Discussion Papers 2004. No. 45.
Spatial Development and the Expanding
European Integration of the Hungarian Banking System
CENTRE FOR REGIONAL STUDIES
OF HUNGARIAN ACADEMY OF SCIENCES
DISCUSSION PAPERS
No. 45
Spatial Development and the Expanding
European Integration of the Hungarian
Banking System
by
Zoltán Gál
This paper was prepared for the “Economic Geography and European Finance”
European Science Foundation Exploratory Workshop
17–19 September 2004, Jesus College, Oxford
Series editor
Zoltán GÁL
Pécs
2004
Discussion Papers 2004. No. 45.
Spatial Development and the Expanding
European Integration of the Hungarian Banking System
ISSN 0238–2008
2004 by Centre for Regional Studies of the Hungarian Academy of Sciences.
Technical editor: Ilona Csapó.
Printed in Hungary by Sümegi Nyomdaipari, Kereskedelmi és Szolgáltató
Ltd., Pécs.
2
Discussion Papers 2004. No. 45.
Spatial Development and the Expanding
European Integration of the Hungarian Banking System
CONTENTS
Abstract ................................................................................................................... 7
1 Introduction: the macro-economic environment ................................................ 8
2 Financial Integration of Central and Eastern Europe ......................................... 9
3 Stages of development of the Hungarian banking system ................................ 14
4 Structural and spatial polarity of the Hungarian banking system
in the 1990s....................................................................................................... 22
5 Spatial development of the Hungarian banking network ................................. 26
6 Territorial and organisational levels of the Hungarian banking system .......... 37
6.1 Budapest: the national financial centre with international aspirations
within the CEE region ............................................................................... 37
6.2 Spatial (re)organisation of bank network in the regions ........................... 42
7 Impact of European integration on the Hungarian banking sector ................... 52
8 Predictable regional impacts of financial integration ....................................... 54
9 Conclusions....................................................................................................... 58
References.............................................................................................................. 61
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Discussion Papers 2004. No. 45.
Spatial Development and the Expanding
European Integration of the Hungarian Banking System
List of figures
Figure 1
Density of the Hungarian bank branch network and the distribu-
tion of branches in the cities with county seats functions, 2000 ......... 29
Figure 2
The degree of banking supply in the Hungarian micro regions,
2004 (Measured by no. of bank branch + no. savings co-
operatives + no. of ATMs to population) ............................................ 31
Figure 3
Regional distribution of branch network in the Hungarian towns,
2000 (included banks headquartered in Budapest, excluded
cooperative savings banks).................................................................. 32
Figure 4
GDP per capita as a percentage of the provincial average
in Financial & Business services, 1999 ............................................... 35
Figure 5
Per capita investment volume of enterprises & public
organizations as a percentage of the provincial average in
Financial & Business services, 1996–1999 ......................................... 36
Figure 6
Expansion and financial exclusion: Bank branches opened by the
foreign owned commercial banks (left) and branch closures by
all commercial banks (right) between 1990 and 1998 in Hungary..... 47
Figure 7
Changes in financial sector employment in the Hungarian
counties, in %, 1996–2002 (Average national decline 13.9%)............ 48
Figure 8
Per capita GDP of the financial sectors as a percentage of the
regional average (=100) in the Hungarian regions, 1997 .................... 50
List of tables
Table 1
Changing of the structural characteristics of the Hungarian
banking in the transition and post-transition period ........................... 11
Table 2
Benchmarking of banking systems in the EU-15 and CEECs
(EU-8), 2001....................................................................................... 12
Table 3
Size of the banking sectors in few CEEC countries and few
European banks, 2000 ......................................................................... 13
Table 4
The evolution of the modern financial system .................................... 16
Table 5
Development stages of the Hungarian banking system,
1980–2004 ........................................................................................... 18
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Discussion Papers 2004. No. 45.
Spatial Development and the Expanding
European Integration of the Hungarian Banking System
Table 6
Assets of foreign owned bank as a percentage of the banking
sector, 2000 ......................................................................................... 20
Table 7
Indicators of access to banking service in selected CEEC
countries, 2000 .................................................................................... 28
Table 8
Regional distribution of the Hungarian banking network,
1998–2004 ........................................................................................... 30
Table 9
Distribution of branch network in Hungary on basis of settlement
categories, 1998–2004......................................................................... 33
Table 10 Potential regional banking centres in Hungary.................................... 44
Table 11 Agglomeration of other financial services in the potential
regional banking centres (No.), 2002 .................................................. 45
Table 12 Correlation coefficients among per capita GDP growth rates
between 1996 and 2000 in Hungary ................................................... 56
5
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
Abstract
The paper is concerned with the development stages and the spatial transformation
of the Hungarian banking system in the economic transition & post-transition peri-
ods. It gives an overview of the development tendencies of the financial re-integra-
tion into the global market and particularly concentrates on the spatial polarisation
factors (concentration – de-concentration; centralisation – decentralisation) which
affect banking. The paper explores the arguments behind the extremely high cen-
tralisation of headquarter functions in Budapest and the factors that have impact on
the establishment of locally-regionally based banks. This is followed by an intro-
duction of the different organisational (institutional) and territorial (location strate-
gies) level of the Hungarian banking system, dealing with either the domestic or
the international financial central-function of Budapest and the reorganisation of
the bank network and with its social consequences (financial exclusion) in the re-
gions. The paper argues that EU membership is not a dramatic event in the integra-
tion process of the Hungarian banking sector, partly due to its particular ownership
structure, the integration of the banking sector has already taken place. The paper
concludes that the EMU integration could have been affected more adversely the
Hungarian regions already characterised by the endogenous disparities, which are
to a large extent rooted in the deficiency of their financial base.
Keywords: Hungarian banking system, transition economy, financial market
integration, structural and spatial polarisation, branch network reorganisation,
uneven regional development, financial exclusion
JEL Codes: G 21, G 28, G 32
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Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
1 Introduction: the macro-economic environment
Financial Geography, regarded as a newly established sub-discipline of Economic
Geography, deals with the flows and transformation of money, and the spatial,
institutional and regulatory structure of financial capital (Leyshon, 1995; Leyshon–
Thrift; 1997). The recent growth of interest in the Geography of money has been
stimulated by an explosive growth in information technology and financial services
and also by the profound changes, upheavals (crises) that have remapped, and are
continuing to transform the financial landscape of the World (Leyshon et al. 1988).
These changes are usually associated with a single word, globalisation. Globalisa-
tion refers to the increasing integration of financial markets, hybridisation, conver-
gence and stretching of economic relationships across the space, regardless of na-
tional borders and institutions, and to the growth of „stateless monies” that move
electronically around the globe at a very high speed, ignoring national borders and
economic territories (Martin, 1999). Financial globalisation is inherently geo-
graphically constituted, the product of organisational, technological, regulatory and
corporate strategies by individual firms, financial institutions and authorities in
specific location. Divergent forces of deconcentration/decentralisation and con-
centration/centralisation are consistent with financial globalisation, which are
shaping the evolving geographies of the national, regional and global finance.
Different monetary spaces – national, global and local, regional – coexist, as it is
recognised that globalisation of finance is a global-local process.
These changes have several effects on the emerging single European market,
where finance with the European banking licence lies in the heart of the policy, and
have huge effects on the emerging financial markets of Central and Eastern
Europe. The emergence of the European Monetary Union encourages mergers and
acquisition activity across the EU in order to strengthen the position of financial
institutions to hold their own in increased competition. While cross-border acquisi-
tion has been limited, the emergence of new large national universal banks, as the
amalgamation of several national or regional institutions, is bound to have impor-
tant spatial consequences, as they are located in the existing financial centres.
These banks will have even more power to dominate the European market (Ley-
shon-Thrift, 1997). Changes that are imposing a universal monetary space for
Europe remove a significant element of national and regional autonomy concerning
the monetary control over their economic territory. The consequences of financial
integration will affect regional and local banks as well as different national banking
systems. According to the predicted main trend for future organisational structure
of the European banking the emerging predominance of the large multi-country
banks and the locally based regional banks gaining strength will dominate the mar-
kets. Small and local banks might suffer a competitive disadvantage initially;
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Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
eventually a two-tier banking system would emerge with one tier consisting of in-
ternational banks and the second tier consisting of local banks (where local banks
include local, regional and national banks devoted to their domestic markets). The
major losers of this segmentation process will be the medium size domestic banks
without international scope of activity.
Study of banking history reveals a wide variety of the development of different
national banking systems. Despite its increasingly transnationalised feature the
banking system (even in the core regions) very much retained its national charac-
ter. National banking systems experience also spatial diversity, arising from the
particular location of a distinctive financial centre and from the differences in spa-
tial structure and in the origins of particular national and regional banking (Dow,
1999). National borders that coincide with economic borders continue to play an
important role and impose several difficulties on mergers and acquisition (M&A)
activity and bank entries. National banking markets are still segmented even within
the European Union and resulting in different stages of integration into the com-
mon market. However, recent moves, both towards supra-national economic, po-
litical and monetary unions and towards secession and regional autonomy, have
tended to undermine the usefulness of the nation state and simultaneously
strengthen the role of locally based regional units. In contrast to the concentration
processes in the global markets the growing significance of European regionalism
requires strengthening of the regional money markets and institutions financing
regional policies. Globalisation and the emergence of global financial spaces may
actually serve to open up opportunities for local-regional alternatives (Lee, 1999;
Porteous, 1996).
