Discussion Papers 1999.
Spatial Research in Support of the European Integration 69-85. p.
THE HUNGARIAN BANKING SYSTEM
69
THE HUNGARIAN BANKING SYSTEM AND REGIONAL
DEVELOPMENT IN TRANSITION (1987-1997)
ZOLTAN GAL
In this essay I would like to give a short overview of the spatial structure and the
development tendencies of the banking network on the regional and settlement level
which occurred during the first decade of two-tier banking. Allocation of branches of
the banking institutions plays an important role, not only in the development of the
national economy as a whole, but in the development of the local and regional econo-
my, in innovation and, last but not least, in the organisation of production and service
sectors. The elements of the banking network connect to regional development as the
supply section of the business services therefore the density and the number of banks
and their branches are an important indicator of regional economic development.
Surveys on the regional structure of banking are all the more important because in
the last decade the Hungarian banking system underwent fundamental transformation
followed by bankruptcies, bank consolidation, privatisation processes, sometimes
accompanied by strong state intervention. The role of the state in these processes very
often became a bone of political contention.
DEVELOPMENT AND SPATIAL STRUCTURE OF THE HUNGARIAN
BANKING SYSTEM
(1987-1997)
The first important step forward in the modernisation of the Hungarian financial
sector was the creation of the two-tier banking system in 1987, which was more adapt-
ed to a market environment. Following this Act, the National Bank of Hungary, per-
forming primarily central bank functions, and the institutionally-separated commercial
banks were set up in January 1987. Commercial banks who originally had corporate
clientele were admitted to the retail market, while financial institutions were given
commercial banking licenses.
If we take ten years of development in the banking system into consideration it can
be divided into different periods. The short period between 1989-1992 was the peak
time for foundation of new banks. Competition was also increased by the entrance of
the new foreign-owned and joint-venture banks founding their own subsidiary banks in
Budapest.
After the period of rapid and extensive expansion the banking- system was charac-
terised between 1992-1995 by the first bankruptcies and failures. This automatically

Gál, Zoltán: The Hungarian Banking System and Regional Development in Transition (1987–1997).
In: Spatial Research in Support of the European Integration. Pécs: Centre for Regional Studies,
1999. 69–85. p. Discussion Papers. Special
70
ZOLTAN GAL
led to the loss of market shares of the Hungarian owned banks and strengthened the
position of foreign banks. Pecuniary difficulties of the mainly state-owned banks made
inevitable the restructuring of the Hungarian banking sector, together with the loan,
bank and debtor consolidation. The main purpose of bank consolidation and privatisa-
tion was to decrease the percentage of state ownership in the banking sector to at least
below 25%.
In the third period, commencing in 1995, a stabilised and a more competitive bank-
ing system emerged, characterised by successful privatisation of the banking system
resulting a slower expansion in the banking from 1996 onward. In this latter period of
development the branch network expansion was one of the major phenomena. This
was due to business policies of banks shifting from the corporate to the retail market,
intending to gain more of the market shares through easier access to retail customers,
and on the other hand strengthening the competition which force mainly foreign banks
without branches to build networks in order to hold their ground.
One of the most important alterations in the Hungarian banking system was that the
role of foreign capital in ownership was determined.  (Table 1)  As the consequence of
foreign capital inflow into the Hungarian banking, the structure of ownership was
entirely transformed; parallel with the process of the significant decrease in state own-
ership (17% recently), shares of foreign capital attained 65% of the banking system,
Table 1
Proportion of foreign capital in the Hungarian banking system
1987
1991
1996
1
1
ope
Germany
2
260
0.4
884
0.7
7
15  503
7.4
a
2
260
0.4
5
3 817
3.1
6
14  508
6.9
1
110
0.2
3
884
0.7
4
4 987
2.4
Italy
1
110
0.2
4
1 419
1.1
5
4 427
2.1
Holland
0
0
0.0
4
1 220
1.0
2
2  701
1.3
Russia
0
0
0.0
0
0
0.0
1
3  500
1.7
America
USA
1
806
1.3
1
1 660
1.3
2
9  802
4.7
Far East
Japan
1
110
0.2
3
1 434
1.2
3
4  893
2.3
Korea
0
0
0.0
1
3 154
2.5
3
6 094
2.9
International banks
EBRD, IFC, CECD
1
150
0.2
4
803
0.6
3
8  510
4.0
Others
0
0
0.0
2
1 652
0.8
10
9  759
4.6
Sum-total
3  1 910
3.1
17
16 685
13.6
29
84  684  40.3
1 Foreign bank shares in number of Hungarian banks
2 Amount of foreign capital in registered capital (million HUF)
3 Proportion of foreign capital in the total registered capital of Hungary (%)

