banking system, in respect of their financial weight, the circumstances of
their foundation, as well as the conditions for their operations. Placements
of over one year account for only 30% of the principal amount in their balance
sheets, and the majority of their activity is concentrated on short-term
lending to companies.

     Some banks only partially engage in activities for which they are
authorized. For instance, the large banks which all fought in previous years
for acquiring the right to carry out banking operations for the population, do
not practise these in essence, with the exception of the issue of securities,
through which they acquire resources for the financing of the company sphere.
Greater emphasis on short-term credits, which are more profitable and involve
less risk, are universally characteristic. Almost every bank also offers
credits of more than one year expiry to its clients, but there are banks,
e.g., CITIBANK, which grant only short-term loans.

     The following activities are either entirely missing from the banking
sector, or play only a marginal role: financing of consortium projects,
financing of company transformations, financing of commerce, factoring and
investment funds, investment companies, establishment of risk capital funds,
entrepreneurial credits, types of varied deposit accounts with high interest
rates, credit cards, cheques for clients.

     The network of branches is missing or has many gaps, and some important
banking activities, e.g. foreign exchange transactions, cannot be implemented
outside the capital city.

     Problems are caused by the under-development of the banking infrastucture
and the absence of integrated communication systems.

     The management of liquidity

     In the first few years the management of the liquidity of the banks did
not meet requirements. It was characteristic, particularly of the large banks,
that they regularly experienced liquidity troubles, in which cases they needed
assistance from the bank of issue. Causes of the shortcomings included: the
absence of a computer background, the lack of development of a system of
guidance for branches, the shortage of suitable staff, and in certain cases
ad hoc restrictive measures by the bank of issue, which did not allow time for
adjustment.

     Since last year the bank of issue has demanded from the commercial banks
quarterly and monthly liquidity plans, compelling them to deal with this
question properly. The large banks established their "liquidity councils",
which prepare quarterly and monthly liquidity plans and evaluate their
performance.

     The medium-sized banks and the specialized financial institutions had no
liquidity problems. The banks set as a condition of building up the network
of their branches the building up of computer links and the communication of
data per telex daily.

Forty Years' Experience

     The Hungarian Foreign Trade Bank Ltd. founded in 1950 is one of the
oldest actors in the Hungarian banking system. It was established to deal with
international payments turnover, primarily with foreign trade-related tasks.
From the late 60s HFTB has been most active in taking advantage of the
business opportunities appearing in the wake of the economic reform and
expanding with the intensification of East-West relations. Since the mid-80s
it has essentially diversified its range of activities.

     Side by side with strengthening positions in the conventional business
branches, emphasis has been laid on acquiring a considerable share in the
financing of domestic enterprises, guided by the principle that no bank can
be strong in international markets if it is not strong in the domestic one.

     Today the bank plays a major part in the banking management of
convertible currency trade. For joint ventures being established it also fills
some sort of "house bank" function, in reliance on its wide range of services.

     In the currently most profitable line of business, the financing of
domestic enterprises, HFTB has been pursuing a modern financial engineering
type approach, within the framework of which it can use tailor-made financial
packages in meeting the requirements of its clients. Those include the
extension of forint credits, special arrangements for the extension of foreign
exchange credits, export pre-financing facilities, discount of bills and
export documents, leasing, and the like.

     The number of longer-term domestic credit and account relations is well
over a thousand; it is mostly joint ventures and dynamic enterprises concerned
with foreign trading activities which have shown confidence towards the
financial institution. Gabor Erdely, President and Director General of the
bank, was interviewed on the future and the US contacts of the institution.

     The past and present of HFTB has been characterized by a permanent
adjustment to the given possibilities, by a maximum utilization of the
latitude available. Do you have similar ideas for the future?

     I think the Hungarian economy is facing a decisive period. With the
development of a private economy more reality can be foreseen for an overall
progress and a gradual catching up through modernization. The development of
business mentality will result in gaining strength by a considerable stratum
of people, who will represent a vast business potential and encouragement for
our bank, partly as savers and investors and partly as entrepreneurs and
demanders of sophisticated financial services. At the same time, many
potential entrepreneurs featuring initiative capacities and imaginative
faculties are in need of the necessary financial and market knowledge and of
capital.