2 Financial Integration of Central
and Eastern Europe
The growing literature on regional finance suggests that credit allocation in re-
gional banking systems and in the different national banking vary according to
their stage of development, and frictions exist across regions within national
economies, resulting in different availability of capital. Money flows between lo-
cations and regions raising the problems of integration between the global and local
level, or between centre and periphery, which concerns an irregular financial divi-
sion of labour between central and peripheral areas. Consequently capital is con-
centrated into the financial centres of the core areas, which can be resulted in re-
gional inequalities within the single European markets as well (Porteous, 1996;
Leyshon–Thrift, 1997). Less developed national banking systems – and peripheral
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Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
regions within – have a lesser capacity to promote their economic development and
might experience certain disadvantages because of the financial integration in
Europe. Despite the fact local banks can serve local economic interests better than
financial-centre banks whose priorities relate more to the single European and
global markets, less advanced banking systems can be controlled more easily by
the large universal banks of the financial core areas.
This latter argument refers very much to the accessing countries (new EU
member states) of Central and Eastern Europe. Their transition period was char-
acterised by the reintegration process into the world’s financial market in the early
1990s and where the banks have turned out to dominate the financial system.
Countries of this region one and half decade ago began to dismantle the structure of
the central planning and permitted their economies to be governed by market
forces. The transition to the market economy was largely influenced by the ex-
panding globalisation of the World’s economy and it was a large extent determined
by the very harsh international framework conditions in the early years of transi-
tion. These framework conditions rooted in the capital shortage followed by the
debt crisis of the 1980s were at least so much a determining factor (Table 1).
An important dimension of the transition to a market economy is the creation of
efficient financial system since well-developed financial systems cause economic
growth and faster transition. They not only had to adopt new technologies and the
financial behaviour it accommodates, but also had to cope with a legacy of bad
debts and a lack of experience in credit risk assessment. In the last 15 years post-
communist countries of Central and Eastern Europe (CEECs) have moved a long
way towards establishing market-based banking systems as well as reforming in
wider economic sense (Bonin et al. 1998).
Most of these countries had a prior memory of being market economies with
banking traditions of their own up to a mere 40 years before the collapse of the
Communist regimes. However, it is important to note, that the establishment of the
financial markets in the CEEC was not the consequence of natural evolution, but
rather a creation of a framework structure from a top-down directed way by the
new elites of the transition period (Várhegyi, 2002a). Despite the traditional legacy
of the bank-based financial system in continental Europe the policy makers in the
CEEC had a preference for market-based over bank-based financial systems at the
beginning of transition which was closely related to the growth pressure and to the
heavy burdens of the indebted banking sectors with the legacy of non-performing
loans (Budd, 1997). Despite initial preference for capita market-based over the
bank-based systems, banks have turned out to dominate CEEC financial systems
(Table 2).
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Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
Table 1
Changing of the structural characteristics of the Hungarian banking in the
transition and post-transition period
Transition: reintegration into the world’s
Post-transition: integration process into
financial markets
the EU & EMU
Macroeconomic framework conditions: globalisation, neo-liberal paradigm, monetarist approaches
Unfavourable conditions: depth crisis, collapse
Same structural problems than in the EU-15, but
of the ‘old’ economy, capital shortage, pressure
different scales;
for liberalisation
Banking is considered one of the most integrated
sector: 3/4th of the ownership structure
dominated by global players (stable equity
background)
Banking reform: shift from the mono-bank
Steady network expansion & spatial
system to the two tier system: ‘bank-based
consolidation (centralisation of certain services,
financial systems emerged through a non-natural
rationalisation of local branches, financial
evolution (top-down directed reforms)
exclusion)
Bank failures, indebtedness,
Trading scandals & speculative shocks
irrecoverable assets in the sector
(K&H equities)
Restructuring & institutional development:
Growing financial disinter mediation: rise of
banking sector re-capitalisation and supervisory
non-banking institutions (pension and insurance
regulation by the state
funds),
Strong competition in the retail market
Privatisation of the banking sector:
Dual-economy: foreign versus domestic
privatisation = ‘foreignerisation’
institutions (loss of monetary autonomy,
‘Outer-directed capitalism’)
increased volatility of capital flows, ‘redlining’
strategies)
Transformation & convergence:
Expansion abroad: banks are net external
enormous progress in banking fosters its
creditors in a capital-importing environment
expansion and modernisation
(foreign direct investment abroad by the OTP
Bank)
Small size of the sector & low degree of
Enormous profit growth (ROE) in global context
intermediation
despite the lower productivity of banks (OTP is
within the TOP 10 in the World)
More stages & more rapid pace of development
“Over-banked sector in under banked market”:
during 1.5 decades than anywhere else in the
many players, but lower penetration in the finan-
developed World
cial market (enterprises’ strong direct & cross-
border financing in corporate market)
Source: Edited by the author.
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Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
Table 2
Benchmarking of banking systems in the EU-15 and CEECs (EU-8), 2001
Benchmarking factors
EU-15
CEECs (EU-8)
Type of financial system
Bank and/or capital market
Bank based
based
Aggregate size of banking
Large (40% of the global
Small: 2.4% of the EU-15’s
systems
market share)
balance sheet
Share of loans in the EU’s single
98.8%
1.2%
market
Average size of banks
Large
small
Ownership structure
Rather national
Trans-national
Share of foreign ownership
20%
70%
Degree of intermediation
Intense (transmission ratio
Shallow, low transmission ratio
(Asstes/GDP)
average 200 %)
(transmission ratio average
75 %)
Disinter mediation
More modest relative to the
Less apparent, bank
US, but increasing rapidly
intermediation still expands
Consolidation
Increasing concentration &
Further de-concentration
centralisation
(cyclical) and centralisation
Density of Branch network
1,923
9,200 (average)
(inhabitants per branch)
Expansion abroad
Significant
Recent phenomena (OTP Bank
in Hungary)
Source: Edited by the author.
Since macroeconomic performance, the depth of liberalisation, enterprise re-
structuring, privatisation methods, and the legal framework of market economy
varied from country to country in the early stages of transition, economic perform-
ance and the created banking systems have not been uniform across the region.
Because of the different degrees of market liberalization, the solution and the dura-
tion of privatisation, following a series of severe banking crises, involving a col-
lapse of both the confidence in banks and the injection of large amount of state
funds, varies from country to country. Stability of the sector has been restored not
only by prudential regulation, consolidation and by the liquidation of insolvent
institutions, but to a large extent by the large–scale entry of foreign banks (Ábel et
al. 1998). As European Union membership was approaching in the CEEC’ more
advanced economies, Western European banks were ‘aggressively’ moving to ex-
pand into what would soon be a home market for them. The result is an increasing
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Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
pressure on margins, as more banks compete for relatively little business. Follow-
ing Hungary’s pioneering path in the attraction of strategic foreign investors, by the
early 21st century foreign banks own three-quarter of the banking sector in the eight
(CEEC) new member states (This figure for the old-member states only one
quarter.) (Tálas, 2004).
Central European countries have chosen the path of the “outer directed
capitalism”, which was strongly relied on FDI (Szelényi et al. 2000). The foreign
direct investments did not but resulting in a more rapid modernization of the
Hungarian economy. The advantage of foreign investors was that they not only
helped a faster recovery from the economic crisis and injected capital into the
transforming economies but also wealth of expertise into the banking sectors.
The transition period was followed by the integration into the market of the
European Union during the post-transition period since the late 1990s (Table 1).
Despite its expansion after the privatisation process banking sector remained small
by Western European standards. This is true both for absolute and relative figures.
In 2001, the aggregate total assets of banks in the accession countries of Central &
Eastern Europe came to EUR 324 billion, thus reaching only 1.7% of total banking
assets of the EMU (EU–12). The other Comparisons are particularly striking. The
aggregate total banking assets of the accession countries roughly equal the size of a
middle-large west West European bank, and much below the size of the large Pan-
European banks. Eastern European banking market also remains underdeveloped
with regard to financial intermediation, which is measured by assets- to-GDP
(balance sheet-to-GDP). Economic crises and high inflation eroded banks’ balance
sheets, insufficient capital resources and bad loans triggered banking crises and
restricted the lending capacity (Table 3).
Table 3
Size of the banking sectors in few CEEC countries and few
European banks, 2000
Transmission ratio:
Total Balance sheet of
Number of banks
balance sheet
banking system
total/GDP %
(in Billion EUR)
Hungary
68
50
42
Czech Republic
120
167
40
Poland
62,3
210
84
Deutsche Bank
940
KBC Bank
165
Raiffeisen Bank
36.5
Source: Central Banks’ publications.
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Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
However, the banking sectors in the CEECs for several reasons (to a large
extent because of its international character) can be considered better integrated
within the EU than most of the banking sectors in the older EU member states
(Riess et al. 2002). Since most of the foreign banks dominate the CEECs’ market
residence in the EU, therefore the true size and the profitability of the financial
sectors very much depend on the performance of their parent companies.
East Central European banking systems are accelerating through more of the
stages of development within a relatively short period because of competition with
more advanced systems and state encouragement of banking development. While
in the West the processes of market concentration and the financial exclusion are
the major characteristic, in the Eastern counterpart the growing number of institu-
tions and the network expansion was observable in the first decade of transition
(Anderson-Kegels, 1998). The foreign banks entering the region often boast deeper
pockets, greater expertise and more solid reputation and making circumstances of
competitions worse for the local players. Foreign banks not only contributed to the
modernization and the expansion of the sector, but often argued their lack of com-
mitment to the local economy, which reinforce its dual and segmented character
causing less development prospective for the local firms. All these challenges,
which are to be faced, are common in these countries, but what could be varied
from country to country is the spatial (regional & settlement) and institutional
structure of the national banking systems. The development of the spatial structure
of the emerging banking sector in CEECs offers a view of rapidly transforming and
converging structures and allows testing of several hypotheses of regional finance
theory.
3 Stages of development of the Hungarian banking
system
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
adapted to a market environment. Hungary started the modernization of banking
first in the CEE region and Hungary already had for three years a two-tier banking
system when the Berlin Wall came down.