Gál, Zoltán: The Hungarian Banking System and Regional Development in Transition (1987–1997).
In: Spatial Research in Support of the European Integration. Pécs: Centre for Regional Studies,
1999. 69–85. p. Discussion Papers. Special
THE HUNGARIAN BANKING SYSTEM
71
gaining a majority of market shares within a short time. This very high proportion of
foreign capital is unique not only compared with Poland (where it was 8.5% in 1994)
but in the European context it is also one of the highest. (In the UK 53% of ownership
is foreign, but in Finland it is only 1%, in Germany 2%). The main investors are,
according to the portion of invested capital, still the leading German and Austrian
entrepreneurs, following by the American, Dutch, French, Japanese and Korean
investors. Activity of the Dutch banks is indicated by the fact that all the top-ranking
Dutch banks opened subsidiaries in Hungary (ABN Amro, ING, Rabobank) but
British banks are conspicuous by their absence.
To summarise the role of foreign capital in the Hungarian banking system it can be
said that such a rapid process of privatisation of banking without foreign capital inflow
would have been impossible. Foreign capital investment has contributed significantly
to the growth of international competitiveness of Hungarian banking. (Per capita
investment of foreign capital accounted for 1,520 USD in Hungary, compared to 680
USD in the Czech Republic and 318 USD in Poland till 1996.)
In contrast to Hungarian traditions, a specialised rather than universal banking sys-
tem has been created, sorting different type of banks by functions (32 commercial
banks, 8 specialised banks, mortgage banks and building societies, 246 co-operative
savings banks). Compared to the network which existed at the turn of the century
(when the number of independent banks scattered throughout the countryside were
overshadowed within the banking network, and there were proportionally few branch-
es in banking before World War I, consequently only 5.7% of the network was concen-
trated in Budapest), the recent banking system is characterised by strong spatial
concentration. (Figure 1)
The fact that all the banks except one are based and headquartered in Budapest
results in a deformed structure in the banking system. Banking in Hungary is still the
most centralised branch of the economy with a definite centre in Budapest. The lead-
ing position of Budapest in the financial sectors, especially in banking and insurance, is
more striking than in any other sectors. Consequently local and regional banks are
missing from the Hungarian banking system. (However, this strongly monopolistic
structure is more in line with international tendencies, which are characterised by
overconcentration at the global level; in contrast to other transitional economies, such
as Poland, where the role of regional banking is significant.) Branches of banks based
in Budapest have much less room for making independent decisions than the branches
of county seats during the communist period.
In contrast to the concentration processes in the global markets the growing signifi-
cance of regionalism requires establishment of the regional money markets and insti-
tutions financing regional policies. The boom of private enterprise, privatisation, the
necessity of their presence in the local markets and competition for the retail markets
also requires the expansion of the banking network in the countryside. Besides the cor-
porate and the retail market project, financing will be one of the most profitable busi-
nesses for banks which have to support the regional development programmes through