     HFTB feels overall responsibility for the support of the private economy.
Therefore, it is setting up an autonomous organizational unit for providing
services to private clients and it assumes the risks and undertakes the
covering of the considerable initial costs connected with the development of
this business line. It was this idea that guided it when-naturally keeping to
the fore the long-term goal of earning some fair profit-it decided to
participate in the foundation of the investment fund Euroventures Hungary B.V.

     What role do you want to play in the East European region?

     Following from their past, the transformed East European economies can
often only find constrained solutions in the field of international trade. I
am of the view that due to this the organization of indirect export and import
activity will be a service in demand. HFTB is a financial institute having
appropriate capacities in this respect, and therefore it wants to play an
active role in this field.

     The Foreign Trade Bank has extensive business relations all over the
world, including in the USA. Would you mind giving a brief description of your
relations with US banks and of your interests in the USA.

     Our banking relations with the USA have a history of over 20 years, and
currently we maintain contacts with all major banks active in the
international field. In 1989 Hungaian-US trade was worth 580 million dollars,
of which some 100 million dollars was handled by the agency of HFTB. In
addition, our institution maintains relations with US banks in the form of
short, medium and long-term deposits and finance credits. However, these do
not account for any significant volume in comparison to the total range of
business of HFTB and have been showing a declining trend since the early 80s.

     What do you think this is to be attributed to?

     Following the payment crisis in South America, the US banks were obliged
to moderate their engagements in other regions, including Eastern Europe.
Their interest in deals abroad decreased in general, due to declining
profitability on the one hand and to less sophisticated conditions about and
easier foreseeability of risks at home on the other. Simultaneously, direct
credit extension was made less significant by the greater emphasis laid on
investment and merchant banking activity. Accordingly, our current relations
are fundamentally of a service nature (we maintain correspondence relations
with over 50 banks), but on the part of US banks we are experiencing a
requirement for cooperation in the field of trade promotion. Moreover, HFTB is
also often requested by US banks to check their investment ideas and to seek
partners for them.

     I would like to make special mention of an unusual joint undertaking of
ours: in 1989 a major West German industrial and financial group and HFTB
established in the US an enterprise called Hungarian Finance and Trade
Corporation on a fifty-fifty ownership basis. The registered and paid-up
capital is one million dollars. The firm concerns itself with general agency,
trade and service activities and handles money and capital market operations.
In addition, it helps the creation of special financial funds, with a view to
promoting the realization of various goals of Hungary and other East European
countries.

Beata Majer

Banking Law in the Pipeline

     The development of the Hungarian financial system is expected to be
greatly livened up by the new banking law liable to be put into force on
January 1, 1991. After the clarification of various, still pending details,
this legislation will open wide the doors of the Hungarian economy to
international movements and will simultaneously give answers to lots of
questions connected with ownership. The flow of information is likewise
expected to liven up. We spoke to Tamas Rusznak, Deputy Head of the State
Banking Supervisory Board, about the forthcoming law.

     Nobody doubts the need for a banking law complying with a market economy
in Hungary, all the same, its birth is awaited with mixed feelings. What is
the reason for this?

     - This law is in close connection with lots of other laws - concerning
the budget, accountancy, the central bank, and the operation of investment
companies - and the imminent modernization of the foreign exchange code.
Therefore, following the free elections the government coalition had as one
of its responsibilities the creation of harmony between the legal rules
mentioned. In addition, a law of so great a significance can nowhere in the
world be framed in a hundred days; its elaboration takes two or three years
even in developed countries. And then in a country where a total restructuring
is taking place, this process naturally requires more time. Today more than a
hundred legal rules concern banks, that is to say, the banking system is not
without regulation currently either, on the contrary... However, those rules
are partly unharmonized and partly obsolete. Although at the introduction of
the two-tier banking system in Hungary various attempts were made to modernize
the regulation, the lack of differentiation and the rules, loose in comparison
to international standards, could not be eliminated. In fact, it would have
been impossible, and in practice it would have been inexpedient to regulate
an underdeveloped structure in a differentiated way. As a matter of course,
legislation must always comply with the conditions of the economy.

     To what extent will the law in preparation feature international
characteristics?