Despite the fact that the Hungarian banking system is to some extent still lag-
ging behind western countries, we cannot say that there is a huge inherited gap
between Hungary and Western Europe because despite some delay, already at the
turn of the 19/20th century, the Hungarian banking system was well developed in
comparison to international standards. Moreover, it became one of the most rapidly
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Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
growing sectors of the domestic economy of that time1. The historical evolution of
the Hungarian banking system, despite it has developed in a latecomer country
with regards to the phases of industrialisation, has gone through the similar devel-
opment stages of the modern financial system than the more advanced economies
(Martin, 1994). With the earliest stage of industrialisation the “regionally-locally
based, bank-oriented system” operated in Hungary until the end of WWI, based on
the extensive network of locally based banks using local sources of capital accu-
mulation (Table 4). During the interwar period it was replaced by the “national or
capital market-oriented” stage, in which the banking system became more cen-
tralised into the capital city of Budapest and the national market incorporated the
local, regional banks setting up the centralised national branch network (Gál,
2001). The post-war history of the Hungarian financial sector is a history of nation-
alization and the introduction of a centrally planned economy, which resulted in
Hungary turning aside from the world’s development mainstream. By 1948, the
whole financial sector was nationalized, and the introduced one-tier mono-banking
system was characterised by a monopoly of the National Bank of Hungary (NBH).
This meant a direct line to the monetarisation of the economy that was financed
through an oversized redistribution.
Despite the NBH monopoly few off-shore and joint-venture banks were estab-
lished until the middle of the 1980s, representing not only the reform endeavour
rather the capital (foreign currency) shortage during the communist period. By the
early 1980s a particular contradiction evolved between the already existing small-
scale enterprises wanting to finance their functioning and the one-level financial
system based on the credit monopoly of the National Bank.
Hungary was the first in the region to repair the mistakes of the early transition
years and opened the doors very early to the foreign strategic investors, as the trust
slowly grew for foreign investors due to political transformation and new legisla-
tion, serving the market economy. The country was at the forefront of creating a
market-driven bank sector. This act provided legal base for the institutional trans-
formation in banking. The National Bank of Hungary started to perform primarily
central bank’s functions and the new commercial banks were set up from the for-
1 Were someone to compare the state of our recent banking system with the banking sector of the turn
of the century, one can find many similarities between them. Both were created following a change
of regime (1867: Austrian-Hungarian Compromise; 1990: the fall of the Communism) and
coincided with the early stages of modernisation that were characterised by an original accumulation
of capital, by an early foundation of credit institutions, by a mass inflow of foreign capital (although
its share was much smaller in 1910 amounting to 11%), by the foundation of joint-venture banks
and by bankruptcies that demanded new legislation on banks and the creation of the public
supervision of banking in both eras. The predominant position of Budapest in the money market and
in banking is as important as it was 100 years ago. Budapest became the national centre of Hungary
with intense international relations (Gál, 2001).
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Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
mer lending departments of NBH in January, 1987. Commercial banks that origi-
nally had corporate clientele were admitted to the retail market, while financial
institutions were given commercial banking licenses. In contrast to Hungarian tra-
ditions, a specialised rather than universal banking system has been created in
1987, sorting different types of banks by functions (34 commercial banks, 8 spe-
cialised banks, mortgage banks and building societies, 236 co-operative savings
banks) (Lengyel, 1994).
Table 4
The evolution of the modern financial system
Regional and bank-oriented
National and capital market-
Transnational and securitized
oriented
form
Associated with industrializa-
Characteristics of industrial
Associated with post-industrial
tion phase of economic devel-
maturity phase of economic de-
and transnational phase of eco-
opment
velopment
nomic development
Banks main source of external
Capital markets main source of
Bulk of funds obtained through
funds needed by private sector
funds, using savings of private
capital and credit markets, using
firms
investors
mainly resources of institutional
investors
Industrial growth financed by
Capital markets channel per-
Separation of capital and money
loans, risk capital and profits
sonal and other savings into in-
markets from industry and
dustry; risk spread across share-
commodification of money;
holders
proliferation of monetary prod-
ucts
Local-regional and national
Concentration and centralisation Development of globally inte-
banking system; local sources
towards national banking and
grated system of world financial
of capital important
capital markets; loss of local-
centres; loss of national financial
regional financial autonomy;
autonomy to supranational
emergence of internationaliza-
economy of stateless monies
tion
Source: Martin, 1994.
Since the reintroduction of two-tier banking (after 40 years discontinuity) the
banking system was opened up to the world as a competitive and rapidly growing
sector. The transformation into a market economy, the radical diminution of the
state's role in the business sector, privatisation, and foreign capital inflow, a more
intensive participation in the international division of labour and European integra-
tion all provided new opportunities and challenges for banking. Hungary’s finan-
cial sector after 40 years of discontinuity was reintegrated into the world‘s financial
system and entered the stage of “transnational” and “securitised” financial world.
The recovering financial sector in Hungary, besides the heavy burden inherited
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Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
from the centrally planned economy, had to cope with the unfavourable framework
conditions of the increasingly globalized financial markets.
The last 15 years of development in the banking system can be divided into dif-
ferent periods. The comprehensive periodisation of different development phases
of the development of the Hungarian banking system is closely related to the po-
litical-economic-legislative transformation of the country during the transition pe-
riod, lasting till the late 1990s and to the expanded integration of banking into the
international financial markets (Table 5). The short period between 1989 and 1992
was the boom for foundation of new banks, following the steady increase of
financial institutions during the 1980s. Competition was also increased by the
entrance of the new foreign-owned and joint venture banks, founding their own
subsidiary banks in Budapest (Bácskai, 1997).
After the period of rapid and extensive expansion between 1992 and 1995 the
banking system was characterised by the first bankruptcies, failures and bank con-
solidation. The legislative action regulating the booming market came into force
with a certain delays. The Act on Credit Institutions passed in 1991, and the first
bankruptcies were followed by the Act on Bankruptcies and Banking Supervision.
In 1991, soon after its ratification, the bankruptcy act was enforced during the first
bankruptcies. The strong wave of establishment and expansion of banks coincided
with a period of general economic recession following the economic transition in
the early 1990s. Over-geared expansion of balance-sheets and increasing risk-tak-
ing stood in contrast with the low level of financial standing and the huge sum of
inherited debts (non-performing loans). This automatically 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. This has contributed to the evolution of a market economy,
particularly in bringing about important structural changes through the privatisation
of banking to develop a modern financial system. Banks showing deficits gained
huge amounts of capital from the state, which imposed a substantial burden on state
finances and thus on society as well (the state spending on bank consolidation be-
tween 1992 and 1995 exceeded the four Billion USD accounted for the 10% of the
annual GDP). The purpose of bank consolidation and privatisation was to decrease
the percentage of state ownership in the banking sector (Várhegyi, 2002a).
In the third period after the reconstruction (between 1995 and 1997), a stabi-
lised and a more competitive banking system emerged, characterised by successful
privatisation of the banking system resulting in a slower expansion in the banking
from 1996 onward. The number of banks grew dynamically during this expansion
period (with 40% between 1990 and 1997) and parallel to this the concentration
(measured by the Herfindhal-Hirshman index of the total assets) decreased (Móré–
Nagy, 2004). The period of “reduction versus expansion”, as Jöns (2001) calls it,
17
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
Table 5
Development stages of the Hungarian banking system, 1980–2004
Institutional
Decentralisation
of
Rapid expansion
Steady expansion
Concentration
and
development
mono-bank system
and
institutional
diversification
reorganisation
Slow growth in joint-
‘Boom’i
Privatisation
De-
Further
venture banks
n
bank and
concentration-
consolidation,
establishme
“foreignisation” de-
Institutional
nt
centralisation
centralisation,
Dual economy bias
Bankrupt
Bank-
Adaptation
Decrease in the no. of
cies
& Consolidation of
western banks: M&A,
liquidations process
(universal)
Competition of non-
banking
banking intermediaries,
structure
Cross-border
Network
branching,
expansion
De-intermediation
Legislation
Liberalisation
Formation
Harmonisat
Harmonisation with
of
the
one-tier of
the
two-tier ion with EU Basle II, EMU’s criteria,
banking system
banking system
regulations
Act
on
money
Act on credit institutions ’91
Acts:
laundering
amendments,
Single
Structural & spatial
Financial
inequalities
in
dual
Supervisory
economy
unit,
Economic
Market-orientated
reforms Economic & political transformation:
EU
accession,
policy
within
the
centrally
planned
creation of a market economy
Preparation
for
the
economy
during
EMU’s criteria, Push
Push factor: Debt crisis, capital
transition period
factor:
cost
saving,
shortage
Push factor: general economic Increasing competition
crises versus modernisation
Year
1980
87
1990 91 92
94
96 97
2000
2004
Source: Edited by the author and Jöns (2001).
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
was a transitional period in network building, as parallel processes had overlapped
each other: reductions of branches of (former) Hungarian owned banks (OTP
Bank), mergers and liquidation processes, and finally the steady opening of
branches of foreign owned banks.