Gál, Zoltán: The Hungarian Banking System and Regional Development in Transition (1987–1997).
In: Spatial Research in Support of the European Integration. Pécs: Centre for Regional Studies,
1999. 69–85. p. Discussion Papers. Special
THE HUNGARIAN BANKING SYSTEM
73
financing infrastructural, power and telecommunicational investment and co-operating
with regional and local administrations.
From the deformed spatial structure of the banking network of the early 1990s arose
more difficulties:
-
Lower density of the network meant both the low level of availability of
branch offices and the higher structural polarisation of the branch net-
work. On the one hand this meant that the rapid expansion of banking,
initially concentrated almost exclusively in Budapest, was not followed by
the extension of the branch network at a rapid pace in the countryside.
On the other hand the new banks established in 1987 inherited a particu-
lar branch network from the National Bank of Hungary, since branches
were missing from certain county seats, accompanied with a spatial-
regional asymmetry.
-
The other marginal pole of the national banking system is the dense net-
work of the co-operative savings banks scattered throughout the country-
side. The most important disadvantages of these are their weak financial
standing and lack of strong centres or headquarters. Despite the number
of co-operative savings banks being 1,740, thereby accounting for 64% of
the total national network, most of these small savings banks situated in
the smaller towns and villages have a very low capital circulation and can
supply only a narrow range of services.
The start of the 1980s and 1990s was the first period of boom in the establishment of
banks: 17 commercial banks founded about 350 branches, concentrating 85% of the
new offices into the provincial cities. During the next period of the two-tier banking
system between 1992-1996 the network was considerably restructured. Expansion of
the banking system was restricted very much by the huge inherited debt imposed a
large burden on the institutions. The smaller banks went bankrupt (Ybl Bank), others
were liquidated (Dunabank, Iparbankhaz) or some of them were merged. The big
banks rescheduled their policy of network building and a few closed some of their
branch offices, but the other banks such as Budapest Bank and Postabank started a
spectacular growth in network expansion. Accordingly, between 1992-1996 the number
of banking institutions decreased due to the bankruptcies, mergers and the purchasing
processes of privatisation. In only two years (1995-1996), six banks were liquidated or
merged into other commercial banks. (Figure 2)
The foreign-owned banks started to expand their branch network (by purchase
through privatisation and opening new branches) later and more cautiously. There are
different reasons for this policy. On the one hand, these banks were strong enough in
terms of capital intensiveness, therefore they could adjust the pace of network building
to their own pace of development. On the other hand, foreign-owned banks were first
of all interested in corporate banking supplying services for the joint-stock companies.
However, the foreign owned banks switched to rapid expansion, gaining both larger
market shares and leading positions in terms of profitability, and grew more rapidly
than the bigger banksl.

Gál, Zoltán: The Hungarian Banking System and Regional Development in Transition (1987–1997).
In: Spatial Research in Support of the European Integration. Pécs: Centre for Regional Studies,
1999. 69–85. p. Discussion Papers. Special
74
ZOLTAN GAL
Figure 2
Branch network of Hungarian commercial banks, 1997 (not including OTP)
37
140
120
100
•••C
el
/.3
4E'
60
.4%
E
45
40
23   21
20
20
1c
14 14 12
ri  8 8 8 7
3 3

0
E
k
k
E
1-f,9 111i
..
.1
Ban
<
•
LQ
1
1.1
1)
-
t
ekban
0  A
g
kar
U
Ta
HYPO-
z
Banks
Recently, the tendency of concentration has decreased due to the successful expan-
sion of the foreign-owned and medium-sized banks 2. The balance of power in the
banking system which held sway at the end of the first decade of two-tier banking will
be expected to readjust according to growing competition for larger market shares.
According to surveys, a shift from the moderate deconcentration will emerge and the
few large banks (from the group of the medium-sized and the foreign-owned ones)
with considerable financial standing will dominate in the retail market. Besides these,
10-15 banks will play an important role in the banking system.  (Table 2)
REGIONAL STRUCTURE OF THE
HUNGARIAN BANKING NETWORK
Surveying the diffusion of the banking system by means of its geographical location
and settlement hierarchy is very important.
At the birth of the two-tier banking system the network was characterised by a cer-
tain spatial balance due to the evenly-allocated branches of the OTP Bank (National
Savings Bank), located in more than 270 settlements. After the foundation of the new
commercial banks significant spatial asymmetry occurred within the country since cer-