     - According to our intentions, it will reflect market economy principles
and conditions. However, there will be need for a range of transitory
regulations, and it will by no means be a simple task. For example, banks need
to be supplied with sufficient capital, and it must be specified which capital
elements may and must be taken into account in determining risks. Since the
risk limitations of banking activity are fundamentally related to the nominal
capital, often enough it sets limits to the operations of banks that their
nominal capitals are of a low level. In addition, the reserves of banks must
be increased at a predetermined rate.

     What contradictions will be resolved by the new law?

     - Today, quite apparently the Hungarian banks have the aspiration to
become, in shorter or longer periods of time, banks with universal
authorization, or commercial banks as they are called in Hungary. At the same
time, a number of services are simply lacking. The Hungarian Banking
Supervisory Board is of the view that what should indirectly be encouraged is
the elimination of such deficiencies, that such credit institutions should be
created as concern themselves with the currently lacking banking services. But
a bank only becomes universal, if it has the necessary capital and can rely
on a suitable professional background.

     And what about investment banks?

     - We would like this type of bank to appear, too. Naturally, it depends
on the state of the Hungarian money and capital market. Today, because of
economic risks, lack of information, lack of practice, and last but not least,
the demands for borrowing banks give preference to short-term businesses,
since these incur much less risk than long-term development credits.

     Can it be predicted what the structure of the Hungarian banking system
will be like in say one year?

     - I can't tell you that. But one thing is sure, namely that given the
legal possibilities the future will be greatly influenced by what the
government decision will be concerning the credit portfolio the financially
strong commercial banks inherited at the time of the creation of the
two-tier banking system. A stand must be taken, as soon as possible, on the
settlement of doubtful and irrevocable debts.

     Nowadays it is often said that the Hungarian banks can, to a certain
extent, go over into foreign ownership. There are opinions according to which
this is desirable, since then the Hungarians could come into possession of
advanced banking techniques, while others believe that one must be cautious.
What stand will be taken by the new law on this issue?

     - We are of the view that the current system, according to which it is
the discretional responsibility of the Council of Ministers to license or
refuse the establishment of mixed banks, must be maintained. One must be aware
that the Hungarian banking system is in the initial phase of its development.
In a similar situation, a lot is done even in market economies to protect the
domestic banking system. It must be made clear to everybody what benefits may
be entailed by the appearance of foreign owners, but attention must be called
to hazards, too. A policy of licensing should be pursued whereby benefits are
achieved and hazards are minimized.

     In conclusion, would you mind formulating the purpose of the banking law
in Hungary.

     - A relative stability of the banking system is indispensable for the
normal functioning of the economy. On the one hand, it is necessary for
depositors to see that their money is secure in order that savings increase,
and on the other hand, the smooth functioning of money circulation and the
assurance of the necessary credits are basic conditions for a feeling of
security for the whole economy. According to our intentions, the creation of
this is what the new law should promote.

M.B.

Dunaholding

     In Hungary the drafting of the Bill on the securities' and real-estate
investment trusts is now underway, and the regulation of the activities of
risk-capital investment companies is in the offing. However, life has
overtaken the legislation also in this field. As it is, already several firms
have been engaged in such activities in our country. One of these is called
Dunaholding Ltd. We have interviewed its President-General Director Dr.
Istvan Tamas on the activities and prospects of the company.

     Dunaholding Ltd. is primarily engaged in estate management,
privatisation, company transformation and consultancy. In addition it
undertakes the investment of alien (domestic and foreign) capital and also
acquires equity interests from own capital. The latter transactions include
the buy-out of firms, troubleshooting, leveraging of ventures and sales of
firms - all this coupled with financial advice. Parallel with this, it
purchases or redeems real estates.

     From what you said it seems that the company seizes every opportunity
that can be grasped under the circumstances, maybe even a bit more...

     That is so. Our firm engages in activities for which there is a demand,
but for which the regulations aren't yet complete. Nowadays Hungarian would-be
small investors cannot invest their money in investment funds. They may choose
between two alternatives: either they buy securities available on the market,
undertaking thereby no small risks, or they invest in firms like ours. Thanks
to Dunaholding's portfolio pattern, the investors' risk is lower than the
average, as we are participating in a growing number of ventures which even
now are admissible to the Stock Exchange.