During this period, foreign investors successfully privatised a few big banks
while a few smaller banks went into bankruptcy and were liquidated. One of the
most important alterations in the Hungarian banking system was that the role of
foreign capital in ownership was determined. As the consequence of foreign capital
inflow into Hungarian banking, the structure of ownership was entirely trans-
formed; parallel with the process of the significant decrease in state ownership,2 the
foreign market shares as a proportion of registered capital attained 78% of the
banking system in 2002 (91% in terms of banking assets) , gaining a majority of
market shares within a short time (Table 6). FDI (Foreign Direct Investment) be-
came a salient feature of the Hungarian banking sector early in the transition proc-
ess. Of the banks in Hungary, 80% are foreign owned. The Hungarian proportion
of foreign capital was the highest in CEECs context until the late 1990s, but other
countries in the region have now opted to follow Hungary’s pioneering path gain-
ing even larger share of foreign capital. With the exception of Slovenia, the bank-
ing sectors of the CEEC countries are now dominated by foreign banks. Despite
this self-explanatory nature of this ownership structure, the role of foreign banks is
much less dominant in the EU–15 countries and foreign penetration only in
emerging regions has reached unprecedented levels.3
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 inflow into the banking system
together with the foreign ownership shares of privatisation, comprising a total of
1,1 Billion USD, was directly invested into banks headquartered in Budapest. Al-
ready in 1995, foreign banks, occupying one fourth of the total market, accounted
for 70 % of profit returns due to their high profitability, which was twice as much
as in the Hungarian owned banks. Foreign capital investment has contributed sig-
nificantly to the growth of international competitiveness of Hungarian banking
(Wachtel, 1997). The main motivation of foreign banks’ entry into the CEE region
is the existence of host country opportunities provided by the competitive advan-
tages of non-saturated and rapidly expanding markets (Clarke et al. 2001). More-
2 The state ownership decreased from 74% in 1990 to 20% recently.
3 As a result of foreign capital inflow, foreign investors own about three-quarters of banking industry
assets in the new member states of the CEE region, compared with about 20% in the Eurozone (The
Banker, May 2004). The main investors are in Hungary, according to the portion of invested capital,
still the leading German and Austrian entrepreneurs, followed by the Belgian, American, Italian,
French, Japanese, Dutch and Korean investors. British banks are conspicuous by their absence
(Várhegyi, 1997).
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
over, foreign banks played a multiplication role as they attracted other foreign in-
vestors in the non-banking sector. Nevertheless, opening up the banking market
was not decided upon after careful consideration of the advantages and disadvan-
tages. Rather it was the direct response to the capital shortage and the demand for
sophisticated services. During the turbulent years, foreign banks could also provide
a “safe heaven” for depositors and stable source of funds compared to domestic
banks, which latter ones needed time to mature. Only handful local banks, such as
OTP Bank, were able to compete very successfully without the benefit of foreign
banks’ backing and experience, their risk-management systems, and their product
range. On the other hand, one of the typical disadvantages of market opening is
cherry picking: powerful foreign banks, selling services that are more sophisticated
and often unburdened by non-performing loans, can easily acquire the best clients
with the lowest risks. This also might be one reason why the foreign banks have
reached exceptionally high shares in the market.
Table 6
Assets of foreign owned bank* as a percentage of the banking sector, 2000
CEECs
1995
1996
1997
1998
1999
2000
2002 Foreign banks’
assets as % of Commer-
cial banks’ assets
Hungary
41.8
46
61
64
66,4
68
90.7
Czech Republic
10
12
15
16
28
54
85.8
Poland
4
14
16
17
49
70
70.9
Slovenia
–
5
5
5
5
5
16.9
Slovakia
–
–
–
–
25
76
95.6
UK
52.1
Spain
11.7
Germany
4.3
Sweden
1.6
* The foreign share in ownership being more than 50%.
Source: Riess et al., 2002.
The period between 1997 and 2004 after the major transformation in the owner-
ship structure was characterised by the adjustment to the European banking struc-
ture. The majority of Hungarian banks by the Millennium became integrated into
large European banking groups, which created the conditions for sustainable de-
velopment conditions for them (Várhegyi, 2002a). This period was a transition
from the extensive market expansion (accompanied by the acceleration of an ex-
tensive branch network expansion) towards the formation of more mature market
20
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
structures. In the earlier stage of development the branch network expansion was
one of the major phenomena. The growing retail market from the mid–1990s has
urged banks to establish their extensive nation-wide network of local branches. The
rapid growth in the number of banks had stopped by the end of the period, and the
mergers and acquisitions strengthening the market concentration counterbalanced
the new establishment. New players such as mortgage banks and building societies
have entered to the market. In this period, the banks became increasingly universal
(all-finance), as they integrated the previously separately conducted intermediary,
insurance and capital investment services. After the years of dynamic growth, the
leading bank (OTP-Bank, during the state-socialist period a savings bank with a
monopoly of retail market) has thrived thanks to its good Hungarian management,
and found the Hungarian market too small and has started foreign expansion within
the CEE region.
With the EU membership, achieved in 2004, a new period has commenced in
the banking system. The structure of the Hungarian banking sector will continue to
change – without and even more so with the EU accession. With the accession, the
process of integration can be expected to proceed smoothly not least because EU
financial institutions have taken large stakes in the Hungarian banking system and
since the integration of the banking system has already taken place by the end of
the 1990s. Hungary was at the forefront of creating a market-driven bank sector,
therefore the structure of bank balance sheets and portfolio is similar to that found
in the EU. However, the accession should further enhance the integration and the
slower accommodation of the banking sector (EU regulation, Basle II principles).
Considering the size of the banking system, it is still small; the total banks assets to
the GDP are only 78%. The still “under-banked” nature (in terms of accessibility of
services) of the country, particularly in consumer finance, offers huge potential for
further growth. On the other hand, the CEEC banking, the Hungarian Banking
system in particular, mobilises more funds than banks can lend domestically, which
effectively makes them net external creditor in a capital importing environment.
European integration increases the competition due to the opportunity of cross-
border bank branching of foreign banks currently not operating in Hungary (Riess
et al. 2002). EU accession influences the new foreign banks entry branching out
without the commitment to establish subsidiaries; therefore resident banks might
face up to stronger competition. Nevertheless, mass entry of foreign branches is not
expected since new players might face strong competition in the market. There is
also a potential for resident banks to benefit from local information and increase
lending to borrowers and they may exploit their knowledge of local conditions and
existing client relations. In regional context, resident banks have the best chance to
raise their market share. The macroeconomic and institutional environment of
banking seems to be conductive for future development and further expansion
(Várhegyi, 2002b).
21
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
Banking in Hungary is recently facing to similar structural problems as the
more mature banking of the older EU members since it has already come over the
earlier stages of development by the Millennium, which is characterized by the
more mature stage of banking: dez-intermediation, increasing competition, em-
ployment loss subsequent to IT development and financial exclusion. Structural
adjustment will continue. This will influence both the institutional and the spatial
structure of banking since on the one hand the number of banks licensed is likely to
decrease and the number of non-financial institutions may rise, but on the other
hand, further expansion of branches due to the lower branch density and unex-
ploited markets potential especially in retail banking continues. Following the
M&A activities taken place in the last years the market concentration is increasing,
which accelerated by the introduction of IT technologies and operation cost effi-
ciency. Banks react to these challenges with the reorganization of their organisa-
tional structure gaining ground for the centralisation of the organizational structure,
which results in a growing spatial concentration in the market.
4 Structural and spatial polarity of the Hungarian
banking system in the 1990s
Money flows on global level are often independent from the real economic proc-
esses at the same time uneven capital flows among the regions and the deficiencies
in accessibility to the financial institutions caused by the spatial inequalities in the
economic potentials. The presence of high level services and the location of the
head offices, and also the absence of bank branches express territorial disparities in
economic development (Jöns, 2001). Financial services became the key sector in
the processes of economic transformation and differentiated by uneven regional
and urban development. The market of the financial and business services in Hun-
gary is very much centralised by geographically and organizationally. Several fac-
tors underpin this argument:
1) The spatial structure of the banking sector is characterised by a large-scale
concentration in Budapest. The Budapest-centred organisational control in the
banking sector is predominant. The extremely high centralisation of headquarter
functions in Budapest is illustrated by the fact that all the 38 banks, except one4,
have head-offices in Budapest. Banking in Hungary is still the most centralised
branch of economy with a definite centre in Budapest. The leading position of Bu-
dapest in the financial sectors, especially in banking and insurance, is more striking
than in any other sectors. This can be indicated by the 94% of the total banking
4 Sopron Bank Rt. established by the Bank Burgenland of Austria in Sopron.
22
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
assets and the 86% of employees (registered according to the headquarters) are
concentrated into Budapest, which is the major strategic geographical location and
financial core of the country.
2) The Hungarian banking system is characterised by the lack of strong locally
and regionally based banks. The marginal pole of the national banking system is
the dense network of the locally-based co-operative savings banks scattered
throughout the countryside. The most important fundamentals of these are the weak
financial standing (accounting for only 6% of the total balance sheet of banking)
and lack of strong centres of their headquarters5. Despite the number of co-opera-
tive savings banks being 1,700, thereby accounting for 58 % of the total national
network, most of these small credit institutions are situated in the smaller towns
and villages having a very low capital circulation and can supply only a narrow
range of services.
3) The third reason of polarity lies on their governance structure. Branches of
banks with the headquarters in Budapest have much less room for making inde-
pendent decisions than the branches in county seats during the communist period.
Since the Hungarian banking system is characterised by an over-centralised man-
agement, controlling and structural system, branches are not in a real decision-
making position, partly because they have got only limited information (informa-
tion asymmetry). Most of the banks offer the same services all over the country and
do not have local advertising strategy.
4) Lower density of the network compared to the European average means both
a lower level of availability of branch offices and higher spatial polarisation of the
branch network. Despite the rapid expansion of branches, banking services are still
missing from the lower hierarchical levels of settlements and their presence is low
in certain micro-regions, which is accompanied by a spatial-regional asymmetry
(Gál, 1998).
In the case of financial services the dual and the segmented feature of the tran-
sition economies is observable. The dual term can be applied to both the structural
and the spatial segmentation of economic development during the transition period.
The financial sector of the transition economies is on one hand dominated by the
large foreign (transnational) institutions owning the lion’s share of the market, on
the other hand domestic players facing them do not stand for significant market
force. The dual character does not imply only the structural peculiarities but in-
crease the spatial segmentation as exists between the large financial firms almost
exclusively concentrated in Budapest and the local service providers of the coun-
tryside (Nagy, 2002).
5 Until the early 1990s savings co-operatives located exclusively in villages and were not allowed to
open urban branches.