Gál, Zoltán: The Hungarian Banking System and Regional Development in Transition (1987–1997).
In: Spatial Research in Support of the European Integration. Pécs: Centre for Regional Studies,
1999. 69–85. p. Discussion Papers. Special
THE HUNGARIAN BANKING SYSTEM
75
Table  2
Annual balance sheet footings and number of employees in the  Hungarian banking,
1991-1996
Date Of
Number
Balance sheet footings(million HUF)
Number of emp oyees
Owner-
founda-
of
ship
tion
branches
1991
1993
1995
1996
1991
1993
1995
Big banks
I.  on.
1949
423
669 599
830 958  1072 777  1256 085
12  659
14 367
2. Postabank
1988
41
89 863
168 085
269 632
378 718
987
1  472
2  173
3. KIIB
1987
174
214 234
231  723
342 294
360 003
3 891
4  112
3 837
4. MKB
1950
20
238 319
238  293  330 516
347 901
1  500
1  512
1  333
5.  11.1H11'
1987
78
321  824
357 463
246 091
250 873
4  180
4 322
3 095
6. Budapest Bank
1986
74
146 067
156 61(5
212 931
225 380
2 085
2 952
2 831
7. CIB
1979
1)
35  000
76 010
144 113
175 021
267
184
174
8. C1B Hungaria
1988
12
26 341
45  135  126 424
134 712
..
168
268
9. Creditanstalt
1990
12
28 400
27 202
77 074
116 119
111
193
343
Medium-sized banks
10. Raiffeisen Unicbank
1986
28 450
36 083
77 117
109 630
88
152
309
I I. Mezaankh
1986
29 984
34 544
80 883
97 152
41)1
657
720
12. Citibank
1985
35  248
36 474
59 628
93 196
97
150
216
13. MFB Rt.
1991
-
20 468
57 81)5
91 921
-
117
184
14. IEB
1980
35  090
40 540
62 387
91 117
202
323
417
15. ING Bank
1991
2 564
20 283
64 558
84 005
..
80
..
16. Commerzbank
1993
11  027
57 994
75 270
-
40
74
17. AEB
1922
19  766
26  148
37 970
71 657
270
294
279
I8. Takarekbank
1989
36 760
37 323
40 360
66 789
281
509
613
y
19. BNP- Dresdner Bank
1990
i
9 836
15  014
35 252
50 639
90
115
20. Credit Lyonnais
1992
12 577
28 627
42 160
..
21. HYPO-Bank
1993
4 831
22 349
40 198
-
3(1
160
22. DAEWOO Bank
1989
11  291
12 854
25 ((48
38 774
44
54
76
23. ABN-Amro r
1993
-
5 566
29 826
38 430
-
19
51)
24. EKB
1991
6  612
8 71)0
23 081
33 631
34
46
110
25. WestLB Hungaria
1985
12 890
9 186
20 372
31 975
113
122
110
26. Penzintezeti Kozpont
1983
15  364
24 001
29 768
-
354
244
27. Polgari Bank
1993
2 900
27 069
29 764
-
210
291
28. Konzum bank
1986
16 016
11  725
12 894
27 590
179
332
354
Small banks
N
29. Realbank
1989
I
10 200
13  948
16 622
20 704
63
..
..
WI O
.10. Volksbank
1992
-
1  227
9 356
15 579
-
24
52
.
, 0 C 0
31. Merkantil Bank
1988
4 508
5  530
11 772
13 689
66
90
93
32. EXIMBANK
1994
-
1  267
5 196
12 134
-
..
66
33. Corvinbank
1984
11)  449
18  375
12 558
11 888
91
173
193
34. Porsche Bank
1994
-
500
7 834
7 072
-
..
52
35. Opel Bank
4 630
•--.
36. Ilanwha Bank
1990
0
4  206
5 613
4 551
4 371
65
74
59
.
..
37. Kvantum Bank
1991
1  036
1  050
3 164
3 581
16
39
68
38. Deutsche ;lank
39. IC Bank
1993
40. RilkOczi Bank
1992
41. Nomura
1991
i
2 994
0

-
979
1 087
2 330
-
22
..
.:"
..
-
1  056
1 072
1 689
-
18
22
0.
1  042
1  037
780
774
8
11
10
H - Hungarian ownership HT - majority of Hungarian sl arcs
K- foreign ownership
KT - majority of foreign shares
KV - joint-venture with foreign ownership
a  State of development at the end of 1996
In 1995 together with balance sheet footings of Agrobank
ABN-Amro Bank purchased 89% of MHB in 1996