     As regards foreign investors, Hungary still lacks that kind of service
which would assist their investing in various ventures. Even if such a firm
existed, a foreigner investing in a single Hungarian venture would undertake
quite a heavy risk. Thus, Dunaholding Ltd. is filling a gap as - on the one
hand it has access to the information required for such a service and is
prepared from the technical side, on the other hand it can offer its own
shares to investors providing the latter with the ownership of several
companies this decreasing the risks of their Hungarian investments.

     What kind of contacts does Dunaholding maintain with American investors?

     Of our Ft 800 mn registered capital a US investor has bought Ft 50 mn.
We will of course welcome the coming forward of foreign - including
American - shareholders, when we start the subscription of shares increasing
capital on November 15th.

     What can you offer to your potential investors?

     In view of the general level of our economy, our company can acquire
ventures at a relatively cheap price, and we can subsequently boost them. In
that way they become attractive to foreign capital. As for investors, what we
undertake is not limited to consulting but covers the full range of economic
tasks.

Like a Big Family

     Established in mid-1988 with a registered capital of Ft 2.3 billion, the
Post Bank and Savingsbank Corporation Ltd is proving to be one of the most
dynamic financial institutes within the Hungarian banking system. Its stock of
citizens' savings has been doubling every six months. Its clients can confirm
day-by-day the truth of the bank's slogan: "Close to Everyone" indeed they
are to be found everywhere, in the country's 3200 post offices and 5 regional
directorates.

     In two years the Bank - apart from collecting the population's deposit
accounts - has extended its activities through various commercial banking
transactions and embarked on granting citizen loans. By now the Post Bank Ltd
offers an almost full range of banking and saving-deposit services. In
addition, it would like to expand its services to foreign currency account
holders abroad. This and the Bank's foreign relations were the topic of our
talk with Gabor Princz, the 34-year-old president-general manager.

     What role does foreign capital play in the Post Bank's business policy?

     Well, this question really arose this year when the Post Bank and
Savingsbank Corporation increased its initial capital. At last year's
general assembly we had decided to roughly double our capital and to seek the
support of foreign partners. The Austrian savings bank - Osterreichische
Postsparkasse - had maintained traditionally good relations with our
predecessor, the Post Savings Institute dissolved in 1949. Our Austrian
partners had been watching our re-formation with great sympathy and indicated
their willingness to cooperate. That, however, could ensue only later, upon
our transformation into a mixed-purpose bank. Another Austrian partner of
ours, the Wiener Allianz, is one of the biggest insurance companies in the
neighbouring country. Together we have created - with the mediation of the
Hungarian Postal Administration - an Austro-Hungarian insurance company called
Providencia. The two Austrian partners have a 16 per cent stake in the Post
Bank.

     What are the advantages of this foreign equity participation in the work
of the Bank?

     I think we are just beginning to feel the advantages. For instance we
have been getting substantial help in various professional issues. Many of my
colleagues have attended study trips in Austria and elsewhere. By next year
we shall launch the citizens' current account project. We have been preparing
for this for a year and found that the West-European experience is
indispensable as it can accelerate our work.

     The postal savings banks are a big family throughout the world. Almost
every country has a post bank or similar establishment. Some of them act as
savings institutes, others function as commercial banks. We carry on both.
After we had been formed, we knocked at the door of nearly every
brother-institution globally: here we are, we are working and willing to build
contacts.

     Let us now move over to another continent! In the United States serious
economic and business interests are being attracted to East-Central Europe.
What is your experience? Does this interest also permeate the financial world?

     There the possibilities are more restricted, since centralized
foreign-exchange management prevails in Hungary - for the time being. We do
not have that kind of freedom of movement in the international money markets
as other foreign banks have. Nevertheless, I can see chances for cooperation
in various fields. One of these is the American-Hungarian Entrepreneurial
Fund destined to enliven the domestic private sphere. We are deliberately
focussing on the private sector. We have joined some central actions, such as
the Hungarian Foundation for Enterprise Promotion and we are launching a new
credit system specially destined to the development of the private sector, in
the autumn. I think we could assist the capital flow in the case of the
American-Hungarian Entrepreneurial Fund. After all, the private ventures
involved require relatively small capital and the capital flow necessitates a
sound financial infrastructure, which we possess.