23
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
There are several arguments concerning the predominant position Budapest
plays within the Hungarian economy and the lack of the self-autonomous locally
embedded financial centres (Jöns, 2001). The five main reasons that have been
responsible for the centrally organised financial system in Hungary are:
– The historical dominance of Budapest within the country (path dependence);
– The inherited centrally managed feature of the state socialist economy, mak-
ing centralisation in decision-making;
– Transition processes was largely influenced by the framework conditions of
the global economy;
– The key role of Budapest as the centre of innovation in economic transforma-
tion (bridgehead of FDI in service sector);
– Inefficient level of capital accumulation outside Budapest.
The strongly centralised structure, as one can argue, is more in line with the
contemporary international tendencies, which prefers larger concentration at the
global level. Most countries typically have a single national financial centre, even
in those countries that have a number of major regional centres. However, the fi-
nancial centre do not need to be the largest city of the country in terms of popula-
tion, but in financial centres have to be an intensive economy activity, providing
high-level services which are in demand over a larger area possibly the nation and
even the global economy (Porteous, 1999). The large scale concentration of the
financial sector in the capital city is explainable partly with the adjustment not only
to the more concentrated international banking structures, but as Bellon (1998)
argues, the result of the small size of the Hungarian economy and territorially re-
stricted preconditions of capital accumulation within the country. Others add to this
(Beluszky, 1998; Gál, 1998) the path dependence factors and the traditional ag-
glomeration of key economic sectors in Budapest since the first wave of moderni-
zation in the 19th century.6 A common characteristic regarding the spatial organisa-
tion of the Hungarian banking system before and after the political transformation
in 1990 has been an extremely high centralisation of headquarter functions in the
capital city.
6 Although regions were important territorial element of the financial space in the late 19th early 20th
century Hungary, when banks closely connected to regional economic structures, their significance
is much less clear in the era of globalisation. The spatial structure of banking system is more
centralised compared to the network which existed at the turn of the 19/20th century. That time
the number of independent banks scattered throughout the countryside was overshadowed
within the banking network. Consequently there were proportionally few branches in
banking before World War I, consequently only 5.7% of the banks were concentrated in
Budapest (Gál, 1999a).
24
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
The establishment of financial markets in the early transition years in the
CEECs was not the consequence of natural evolution, but rather a creation of a
very much centralised framework structure from the top-down directed way by the
reform elite. The introduced two-tier banking system more or less remapped the
over-centralised and Budapest dominated nature of the state-socialist monobank
structure. Nevertheless, the rapid foreign bank penetration in the early transition
year has placed the strategic decision-making, including the location of the head-
quarters into market base, and all the privatised banks and so the new green-field
establishment selected the capital city as their strategic location. This meant that
the total amount of capital inflow invested into the Hungarian banking sector was
concentrated in Budapest. In other CEECs, part of the early bank establishment by
governmental policy makers considering the historical traditions, has taken place
outside the capital cities creating a more even spatial structure of the headquarter
locations. It is also due to the fact that, at least in e.g. Poland and Slovakia, the
dominance of the capital city is much smaller than in Hungary, consequently there
are more big cities besides the capital city. Nevertheless, the constraints of the de-
centralization have reduced the number of bank headquarters in the Czech Repub-
lic and Poland by the end of the transition, and resulting in a stronger correlation
between the existing regional bank centres and the local economic performance
(Blažek, 1997).
Besides the previously mentioned factors, the very much centralised spatial
structure of banking system and the uneven spatial distribution of capital sources
within the country was large extent determined by the international and local
framework conditions in the early years of transition. The transition to the market
economy was largely influenced by two main processes of the World’s economy,
namely by globalisation and the neo-liberal change in economic paradigm. These
processes were not only conductive to the collapse of the communist regimes, but
created very harsh framework condition for the transforming economies. The new
market economies had to adapt themselves to the disadvantageous framework con-
ditions of the very volatile global economy facing global crises. One solution to
avoid the debt crises was the full market liberalization and the promotion of the
mass influx of foreign capital inflows. Hungary has chosen the path of the “outer
directed capitalism”, which was strongly relied on FDI (Szelényi et al. 2000). The
foreign direct investments did not only help a faster recovery from the economic
crisis but resulting in a more rapid modernization of the Hungarian economy.
Among the disadvantages, there are several arguments with spatial and structural
implications. Foreign banks not only contributed to the modernization and the ex-
pansion of the sector but often argued their lack of commitment to the local econ-
omy, which reinforce its dual character. As Claessen (et al. 2001) argued the loss
of monetary autonomy and increased volatility of capital flows might cause capital
outflow from certain regions, resulting in spatial and structural segmentation of the
25
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
peripheral areas. There are also concerns that foreign banks ignore certain markets
segment small and medium sized enterprises or propagate shocks originating from
their home country (Mérı-Valentiny, 2003). These disadvantages became observ-
able as the economic pressure diminished by the end of the transition process.
In the consequence of the diminishing financial role of the state, the growing
importance of the integrated markets both at global and supranational level goes
parallel with the strenuous effort being made to build up sustainable national fi-
nancial markets in the “new” market economies of Central and Eastern Europe.
The market concentration in European finance led to domination by large financial
firms situated in few financial centres located in the core regions. The increasing
role of global and other foreign players imposes a heavy burden on the government
of the emerging economies facing dependence from the global actors, whether to
promote the scope of action of the local firms or the multinationals instead. The big
question is to find the optimal equilibrium between the two ones.
5 Spatial development of the Hungarian banking
network
Developed financial services became determinant factors of the economic devel-
opment and competitiveness of the region, which in the longer run might have in-
fluenced the emergence of territorial differences (Mazucca, 1993). In regards to the
diffusion of the banking network, it is very important to survey the geographical
location and the different hierarchical types of settlements where banks are located.
The expansion of the banking network was determined very much by a huge inher-
ited debt imposing a large burden on the smaller state owned banks, limiting their
ability to build an extensive branch network. Large banks re-scheduled their policy
of network building and few of them closed some of their branch offices. Foreign
owned banks started to expand their branch network more cautiously only after the
mid–1990s. There are different reasons for this more cautious policy. On the one
hand, these banks were strong enough in terms of capital intensity, so that they
could adjust the pace of their network building to their own pace of development.
On the other hand, foreign owned banks were interested first in corporate banking,
and only afterwards the saturation of this segment has shifted to the retail market.
Several banks reformulated their strategies and intended to increase their presence
in the retail markets as well as to lending to creditworthy medium-sized enterprises
(Jöns, 2001).
The geographical distribution and the regional diffusion of the new branches
strongly correlated to the Hungarian economic processes in the 1990s. At the birth
of the two-tier banking system, the network was characterised by a certain spatial
26
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
balance due to evenly allocated branches of the OTP Bank. After the foundation of
the new commercial banks significant spatial asymmetry occurred within the
country since certain banks were missing from particular regions. This was espe-
cially so because some of the newly formed banks did not have representation in 10
counties and the others had strong sectoral affiliation dominating in particular
regions (Lados, 1991).
Significant spatial differences emerged in the network building process. Slight
west-east disparities were preserved from the pre-socialist times. Pre-war dispari-
ties in banking continued to exist in socialist times – though smaller extent – be-
cause of nationalisation of banks, resulting in an extensive branch reduction. The
structure of diffusion of the banking network had followed this spatial pattern for
the first time by the beginning of the 1990s. This was evident because the largest
unexploited territories of financial services were situated in Western Hungary due
to the committed economic development policies during the socialist era, which
had the preference to transfer state fund to the east and especially the north-east,
and to areas alongside the southwest – northeast industrial axes. The reason behind
the policy in favouring of the development of the eastern regions was the priority
of the stronger economic collaboration with the Soviet Union (Lados, 1991; Len-
gyel, 1994).
After the political change the prevailing majority of economic associations,
within it the joint-venture companies and the accumulated capital outside Budapest
flowed into the north-western regions, which were less-frequented in locating in-
dustries during the socialist period, indicating the new direction of economic rela-
tions. 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 an end. From the mid–1990s, after saturation of Transdanubia, the
larger cities of Eastern and Southern Hungary became the main targets of branch
network expansion (Gál, 2000).
A general characteristic of the early transition period was the growing impor-
tance of the national financial centre in the branch network expansion. All banks
have started to open their first branches in the capital city. Within Budapest most of
the head offices of banks are based in the inner districts. The spatial concentration
of the institutions gives a strong impetus to the formation of the central business
district, where the office buildings of banks became an important functional-
morphological element of the urban landscape. The number of banks has grown by
18-fold between 1987 and 2001, increasing the capital’s share within the national
network, with regarding to the network expansion, from 11% to 38% (with 358
bank offices). The expansion of branches has increased the density of network in
Budapest, resulting in that the ratio of one office per 25,000 inhabitants changed to
4,700. These figures demonstrate the high level of extension of the banking net-
work within the capital city.
27
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
Despite that spectacular progress has been made in the field of financial ser-
vices the accessibility to banks and the network density is still much lower than in
the Western counterparts (In the EU–12 [EMU members] there is the average of
1,923 inhabitants per branch). Hungary is lagging behind, in terms of the size of
the network, being low comparing not only to the EU average but also to the
Slovenian and the Czech figures. The smaller size of the banking network is high-
lighted by European comparisons (Table 7). In countries with smaller territories,
such as Belgium and The Netherlands there are seven times more branch offices
and less densely populated Finland has twice as much offices than in Hungary
(Gál, 2000).
Table 7
Indicators of access to banking service in selected CEEC countries, 2000
Country
Number Inhabitants Number of Inhabi-
Employee Inhab. ATMs per Assets
of
per bank
branch
tants
per
1 million (in mill.
banks
per
employee inhabi-
Eur) per
branch
tants
employee
Hungary
42
238,876
1,116
9,091
26,668
379
250
1,2
Czech Re-
40
255,608
1,840
5,556
46,000
222
160
1,7
public
Poland
84
522,220
2,323
16,667
139,280
278
100
0,7
Slovenia
25
79,640
571
3,448
10,883
181
430
1,4
EU–12
4,700
78,663
197,607
1,923 2,968 750
128
540
6,6
Source: Own calculation and Riess et al. (2002).