Gál, Zoltán: The Hungarian Banking System and Regional Development in Transition (1987–1997).
In: Spatial Research in Support of the European Integration. Pécs: Centre for Regional Studies,
1999. 69–85. p. Discussion Papers. Special
76
ZOLTAN GAL
tarn banks were missing from particular regions and county seats: KHB (Commercial
Credit Bank) dominates in the Great Plain region, MHB (National Credit Bank) in
.
Northern Transdanubia and BB (Budapest Bank) around Budapest.
The spatial appearance and the regional diffusion of the new branches of banks
reflected the recent Hungarian economic processes:
-
The prevailing majority of economic associations, within it the joint-ven-
ture companies and the accumulated capital outside Budapest flowed
into the Transdanubian region, firstly into the north-western part.
-
The structure of diffusion of the banking network had followed this spa-
tial pattern for the first time by the beginning of the 1990s. At that time
banks were interested mainly in building up branches in the Transdanubian
region. This was evident because the largest unexploited territories of
financial services were situated in Western Hungary. (Figure 3)
-
Significant differences among the greater regions had practically evened
out, except in Northern Hungary, by 1990, and the disadvantage of the
Transdanubian region came to the end. From the mid-1990s, after satura-
tion of Transdanubia, the larger cities of Eastern and Southern Hungary
became the main targets of branch network expansion.
There were significant differences behind the well-balanced greater regions con-
cerning network density within the regions and counties. In some counties the number
of new branches exceeded ten between 1978-1990 (Gyor-Moson-Sopron, Baranya,
Hajdil-Bihar), while in other places only a few branches were opened (Fejer,
Komarom-Esztergom, Tolna) and in some counties exclusively planted only in the
county seats (Borsod, Fejer, Szabolcs-Szatmar-Bereg). An extreme exception was
Esztergom-Komarom county where no branch was opened between 1987-1990 in
Figure 3
Distribution of banking network among Hungarian regions, 1996
Central Region
28%
Northern
Northern Hungety
Transdanubia
10%
23%
Northern
Great Plain
10%
Southern
Southern
Great Plain
Transdanubia
13%
16%

Gál, Zoltán: The Hungarian Banking System and Regional Development in Transition (1987–1997).
In: Spatial Research in Support of the European Integration. Pécs: Centre for Regional Studies,
1999. 69–85. p. Discussion Papers. Special
THE HUNGARIAN BANKING SYSTEM
77
Tatabanya, the county seat, where economic depression affected its heavy industrial
background. For instance, during the short period between 1995-1997 there was no
increase of the branches in North-Western Transdanubia, as it was viewed as a saturat-
ed region.
A general characteristic of the period between 1992-1996 was the growing impor-
tance of Budapest in the expansion of the branch network (319 bank offices made up
26% of the national network in 1997). All banks starting to open new branches have
opened 2-3 new offices in the capital city in the past five years, and last year 20 banks
had branches there.
Within Budapest most of the principal offices of banks are based in the inner dis-
tricts. The spatial concentration of the institutions gives a strong impetus to the forma-
tion of the central business district, where the office buildings of banks became an
important functional-morphological element of the townscape. In 1990 about two
thirds of the financial organisations were based in the 5th District, namely in the core
area of the city centre itself which is still the most popular domicile for new banks. By
the end of the 1990s business (financial) functions of the 5th District had became satu-
rated and a few years ago the financial organisations started to diffuse towards the sur-
rounding inner city districts. Despite the expansion of banks the low density of network
in Budapest is surprising, namely one office per 7,758 inhabitants (15,000 without the
OTP). This fact unambiguously demonstrates the low level of the extension of the
banking network in the capital city. The lack of banking services is more striking in the
outer area of Budapest, resulting in overcrowded city centre branches. (Figures 4, 5)
In Hungary the number of banking institutions is 1,319, together with 1,800 co-oper-
ative savings banks, stands at about 3,100. Taking the figures of the network density
into account, there is one office per 3,200 inhabitants, which is still a much lower den-
sity than in the Western European counterparts, where there is one bank per 1,400-
1,500 inhabitants. In spite of the boom in the foundation of new branches (last year a
branch office opening ceremony took place every week on average) mainly by the for-
eign and joint-ventures banks. These banks still do not have enough branches in
Hungary, although spectacular progress has been made, especially since 1996. 24 banks
had a nation-wide branch network in 1997. (Figure 6)
Surveying the banking network according to the network density figures we can find
a few counties with lower density of banks. Szabolcs-Szatmar-Bereg and Pest counties
are the most unsupplied areas, accounting for half of the national average in 1995. In
the case of the former, its economic and geographical situation, the activity of entre-
preneurs, the low level of foreign capital inflow etc. would be the explanation for the
smaller interest of the banks. In the case of Pest county, the capital city causes back-
wash effects which influence the development of the banking network. Relative to
population, Hajdii-Bihar, Borsod-Abauj-Zemplen, Komarom-Esztergom, Nograd and
Fejer counties were also badly supplied by banking services. These counties could be
the main target areas of expansion in the near future.
Surveying the distribution of the banking network according to the settlement types
is more expedient than investigating at county level; all the more so as banking institu-

