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Financial Institutions

The economic reforms of the mid- to late 1980s resulted in a restructuring of the country's financial institutions. Up until that time the institutions included the Ministry of Finance; the Hungarian National Bank; five major and several smaller commercial banks, some with foreign partners; the National Savings Bank; small venture-capital institutions; and a nascent insurance industry.

The Ministry of Finance oversaw the financial and banking system and the insurance industry. The ministry also supervised foreign-exchange policy and concluded international financial agreements through the Hungarian National Bank.

In 1987 Hungary unveiled a new, two-tier banking system consisting of banks that were supposed to function as genuine, profit-making credit institutions. Before the reform, the Hungarian National Bank dominated the banking system, functioning as the central bank, the bank of issue, and the main commercial bank. All banks acted as agents of the state, and their lending decisions were based not on profitability but on government guidelines geared toward implementing the economic five-year plan.

The 1987 reform stripped the Hungarian National Bank of its commercial-banking function, but it remained the country's bank of issue and its central bank. In its role as the bank of issue, the Hungarian National Bank established the national payment and accounting system, promulgated rules on money circulation, coordinated Hungary's relations with international financial institutions, and determined foreign-exchange rates. As the central bank, the Hungarian National Bank regulated the money supply using credit policy, interest rates, obligatory reserve requirements, and other means. The Hungarian National Bank was a member of the International Bank for Economic Cooperation and the International Investment Bank, both in Moscow. It was also a shareholder in the Bank for International Settlements in Basel, Switzerland, and owned the Hungarian International Bank in Britain and the Central Wechsel- und Creditbank A.G. in Austria.

The reform created five major commercial banks: the Hungarian Foreign Trade Bank, the General Banking and Trust Company, the Hungarian Credit Bank, the National Commercial and Credit Bank, and the Credit Bank of Budapest. They were all Hungarian-owned joint-stock companies and were licensed to perform a full range of commercial-banking services and provide short-term credits for technical-development projects and the implementation of new technology. The government did not permit these banks to establish direct foreign banking relations, however, or to offer banking services to individuals. The Hungarian Foreign Trade Bank handled foreign-currency exchange, countertrade, letters of credit, and industrial cooperation deals. In addition, it provided short-term import and export credits and loans for projects geared toward expanding exports. Eleven smaller financial institutions also offered commercial-banking services.

Hungary has joined with foreign investors to form several other commercial banks. The Central-European International Bank (CIB), which had US$436 million in assets in 1986, performed lease financing and prefinancing of export contracts. Founded in 1979, CIB was the first offshore bank (a bank set up in a foreign country to take advantage of the particular regulatory environment of that country) in a Comecon country and the first joint venture in Hungary in which Western partners took a majority stake. The Hungarian National Bank held a 34- percent share, and six Western banks each held 11 percent shares. Another commercial bank, Citibank Budapest, was a joint venture of Citibank Overseas Investment Corporation and the Central Wechselund Creditbank A.G. Citibank Budapest was the first Western bank permitted to take direct part in commercial banking activities in Hungary. It was a full-service commercial bank that operated in forints and convertible currencies. Unicbank was a third commercial bank offering equity financing for new and expanding ventures and short-, medium-, and long-term loans to state-owned enterprises, cooperatives, joint ventures, and private businesses. Six Hungarian financial institutions and cooperative banks from Austria and West Germany joined with the International Finance Corporation, a subsidiary of the World Bank, to form Unicbank in 1987.

Other than local savings cooperatives, Hungary's National Savings Bank was the only financial institution permitted to serve individuals in the late 1980s. The National Savings Bank handled savings accounts, made loans to individuals and private businesses, and engaged in foreign currency exchanges through a countrywide network of branches. The bank also handled convertible-currency accounts for Westerners, offering competitive interest rates and protection from Western tax authorities. Other small venture-capital institutions allowed by a 1982 government decree provided either credit or equity to new businesses engaged in innovation, technical development, and the like, that the traditional financial institutions were not equipped or inclined to finance.

In addition to these financial institutions, in the late 1980s Hungary had two separate insurance companies. Spurred by rising inflation in Hungary, the insurance companies had become strong advocates of further economic reform, especially the broadening of laws on equity investment. One of the companies made direct investments in a private hotel and a brewery and planned to invest in the construction of office buildings.

Data as of September 1989

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