In Hungary the number of branches accounted for 1170 by 2003. The popula-
tion per branch, despite its constant improvement (with 22% 1998–2004), is still
amounting to 8561, indicating the insufficient accessibility to banking services.
Surveying the spatial distribution of banking services, measured by the financial
supply index, we can find significant geographical differences between the western
and the eastern parts of the country. Spatial differences can be surveyed more
thoroughly at micro-regional level than simply applying it to the macro-regions
(Figure 1, Table 8). Even more so, from the mid–1990s a shift has taken place,
levelling out the expansion of the banking network in favour of the eastern parts of
the country.
28
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
Figure 1
Density of the Hungarian bank branch network and the distribution of branches in the
cities with county seats functions, 2000
29
Source: Edited by the author and Handbook of the Hungarian Financial and Capital Markets.
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
Table 8
Regional distribution of the Hungarian banking network, 1998–2004
Regions
No. of
No. of
Territorial Territorial
Network
Network
banks
banks
ratio of
ratio of
density
density
1998
2004
branches
branches
(Inhabitants (Inhabitants
1998
2004
per branch) per branch)
1998
2004
Central Hungary
304
441
32
38
9,434
6,417
From which Budapest
253
358
27
31
7,356
4,762
Central Transdanubia
96
109
10
9
11,594
10,211
West Transdanubia
114
127
12
11
8,711
7,897
South Transdanubia
101
111
11
9
9,762
8,865
North Hungary
88
110
9
9
14,591
11,636
North Great Plain
109
147
12
12
14,073
10,524
South Great Plain
132
155
14
13
10,295
8,774
Hungary
944
1,170
100
100
10,736
8,647
Source: Handbook of the Hungarian Financial & Capital Markets.
During these years the number of branches in the cities of Eastern and Southern
Hungary increased more rapidly than in the western counterparts which previously
were the target regions. According to the recent micro-regional survey (see Figure
2) there are internal peripheries even in the western regions, however these are
prevailing in the eastern and the north-eastern parts of the country. The lowest
density of branches can be found in the North Great Plain and North Hungarian
regions, followed by the developed Central Hungary, in which the service supply
concentrating in Budapest explains the contradictions. In the regions with lower
density the economic activity of entrepreneurs, the low level of foreign capital
inflow etc. could be the explanation of the smaller interest of banks.
The spatial distribution of banks strongly correlates with the state of territorial
economic development. It can be said that the network expansion of branches ini-
tially followed the pattern of the spatial-economic division of the country, as banks
were mainly opening branches in the rapidly developing regions. Nevertheless,
surveying the distribution of the banking network according to the settlement types
is more expedient than investigating at territorial level; all the more so as banking
institutions have more links to the cities and towns, therefore capital flows is an
important indicator of the different urban processes. The branch network building
reveals a hierarchical top-down diffusion (Figure 3). The Hungarian banks, in the
early period of network building, aimed at covering the relatively small banking
market alongside the settlement hierarchy, starting their expansion first in the
30
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
Figure 2
The degree of banking supply in the Hungarian micro regions, 2004 (Measured by no.
of bank branch + no. savings co-operatives + no. of ATMs to population)
31
Source: Edited by the author based on VÁTI’s calculation.
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
32
Figure 3
Regional distribution of branch network in the Hungarian towns, 2000
(included banks headquartered in Budapest, excluded cooperative savings banks)
Source: Edited by the author based on Bankinfo database.
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
larger cities. The first branches in villages were also opened. As the number of
branches exceeded the number of larger cities the interest of banks turned towards
the medium-sized towns. The share of larger cities from banking network decreased
from 50% (with Budapest 66%) in the early 1990s to 22% between 1998 and 2004
owing to the network expansion targeting the smaller towns (Table 9). Bankruptcies
and the rationalisation policy of network development in the early transition period
mainly affected the larger cities, being the major beneficiaries of the earlier boom in
banking expansion. Recently the largest share (41.5%) of the network can be found
in the settlements between 10 and 50 thousand inhabitants. In the settlement cate-
gories with less than 5 and over 50 thousand inhabitants, networks expanded only to
a smaller extent, while the number of branches has decreased in the smaller set-
tlements. Population per branch ratio also shows that disparities between different
settlement categories considerably decreased during the transition period, but since
the end of the 1990s differences has been starting to grow.
Table 9
Distribution of branch network in Hungary on basis
of settlement categories, 1998–2004
Settlement
No. of
Ratio of
Territorial Territorial
Network
Network
category by size
settlements population
ratio of
ratio of
density
density
of population
branches
branches
(Inhabitants (Inhabitants
1998
2004
per branch) per branch)
1998
2004
1,000 – 1,999
641
9
0.6
0.2
230,771
461,543
2,000 – 4,999
505
14.8
7.3
6.2
29,826
29,252
5,000 – 9,999
136
9.2
13.0
12.0
10,408
9,378
10,000 – 49,999
122
22.6
36.9
41.5
8,961
6,612
50,000 – 99,999
12
7.5
17.8
17.9
6,109
5,057
100,000 –
8
11.4
24.4
22.2
6,807
6,192
Source: Handbook of the Hungarian Financial & Capital Markets & VÁTI (2004).
Certain larger cities (Pécs, Gyır, Szeged, Székesfehérvár), despite not being
seats of a regional bank, have been started to play significant roles in the agglom-
eration of financial services in which different organisations of the financial sector
(banks, insurance companies, consulting) attract each other mutually (Figure 1).
This also induces increased competition in the local-regional market. In the begin-
ning of the transition, West Hungarian cities, such as Gyır, Pécs, and Székesfe-
hérvár were considered the largest financial centres outside Budapest, while re-
cently Miskolc gained the leading position in the number of bank and co-operative
savings bank branches (37), followed by Gyır and Kecskemét (each with 32
branch offices), then Pécs and Szeged (31–31), and finally by Debrecen (28) (Gál,
33
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
1999). The main targets were the large cities in East and South Hungary, and
Miskolc, Szeged, Debrecen, Nyíregyháza gained a temporary leading position in
size of the local network. However, differences occurring in the number of
branches do not mean differences in the quality of banking services. This latter one
is much more dependent upon the territorial embedded ness and local economic
development, which can induce mutual attractiveness toward the other types of
financial, and business services. This is better highlighted by the territorial differ-
ences in credit supply. Branches in the eastern regions, in general, concentrated on
mobilising savings, while credit allocation is more restrictive there. Consequently
banks transfer their deposit via the Budapest head office to branches in Budapest
and the Central region, and the northwestern part of the country (Wágner, 2004;
Jöns, 2001).
In the 1990s, which is considered to be the transition period in Hungary, new
trends emerged in the national economy that stimulated the rise and expansion of
the new “core” regions and also reinforced spatial disparities inherited from the
former state-socialist system. In the early years of transition, regional differentia-
tion was spurred by the factors of economic crisis and the consequent decline how-
ever, since 1996 the spatial structure has been formed chiefly by the factors of dy-
namics that rested on economic restructuring. The main spatial consequence of the
transition was the deepening of the Budapest-countryside spatial-economic gap,
although it has existed in similar dimension in the communist era as well. What
was a real peculiarity of the economic transformation in the 1990s was the rapid
growth of interregional differences, measured by the Hoover-index, growing from
1.7 to 2.6 times between the most advanced and the less advanced regions (Nagy,
2002).
Besides the role of industrial restructuring in spatial development, advanced
business and financial services were to a large extent responsible for spatial differ-
entiations, although banking in the peak period of its network expansion phase po-
larised economic space to a lesser extent than FDI-related industrial developments.
Recently, advanced industrial development has stimulated the agglomeration of
financial services besides Budapest into the more rapidly growing western and
central regions (see Figure 4).
The growth rate of the financial sector and the growth of per capita investment
volume in the financial sector came close to those of the industry in the West
Hungarian counties and exceeded the industrial investment growth in Budapest,
Fejér and Csongrád Counties (Figure 5). Concerning the spatial diffusion of
financial services there is a strong correlation between the economic activities,
income patterns and the agglomeration of financial service providers (Nagy, 2002).
Spatial patterns of consumers’ income reinforce the position of Budapest and the
larger cities of the urban hierarchy.
34
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
Figure 4
GDP per capita as a percentage of the provincial average
in Financial & Business services, 1999
35
Source: Edited by the author based on Central Statistical Office data.
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
36
Figure 5
Per capita investment volume of enterprises & public organizations as a percentage
of the provincial average in Financial & Business services 1996–1999
Source: Edited by the author based on Central Statistical Office data.
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
6 Territorial and organisational levels of the Hungarian
banking system
Advanced business and financial services became determining factors of the eco-
nomic competitiveness of the regions, and influence the emergence of territorial
differences. Consequently, the differentiation of financial institutions according to
the market division of labour and the organisational structures determine both the
different organisational (institutional) and the territorial (location strategies) level
of the Hungarian banking system. In any developed economy certain basic finan-
cial functions and the related institutions are widely distributed geographically
(retail banking and building societies), corresponding to the distribution of popula-
tion, other more specialised functions and institutions (such as stock exchange,
pension fund houses, bank headquarters, investment banks, venture capital compa-
nies) are much more concentrated spatially. Like other industries, financial services
are also characterised by economies of agglomeration, path-dependence and loca-
tion lock in, and tended to cluster geographically in particular urban centres and
regions (Martin, 1999). Indeed urban hierarchy, as Martin argues, is largely, finan-
cial hierarchy. Most countries have a number of financial centres and typically a
single national centre.