Gál, Zoltán: The Hungarian Banking System and Regional Development in Transition (1987–1997).
In: Spatial Research in Support of the European Integration. Pécs: Centre for Regional Studies,
1999. 69–85. p. Discussion Papers. Special
78
ZOLTAN GAL
Figure 4
Spatial distribution of branches in Budapest, 1996
(without branches of OTP and mutual savings banks)
60
50

hes 40

branc
f
o 30
ber
Num 20
10
10
6
4 4
rl 3 3 3 3
2 2 2
0
I
I
Districts
Figure 5
Banking network density of Budapest
(number of inhabitants per office)
0 - 1 000
1 000 - 5 000
5 000 - 10 000
10 000- 15 000
15 000 - 53 000

Gál, Zoltán: The Hungarian Banking System and Regional Development in Transition (1987–1997).
In: Spatial Research in Support of the European Integration. Pécs: Centre for Regional Studies,
1999. 69–85. p. Discussion Papers. Special
80
ZOLTAN GAL
Table 3
Banking services in Hungarian cities, 1996
1
2
3
4
5
6
7
8
9
10
Hungary
10  212  300
255  043
305  3 216
630
3  175
16  210
79
405
249.7
Budapest
1  906  798
108  865
64
253
125
7  537
15  254
430
871
570.9
Countryside
8  305  502
146  178
278  2 548
505
3  260
16  447
57
289
176.0
Cities - altogether
2  082  932
61  951
...
436
274
4  777
7  602
142
226
297.4
- In Danubian
counties*
736  898
22  225
127
199
305
4  107
8  215
118
230
296
Debrecen
214  228
5  481
20
29
16
7  387
13  389
189
343
255.8
Dunairiveiros
57  970
1  508
5
8
4
7  246
14  493
189
377
260.1
H6dmez6visarhely
50  631
4  374
5
8
4
6  329
12  658
547
1 094
863.9
Miskolc
193  905
4  280
19
31
18
6  255
10  773
138
238
220.7
Tarabdnya
75  258
1  679
9
13
5
5  789
15  052
129
336
223.1
Salgetadin
48  488
1  060
8
9
6
5  388
8  081
118
177
218,6
Szolnok
81  336
2  213
10
16
10
5  084
8  134
138
221
272.1
Nagykanizsa
55  624
875
6
12
6
4  635
9  271
73
146
157.3
Nyiregyhiza
119  317
3  650
16
26
14
4  589
8  523
140
261
305.9
Szikesfeherwir
108  543
3  625
17
25
17
4  342
6  385
145
213
334.0
Kaposygr
70  529
2  135
11
17
10
4  149
7  053
126
214
302.7
Szombathely
84  745
1  996
16
22
12
3  852
7  062
91
166
235.5
Szeged
173  820
7  267
21
46
20
3  779
8  691
158
363
418.1
Pecs
164  872
5  595
25
45
23
3  664
7  168
124
243
339.4
Kecskemet
108  345
3  413
19
30
15
3  612
7  223
114
228
315.0
Zalaegerszeg
62  077
1  663
13
19
14
3  267
4  434
88
119
267.9
GA.
130  244
3  725
26
43
23
3  029
5  663
87
162
286.0
Eger
60  445
1  345
15
20
10
3  022
6  045
67
135
222.5
Bekesesaba
67  621
1  638
13
23
13
2  940
5  202
71
126
242.2
Sopron
54  311
1  338
12
19
9
2  858
6  035
70
149
246.4
Veszprem
63  553
1  749
14
25
15
2  542
4  237
70
117
275.2
Szekszeird
37  070
1  342
12
16
10
2  317
3  707
84
134
362.0
Dunaajvaros, Tatabanya, Szekesjehervar, Pecs., Kecskemet, Gyor, Sopron, Szelazar I
1
Population on January 1, 1996
2
Number of enterprises with legal and non-legal entity
3
Number of banks
4
Number of all institutions of banking network
5
Number of all institutions of banking network counted without OTP Bank and
mutual savings banks
6
Network density 1: population decline per branch
7
Network density 2: population decline per branch without the branches of OTP Bank
and mutual savings banks
8
Network density 3: enterprise decline per branch
9
Network density 4: enterprise decline per branch without the branches of OTP Bank
and mutual savings banks
10 Enterpreneurial activity: enterprise decline per population of 10,000
Sources: Statistical Yearbook 1994
Hungarian Almanac of Financial and Capital Markets 1995-1996