     The US ambassador has told the Stock Market Courier, that United States
firms wished to set up many joint ventures in Hungary. Do you think the Post
Bank is ready to participate in this trend?

     Of course. In this country joint ventures are experiencing a renaissance.
American capital plays a substantial role in this. Thes Post Bank and
Savingsbank Corporation Ltd has been and will be engaged in the foundation of
joint ventures and keeps their accounts. We may even put up equity in such
ventures.

     What kind of authorization does the Post Bank possess to implement its
business policy?

     We have every possible authorization and licence a Hungarian banking
institution may have today. We are a commercial bank, we keep companies'
accounts, we grant loans and keep the deposit accounts of companies; we are
engaged in leasing and factoring; we deal with real estate investment jobs
and so on.

     For the moment we are not allowed to carry on foreign-exchange
transactions abroad, but this year we have already performed export-import
deals and documentary (:L/C:) transactions. I believe, the Hungarian banking
reform is by no means a closed process and I am confident that in one or two
years the Post Bank will be capable of engaging in any foreign-exchange,
foreign-currency deal.

Robert Gal

If America comes - it stays

     Professor Tibor Palankai on capital relations

     MANY PEOPLE TALK ABOUT THE LAND OF PROMISE WHENEVER THE UNITED STATES OF
AMERICA IS MENTIONED. BUT REASON WHY WOULD THE WORLD'S LEADING POLITICAL AND
FINANCIAL POWER BE INCLINED TO HELP SUCH A SMALL COUNTRY? WHAT COULD GUARANTEE
THAT EVERYTHING THAT HAS BEEN MENTIONED AS A FORM OF AID AND SUPPORT DOES NOT
REMAIN A PROMISE ONLY?

     WE DISCUSSED THE MATTER WITH PROFESSOR TIBOR PALANKAI, OF THE BUDAPEST
UNIVERSITY OF ECONOMIC SCIENCES.

     - The possibility of a new "Marshall-aid" plan crops up quite often these
days, a prospect which would lead the Central European region into developed
Europe. Do we really have a true chance?

     - The USA is one of the greatest debtors of the world. It does not have
residues because it had to finance credits given to foreign countries out of
its strongly adverse budget in the eighties. Today it could only redistribute
inside its own aid programme, but this would doubtless be too scarce for a new
Marshall aid. At the same time, as a great power it is essentially interested
in the political and economic consolidation of the former socialist countries.
Taking all this into consideration the probability of central aid is low, but
private capital may prove to be determinative.

     - Private capital cannot be characterised by charity; it wants profit at
any price. Is Hungary, as a country of small area adequate territory?

     - If we put the question whether it is worthwhile investing in Hungary,
the first answer is: no. We are talking about a small market, it is not the
aim of big American companies to satisfy such a marginal demand. But if we
examine the question further we can then answer with a yes. Hungary
constitutes an important part of the Central European region, which means in
fact a 130 million market, and that's something. What's more, Hungary connects
with the Soviet market! Which in fact means that American private capital can
find its own profit. And there is a further, very important factor. Hungarian
production can be directed back to the Western European market. The USA wishes
to maintain its economic position in the united Europe, and if the Hungarians
will join organically the European Community then this is another reason why
American companies do have an interest in investing in Hungary.

     - Getting into the Soviet Union can be said to be a desire of all
American companies. It is often mentioned on such occasions that Hungary is
the "bridge".

     - Hungarians have traditional personal and business contacts with Soviet
firms. Thus it is in the interest of the USA to cooperate with an open
Hungary, and have a perspective of mutually establishing production bases.

     - But why Hungary? Since Prague and Warsaw could just as well be
mentioned...

     - Hungarians are first in the line as regards market creation. And
although they are dissatisfied with the infrastructure, the standard is still
better in Hungary than in the surrounding countries.

     - How do you see USA companies' inclination?

     - American companies are quick and venturesome. Their willingness to
take risks greatly surpasses that of Japanese companies, which are still very
careful when it comes to Eastern Europe. European companies are not expanding
at the moment. In short: the appearance of American companies on the scene
could function as a catalyst. I believe that if American companies enter
Hungary, they will stay, too, and the others will follow their example.