6.1 Budapest: the national financial centre with international
aspirations within the CEE region
Budapest as the single national financial centre of Hungary laid the foundation
more than 150 years ago when the significant stock of original capital accumula-
tion and foreign investments particularly in banking flowed into the city in the era
of the early industrialization. The traditional predominance of Budapest in the
economy has not diminished, quite the contrary, significantly it has been growing
since the change of regime. The leading position of Budapest in finance, especially
in banking and insurance, is more striking than in any other sectors that are char-
acterised by strong spatial concentration. This considerable degree of concentration
implies a 95% of foreign capital investments, joint-venture banks and bank trans-
actions. Since the establishment of the Budapest Stock Exchange in 1990, the cen-
tre of capital markets is concentrated in the capital city. Budapest not only serves
and controls its own domestic finance, but it also has a role in carrying interna-
tional relations. In the capital city are all the specialised functions and institutions
of the financial sectors concentrated: the location of the stock exchange, headquar-
ters of banks, mortgage banks, insurance and leasing companies, and centres of the
37
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
specialised units of banks (treasury, call-centres). The advantageous position of the
city arises from its strategic location function, which acquires and manages the
critical information flows (institutional strategies, central data supply, connection
with the clearing houses, and stock exchange dealings) and the international rela-
tions (Wágner, 2004; Porteous, 1999). The share of Budapest in the employment of
the financial sector exceeds 37% compared to its 18% share of the national popu-
lation. This share can be much higher if we take the financial employees registered
by the headquarters into consideration (86% of financial employees belong to
companies with headquarter in Budapest). Despite banking is still the most cen-
tralised branch of economy the leading role of Budapest is not a peculiarity in
European context. In fact, the share of financial employees within the total em-
ployees (3.5 %) is lower than in other nearby cities (Vienna 5.6%, Munich 9.8%).
Recently, large cities and different regions rather than simply different nations
are in competition with each other in the field of the global world economy in order
to gain investment capital, and to connect with the sources of information. The
prototype of the future city will not be an industrial one, not even a place of ex-
change of services, but will be the city of money and knowledge. Budapest nowa-
days is quite far away from the role of an internationally economically controlling
position in world economy, but it is plain that in the East Central European region
there is a lack of regional economic managing, financial, communication, service
and financial centres (Enyedi, 1992). There is a commonly quoted issue namely the
role of Budapest as a potential financial centre of the CEE region (it was a policy
issue already in the early 20th century) and the question is whether Budapest may
become a real financial centre by international standard (Szabadföldi, 2001). One
of the stakes of the recently ongoing competition among the East Central European
metropolises is which capital city in the CEE region can become the regional fi-
nancial centre of the CEE region with significant international scope? Despite
some envisaged governmental expectations, Budapest has not become the “Singa-
pore of Central Europe” during the 1990s. Nevertheless by the end of first decade
of the 21st century Budapest might have chance to gain competitive advantage in
certain fields of the financial sector. In general, Budapest has favourable conditions
in terms of its gateway location between West and Southeast Europe. The size of
its urban agglomeration, favourable infrastructural conditions together with the
stable economic environment provide advantages, although not peculiar ones in
CEEC context. Communications and infrastructure are comprehensive and well
developed; the work force is highly skilled and reasonably priced. The competitive
advantages of the Hungarian financial sector centralised in Budapest can be under-
pinned by several factors:
– Budapest and Hungary have the best legal and financial infrastructure in the
region. The international competitiveness of the successfully privatised, pre-
dominantly foreign owned Hungarian financial sector is considered to be the
38
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
most advanced in the CEE region (Szabadföldi, 2001). Although, competitive
advantage of the financial sector decreased in the last years, but the sector
still keeps the competitiveness concerning the legal and supervisory frame-
work conditions.
– Because of the rapid restructuring and modernisation of Hungary’s economy,
the capital city has become one of the most important innovation-centres of
the region, which might play an important bridgehead in foreign capital in-
flow and investment within Central and East European countries, although
the pioneering role in the attraction of FDI recently has diminished. Foreign
capital flew into the financial sector was directly invested into banks and
other financial institutions having headquarters in Budapest.
– Budapest has a metropolitan townscape, adequate infrastructural background
and stable economic environment, which are quite important attractive fac-
tors for the investment of the multinational companies. The fact that a grow-
ing number of multinational corporations have chosen Budapest for some of
their business and financial centres forms a certain basis of this expectation.
There are few financial institutions that have yet explored some benefits of
centralising infrastructure (usually back-office functions, call-centres) on re-
gional basis as bridgeheads facing Eastern Europe (Citibank, GE).
– The stock market in Hungary is developing quickly, although capitalization
of the Budapest Stock Exchange (BÉT) is still considered low even to com-
pare with the Warsaw Stock Exchange. Nevertheless, the BÉT recently is one
of the most rapidly growing stock exchange of the world (in 2002 the BUX
(BÉT’s index) was the fourth fastest growing index and it was the third most
advanced according to the liquidity). The traditional Viennese Exchange,
once the leading exchange in the region, in co-operation with the HVB
banking group has purchased the majority of shares of the BÉT in 2004 in-
tending to create, with further acquisitions, a leading regional exchange
within the CEE region. This raises the important question, that if further de-
velopment of capital markets in the CEECs is necessary, does each country
have to go its own way creating parallel and fragmented financial structures
or should countries try to team-up to create a “pan Central-European capital
market” instead, which services the specific needs of the region and head-
quartered in a particular location?
– After years of dynamic growth within Hungary, some of the leading local
banks have started their foreign expansion and looking for investment op-
portunities especially within the region. The Hungarian economy has again a
pioneering role within the CEE region in the capital export attaining the three
Billion USD by 2003. The financial sector itself became the second most
expansive sector in direct investment abroad, comprising 25% of the total
capital export. OTP Bank, the largest Hungarian bank, as a pioneer in foreign
39
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
investment, purchased Slovakian, Bulgarian, Romanian and recently Serbian
banks. The fact that the Hungarian banking sector has become capital ex-
porter increased the international activity of the Hungarian banks, which can
be regarded as an important function of a financial centre.
On the other hand, there are certain limits to the development of such an inter-
national financial centre in Budapest:
– The international financial centres do not need to be the largest cities in the
region in terms of population, however their economic activity and size of
their domestic market could provide higher level of financial functions than
in the case of other cities. These centres not only serve the inhabitants of their
agglomeration area, but the specialised services, which are in demand over a
much larger area, covering a country, a large region and even global markets.
Because of the small size of the Hungarian financial market, the smaller size
of banks (smaller provisions for expected liabilities), and the lower level of
financial intermediation, is it yet nowhere near the level needed to sustain a
properly functioning economy.
– The lower cost of labour has historically guided companies in their Foreign
Direct Investment decision in Hungary, although the importance of this is
diminishing as labour cost-sensitive industrial investments are in the process
of shifting further east. Hungary’s skilled workforce and the well-trained
management pool as a continuing competitive edge, albeit availability of
qualified labour varied. Despite the supply of highly skilled labour, in certain
fields of finance the practice-oriented qualification does not fulfil the re-
quirement of international standard (accounting, cost management), which
resulted in the employment of foreign managers in financial firms (Pelly,
2001).
– The strengthening of economic relations within the region slightly dimin-
ished by the parallel foreign direct investment activities within the financial
sector deriving from the same ownership composition in each country. For-
eign banks that opened their subsidiary banks in Hungary established
branches and subsidiaries in other Central European countries parallel, which
are governed from the headquarters of the parent companies. Consequently,
foreign banks concentrate more on covering each national market rather than
on establishing a single regional banking centre, for instance, in Budapest.
– Decentralization processes set up parallel with centralization in the recent de-
velopment of global markets. Many global players have established their ser-
vice centres and back-offices in Budapest demonstrating a strong tendency of
the Hungarian subsidiaries of multinational companies to take on a regional
role, although investment banks, as one of the indicator of the formation of
regional centre are sill missing from there.
40
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
In the Central European region the important preconditions for the creation of a
regional centre is still missing. Although global financial players built up their ac-
tivities and institutional settings parallel throughout the CEECs there is little evi-
dence of product standardization across CEE region, which is sometimes evidence
for some regional focus (Pelly, 2001). There are other limits to the growth of such
international financial functions in Budapest since telematically based concentra-
tion processes, which are characteristic of global money markets, could overcom-
pensate the advantages of geographical proximity. Multinational companies are
most likely to utilize only the simpler financial services in the Central European
region, and the services requiring more resources will utilize in traditional Western
European and overseas financial centers. On the other hand, the decision making
on the strategic location of companies often prefers the establishment of decentral-
ized sub-centres through geographical outsourcing, locating them with regard to
the expected geographical direction of the future market expansion. The stability of
competitive environment reinforced further by the EU accession makes Budapest
an attractive location for servicing international back-office functions, or especially
in consumer finance there is a good potential to concentrate the scattered functions
throughout the region into a single back-office division of Budapest (Bellon, 1998).
The size of domestic economy to some extent weakens the attraction of Budapest,
which is counterbalanced by the good accessibility to the unexploited South East-
ern European markets. However, one can argue that fundamentals of the sur-
rounding capital cities are similar to that of Budapest, except Vienna where the
wage-level is not competitive with the other locations. Achievement of this re-
gional role depends on several global, macroeconomic factors and also on the
competition between the capital cities (Warsaw, Prague, Vienna) similar in their
financial standing. This raises another important question whether the CEECs need
to develop their own capital markets, or they could instead of rely on existing (the
fragmented and slowly integrating) EU markets (Köke–Schröder, 2002)?
Despite the chances of becoming regional centre have improved since the Mil-
lennium owing to the promising performance and the international expansion of the
domestic economy, Budapest is still not suitable to develop as a major regional
centre with full-scale international functions, rather it might become a back-office
centre with distributive functions. Some experts argue, that Budapest could suc-
cessfully apply only for the position of a subordinate regional sub-centre special-
ized in certain services. Subject to these conditions, services that require smaller
amounts of capital and highly qualified employees will come into prominence. To
carry out all these, it is necessary to strengthen the banking system with the busi-
ness-like intervention of the state (Bellon, 1998).