Gál, Zoltán: The Hungarian Banking System and Regional Development in Transition (1987–1997).
In: Spatial Research in Support of the European Integration. Pécs: Centre for Regional Studies,
1999. 69–85. p. Discussion Papers. Special
THE HUNGARIAN BANKING SYSTEM
81
county seats and in the cities of Western Hungary (which were targets of foreign com-
panies and banks); while in Northern Hungary and in the northern part of the Great ,
Plain the banking network is less developed than in Pest county, where the central role
of Budapest counterbalances its disadvantage. In recent years a shift has taken place,
levelling out the expansion of the banking network in favour of the eastern parts of the
country. During these years the number of branches in the cities of Eastern and
Southern Hungary increased more rapidly than in the western counterparts which
were previously the most saturated parts of the country, considering the number of
branches. Two years ago, Gyor, Pecs, and Szekesfehervar were considered the largest
financial centres outside Budapest, while recently Miskolc gained the leading position
in the number of branches (37), followed by Gyor and Kecskemet (each with 32 branch
offices), then Pecs and Szeged (31-31), and finally by Debrecen (28) 3 .
In conclusion it can be said that the network building expansion of branches initially
followed the pattern of the spatial-economic division of the country, as banks mainly
were opening branches in Western Hungary. Since the mid-1990s, owing to the process
of nivellation, banks have started their expansion towards the eastern and southern
parts of the country along the urban hierarchy 4. (Figures Z 8)
The next group of cities attracting banks consists of the other cities around the pop-
ulation mark of 100,000: Szekesfehervar, Nyiregyhaza, Szombathely. In the third city
group 8-11 banks operate 9-15 branches: Veszprem, Kaposvar, Bekescsaba, Eger,
Szolnok, Zalaegerszeg and finally Sopron figure in this group.
The banking sector shows little interest in certain larger cities: Salgotarjan (6 banks
— 6 branches), Tatabanya (6 banks — 5 branches), Szekszard (9 banks — 10 branches),
Nagykanizsa (4 banks — 6 branches), Dunaujvaros (7 banks — 5 branches) and
Hodmezovasarhely (4 banks — 4 branches). A few smaller towns have stronger finan-
cial functions concerning the number of branches. (Mosonmagyarovar, which is situat-
ed alongside the innovational axis between Budapest and Vienna, has 6 banks, and in
the Danubian region in Baja, Kalocsa and Vac 4-4 banks operate.)
In conclusion it can be seen that different banks are situated on different levels of
network construction in the recent period of development. The share of the larger
cities from the banking network intensively increased from 35-40% to about 50% (with
Budapest 66%) between 1987 and the early 1990s owing to the fact that at least a
dozen new banks entered the market and started their network development.
Bankruptcies and the rationalisation policy of network development in the following
period mainly affected these larger cities as the major beneficiaries of the boom in
banking expansion. Despite several new branches opening, the proportion of larger
cities within the banking network fell to 43% (or 63% including Budapest), parallel
with the network diffusion towards the smaller settlements.
Taking the expansion of the banking network into account, some experts believe
that the spread of electronic home banking will counterbalance the traditional way of
branch office building. According to others, whose opinion I share, there is a brighter
future for the traditional expansion of the branch network since customers are much
more devoted to a personal style of administration and rely more on branch offices.

Gál, Zoltán: The Hungarian Banking System and Regional Development in Transition (1987–1997).
In: Spatial Research in Support of the European Integration. Pécs: Centre for Regional Studies,
1999. 69–85. p. Discussion Papers. Special
82
ZOLTAN GAL
Figure 7
Banking network of Hungarian cities, 1996
30
27
27
25
22
777 20 20
20
C3
16
16
`••••.
15
15
13
12
11
11
— 10
4—, 10
7
6
6
5
0
.+8
,
27'
tr
a.
0
->
.5.
0.
.4
es
-g
I
Yf
4,4
tz
e
Cities
Figure 8
Banking network of Hungarian county seats, 1998
40
37
35
32 32 31 31
30
Z3
21
21
10
15
17
17
0

