Magyar Hitel Bank, Kereskedelmi Bank and Budapest Bank were carved out of the National Bank of Hungary in 1987 and at this time these banks were controlling 80% of the economy. Hungarian's first step in transforming its banks was to invite foreign investors to the country in order to create a competitive environment so the Hungarian banks would be forced to improve their performance. To stimulate foreign investment Hungary has offered generous tax breaks to foreign banks in 1980 and 1990. There were also 12 smaller institutions completing the governments bank portfolio. The next thing to attract foreign investors was the privatization of the banks. The government is seeking to transfer the banks in its control into private hands for several reasons such as: they would provide new capital, a major foreign investor would bring new international business opportunities with it and they would also provide the national bank with a more effective transmission mechanism for monetary policies. So the government is mainly looking for a foreign "professional " investor who has the necessary expertise and capital.

The Hungarian government has sponsored a parade for 17 foreign merchant banks in early 1993 and appointed privatization advisers for each of the Hungarian institutions for sale. A bank privatization committee has also been established, bringing together the representatives of the AVrt, the Ministry of finance, NHB, the Bankers association, the State Banking Supervision office and CSFB under the chairmanship of State Secretary Tibor Pongrasz. The group's purpose is to ready the banks for sale and find investors for them. As a result of this number of foreign banks has already moved into the country. Creditansalt-Bankverein, Westdeutsche Landesbank and the Citibank have wholly or partially owned subsidiaries in Hungary. About half of the countries odd banks are now wholly or partly owned by non-Hungarian institutions.

Foreign banks get many advantages if they buy the shares of a big Hungarian bank. They would get ready access to a much bigger corporate market and a special advantage on the lucrative trade finance front. Such potential has tempted six of the 25 institutions J. P. Morgan approached in 1993 to show an active interest in acquiring shares of MKB. MKB was founded in 1950 as a foreign trade bank and still has a 20% slice in the market. MKB is supposed to be Hungary's premier commercial bank in terms of foreign businness and assets quality. When the three banks were carved of the NBH they all inherited a portfolio of loans to state-owned companies which were already in financial difficulties. Since the Finance Ministry demanded big dividends from the states bank shares the banks could not build up adequate reserves by retaining profits. The banks' situation was made worse by their own management and their own policies. Loans were given to new customers even without a proper credit check resulting in an increase of bad debts. By the end of 1992 the banks' bad debts were heading 300 billion forints ($3 billion) and in June 1993 several banks had declared bankruptcy as a result of bad loan practices. The big three banks suffer from a variety of other financial woes such as depending mainly on depressed corporate sector and financial markets for their funding. Although the commercial banks are trying to move into the retail market it would probably take years for them to have balanced balance sheets.

The bank privatization committee has agreed in late November 1993 to recapitilize the banks. The plan involved raising 110 billion forints with special 20 year state-bonds and using the proceeds to buy new shares issued by eight commercial banks including the big three and OTP. Finance Minister Ivan Szabo has stated that as a result of this the capital ratios were brought up to at least zero by the beginning of 1994. Raising of 30 billion forints in addition to the previous 110 billion is planned in near future to take ratios to a minimum of 4% of risk-weighted assets. Finance Minister Szabo also insists that bailing out the banks increases their appeal. And as a part of the deal banks are expected to set targets for their lending, introduce strict management controls, monitor the performance of their customers more effectively and ensure the credit worthiness of the companies when issuing new loans to them.

Now it seems that Hungary is facing the problem of privatization of the countries state-owned banks which are inefficient and undercapitalized institutions generally burdened with bad debts. But Hungary has established some plans to recapitilize them and turn them into efficient and well managed institutions. Their main concern is to attract foreign investors which would improve the performance of the banks and stimulate foreign investment on many industries. Most of the banks seem to be in bad shape and in order to succeed in privatization of the banks Hungary should turn them into efficient and attractive institutions. 

1. Heti Vilaggazdasag, March 28, 1992, 82 words, HUNGARY: CAPITALISATION ISSUE AT LEUMI-HITELBANK

2. Figyelo, September 12, 1991, 283 words, HUNGARY: MHB'S GYOR DIVISION AMONG THE BANK'S TOP PERFORMERS

3. Finance East Europe, February 20, 1991, FINANCE/BUSINESS, 214 words, HUNGARY: Joint ventures


5. BBC Monitoring Service: Eastern Europe, Dec 23 1993, 587 words "Hungary: Programme for Privatization of Banks"

6. MTI-Econews, Feb 25 1993, 414 words, " Bank Privatization Race Against Time"

7. MTI Econews May 13 1992, 319 Words "Government Plans For Bank Privatization"

8. MTI-Econews Jan 1991, 335 words " Hungary: Banks to be Privatized in Hungary"

9. BBC Monitoring Service: Eastern Europe, Jul 21 1994, 240 words "Hungary:Two Foreign Banks Acquire Shares in Hungarian Foreign Trade Bank"

10. Euromoney Centeral European, June 1 1993, 1640 words, "Hungary:" Bank Privatization Hampered"




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