45.
ar
§
dd
41
0
.1
herv
a.
fe
4
kkes
4
Sz
Cities

Gál, Zoltán: The Hungarian Banking System and Regional Development in Transition (1987–1997).
In: Spatial Research in Support of the European Integration. Pécs: Centre for Regional Studies,
1999. 69–85. p. Discussion Papers. Special
THE HUNGARIAN BANKING SYSTEM
83
Despite the probability that virtual banking will be widespread in the future, building a
more cost-intensive branch network is still very important. In addition, about 40% of
the population has as yet no contact with banking. The figures for the year 1998 justify
both these theories of the future prospects of banking.
SUMMARY
In surveying the spatial characteristics of the Hungarian banking system, it can be
stated that the economic changes are very much dependent on the financial services
which reflect the processes of economic transformation. Financial services became the
key sector of the business services differentiated by spatial and regional development
characteristics. The overall concentration of financial services in Budapest is a direct
result of the general concentration of business sectors into metropolitan centres. As
the consequences of rapid restructuring and modernisation of the economy of
Budapest, the capital city of Hungary has become the most important innovation cen-
tre of the region, with an important bridgehead role in foreign capital inflow and
investment within the CEE countries.
The question is whether or not Budapest will become a regional financial centre.
According to a number of banking experts Budapest could only hope to successfully
apply for the position of a subordinated offshore-style regional financial centre.
Subject to these conditions, services require a smaller amount of capital and highly
qualified employees will come into prominence. To carry out all this, it is necessary to
strengthen the banking system with businesslike state intervention, but the exact date
of the integration into the European Union may influence the development of the
Hungarian banking system and the international role of Budapest, too.
In evaluating the competitiveness of the Hungarian banking system, it can be said
that the banking sector has been strengthened since 1994 and it has become a more
profitable sector. However, progress in banking is significant only compared to the
previous state of the banking system: by international standards, the quality of the sec-
tor is still very low. The proportion of outstanding claims, despite the significant
decrease, is still higher than in any country of the European Union.
Despite the general recovery in banking, the sector has remained polarised. In 1995
70% of profit after tax was produced by banks with foreign ownership that at that time
accounted for a quarter of the market. Their profitability and efficiency were that of
banks with Hungarian ownership. Following the crisis, bankruptcies, consolidation and
the redistribution of the banking market was begun and banks with backgrounds of
foreign ownership have gained stronger positions. The strengthened competition
decreased the interest margin and put the value of the non-interest incomes, such as
charges and premiums, within the revenues of banks.
In summarising the experiences of Hungarian banking it can be said that the open-
ness of this sector compared to others contributed more to the modernisation and
competitiveness of the Hungarian banking system. Until now the activity of foreign

Gál, Zoltán: The Hungarian Banking System and Regional Development in Transition (1987–1997).
In: Spatial Research in Support of the European Integration. Pécs: Centre for Regional Studies,
1999. 69–85. p. Discussion Papers. Special
84
ZOLTAN GAL
banks has been dependent on their subsidiary companies, which have to become estab-
lished in Hungary before starting their operations. Recently the question has been
whether the Hungarian banking system is ready to liberalise itself in order to fully
open its market and stand its ground in the future competition within the European
Union.
NOTES
By the end of 1997, IEB, MKB, CIB, Unicbank and Creditanstalt (Bank Austria) had opened quite a
few new offices in the provinces. ING Bank acquired 14 offices of Dunabank and HYPO-Bank
increased its branches by 14 offices within 18 months.
2
While the share of the five largest banks in 1990 was 83% of the total banking sector assets, by 1997 the
five largest and oldest banks' share had decreased to 54%, and the ten largest banks, including newly
established and more dynamic institutions, accounted for 72% of banking assets.
3
In other banking institutions such as the State Treasury, representative branches of NBH, regional head-
quarters, single branches, representative or cash office, correct spatial differences derive from the num-
ber of banks or branches. Regional centres (Gy6r, Pecs) and greater county seats (Kecskemet,
Szekesfehervar) usually have the complete range of these institutions.
4
As regards number of branches, 17 banks operate 23 branches in Gy6r but together with OTP and the
representative of Raiffeisen Landesbank of Burgenland, the number of branches was 43. In Pecs similar-
ly 17 banks appeared with 25 branches, but the number of branches stood at 46, including the OTP
branches (6) and mutual savings banks (17). Concentration of services is higher here because of the cen-
tral position of Pecs extending over South Transdanubia. There are several reasons why banks open
branches in Pecs. Not only its economic environment but the highly qualified population with a multicul-
tural background, and historical inner city areas with touristic interests provides a distinguished urban
milieu for branch development.
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