41
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
6.2 Spatial (re)organisation of bank network in the regions
The number of actors in the banking sector varies parallel with the spatial concen-
tration processes of banking and capital markets, which produces competition on
the more and more expanding banking markets. With the expansion of branch sys-
tem, the deconcentration processes have strengthened. In contrast with tendencies
experienced in the EU, during the consolidation of the market the number of
branches has not decreased. Moreover, currently the branch system increases in
moderate speed. In spite of the expansion of branch system, the concentration of
retail market is still bigger than the concentration of corporate banking, measured
by the Herfindhal-Hirschman index, and the market share of the largest bank fur-
ther increases it (Móré-Nagy, 2004). Primary tool of acquiring market share is the
enlargement of branch network. The need for the presence in the local market
(collecting sources and crediting) and the competition for retail banking market
inspire for building the nation-wide network, in which financial institutions con-
centrate on collecting local sources. In the formation of the organizational and ter-
ritorial frame of the development of branch network, the role of foreign capital is
determinant. It determines not only the intercompany equity participation and the
technological level but also the spatial dimension of market building strategy (in
the case of bigger retail banks it would be optimal to form a network with 100
units) (Várhegyi, 2002b). The bank network building in the last 15 years of devel-
opment of modern banking is characterised by waves of network expansion–re-
duction, overlapped by the parallel organisational processes of decentralisation
and centralisation of certain functions.
Banks in the expansion period of network building partly contributed to dimin-
ish the earlier existing spatial differences, although with limited spatial scope. The
positive effects of foreign direct investments in the countryside can be experienced
in the enlargement of branch network and services with better quality. In the sec-
ond half of 1990s banks with foreign owners enlarged the branch network inten-
sively. Their roles in the enlargement of network, degree of supply of branches and
thus reducing territorial differences were determinant. The population per branch
ratio significantly decreased during the 1990s, as argued in section 5, indicating the
evening up tendencies and the diminishing spatial disparities during the expansion
period of banking (see Table 6).
In Hungary, more and more financial institution made steps towards the ration-
alisation of organisational structure, forming regional control-offices and decen-
tralisation of controlling functions. Recently, commercial banks with larger net-
works have reorganised their institutional and managerial structure forming a hier-
archically-built domestic network of branch offices, decentralising certain control
functions. Banks are starting to pay much closer attention to the geography of their
distribution networks. In 2002, 6 of 13 banks possessing nation-wide branch net-
42
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
work were having an organisational structure with at least three hierarchical levels.
The majority of the banks with foreign owners also represented this conception; the
foreign owners transplanted their own tried and tested management and controlling
practice into Hungarian banks. A bank with a more extended network builds up a
more decentralised organization structure with a greater probability than a bank
with smaller network. Establishing territorially deconcentrated organisational units
does not mean reduction in decision-making competences of the centre in the
capital city. Strategic developmental decisions are made further on in the head-
quarters situating in the primary financial centre or headquarters of the foreign
parent bank (McKillop-Hutchinson, 1991).
The decentralisation of a bank, of course, has rational (economies of scale) lim-
its. At the same time, Western examples show that certain financial service provid-
ers can have a decentralised organisational structure on a regional level, which
does not call in doubt the role of the national banking and can contribute to a more
effective operation of the network. Today the organisational decentralisation in
Hungary is formal in many cases. It means that not only the decision-making com-
petences are limited outside the centre but also banking services are developed
nation widely, so there are no specific local services or goods in the banking sector
in Hungary. Different characteristics and development levels of the regions can
make the elaboration of certain specific services reasonable.
Besides the head office the next managerial level of a bank system in spatial
terms is represented by the regional centres and sub-centres. For making the first
steps of decentralisation, banks establish their regional control offices and give new
management functions to local branches. Regional control offices play the role of
intermediate tiers between head office and local branches, having supervising au-
thority over local branches in their geographic areas. These newly created region-
ally controlled territories of large banks are different from each other, and have not
overlapped the territories of the statistical regions, but their regional control of-
fices, in the most cases, have been concentrated usually in the largest cities of the
regions with a potential becoming a regional centre. The existence of a financial
centre can be defined by simultaneous presence of quantitative and qualitative in-
dicators (the number of the banking headquarters and branches, position in the
organisational hierarchy, existence of other financial institutions, the number, pro-
portion and change of employment in the financial sector etc.) (Wagner, 2004). It
can be stated that the financial role of five cities in the country (Pécs, Gyır,
Szeged, Debrecen, Miskolc) grows and they started to act as special regional finan-
cial sub-centres (Table 10).
43
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
Table 10
Potential regional banking centres in Hungary
Cities
No. of
No. of
No. of non-
No . of
No. of
No. of
No. of re-
banks with headquar-
banking
bank
savings
financial gional control-
network
ters of
financial
branch
co-opera- employees
offices of
located
savings co- intermediar-
tives
banks with
operatives
ies
Budapest HQ
2002
2002
2002
2001
2002
2002
2002
Debrecen
13
0
22
25
1,632
4
Gyır
13
1
36
27
1
2,073
5
Miskolc
13
0
40
24
2,108
5
Pécs
13
0
35
23
4
1,610
5
Szeged
13
3
37
25
3
1,573
4
Hungary
28
189
n.a
1168
1705
52,748
–
Source: Wágner (2004) and Handbook of the Hungarian Financial & Capital Markets, annual editions
of the Regional Statistical Yearbook.
It is noticeable that the financial service providers agglomerate and more and
more banks open their offices on the regional level. At the same time, they cannot
be considered as real regional centres. International literature considers a geo-
graphical location as a regional centre only if it has an ability to produce and proc-
ess independent information, and it has locally established banks, and has locally
based branches or representative branches of foreign banks (Tickell, 1996; Porte-
ous, 1999). In Hungary there are no real regional financial centres as the organisa-
tional system of banks is strongly centralized, so they produce only limited original
information and information flow is directed mainly towards bank centres. The
decision-making competences of centres are restricted and limited in sum of
money.
On the other hand, differences occurring in the number of branches among dif-
ferent cities and regions do not mean differences in the quality of banking services
and do not obviously constitute a regional financial centre. The territorial
embedded ness and local-regional economic development, which can induce
mutual attractiveness towards the other types of financial and business services. In
the Hungarian regions, the agglomeration of financial services (Table 11) is based
almost exclusively on the employment and information basis of the regional
centres (and on its regional monopoly in many cases), and on the competition
among banks competing for the local market, which in many cases is independent
from the economic performance of the region.
44
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
Table 11
Agglomeration of other financial services in the potential regional
banking centres (No.), 2002
Cities
Leasing
Financial
Insurance, insurance
Companies listed on the
companies
services
brokers
Budapest Stock Exchange
Debrecen
2
2
8
2
Gyır
2
2
16
4
Miskolc
2
15
12
1
Pécs
3
6
13
2
Szeged
3
4
15
1
Source: Handbook of the Hungarian Financial & Capital Markets, annual editions of the Regional
Statistical Handbook (based on Wágner’s calculation, 2004).
Banks founded with FDI from the late 1990s, with the spatial and organisa-
tional reorganisation of their network largely contributed more to a deepening of
uneven regional development. However building branch networks is based strictly
on business and profitability aspects, so these are also the priorities in strategies of
network building banks on either regional or settlement level. Differences in the
financial service supply in certain territorial and settlement levels contribute to the
growth in regional disparities. The most determinant spatial characteristics of
banking supply, after the extensive network expansion has declined, is the almost
total lack of bank presence from villages even from the bigger ones. At present,
branches are situated in 223 settlements (of which 99% is town), so there is no
bank network in villages, which constitute 93% of all settlements. Only 13 % of the
3,145 Hungarian settlements in 1998 had at least one bank branch or main office of
the co-operative savings bank. In some of the other 87% of municipal branches of
co-operative savings banks or alternative financial infrastructure such as ATMs,
post offices might have been available, providing only a basic level of services.
Thus, disparities between rural and urban areas are among the most important
disparities emerged in the geographies of banking at the turn of the 20th and the 21st
centuries. While between 1998 and 2004 the population per branch has increased in
Hungary by 18%, in micro-regions with the lowest degree of branch supply this
indicator has decreased by 5.3%, and the number of micro-regions with the degree
of branch supply under the national average of the country has increased from 97 to
102 (Figure 2). Banks continue their so-called ‘redlining strategy’ not only in the
network building but also in certain service segments. Commercial banks are not
interested in these less profitable and prudent businesses as they have different
orientation of profile and tasks. The majority of banks still do not finance very
often agricultural investments, SMEs and regional developments. Currently some
45
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
of the banks strengthen their competitive positions in these markets too. Because of
the spatial structure of the sectors mentioned above, primarily the degree of bank-
ing supply of rural areas worsens. Therefore they often seem to discriminate
against particular regions, although the building banking network in the transition
period has significantly moderated the territorial differences. However, nowadays
territorial differences are increased by slowing down the deconcentration of the
network and closing down of branches (Figure 6). In Hungary there is a danger of
“financial exclusion” in certain rural regions, in many small towns, small villages,
in one word, the economically disadvantageous areas. Furthermore, there is also a
great inequality in the accessibility to banks within cities or communities differen-
tiated by social positions.
Since recently, banks are facing structural challenges of very competitive mar-
kets, which is characterised by increasing competition and de-intermediation. This
will influence both the institutional and the spatial structure of banking. Following
the M&A activities taken place in the last years the market concentration is in-
creasing, which accelerated by the introduction of information technologies and
operation cost efficiency. Banks react to these challenges with the reorganisation of
their organisational structure gaining ground for the centralisation of the organisa-
tional structure, which resulted in a growing spatial concentration of the market.
Banks after the period of rapid network expansion concern about network restruc-
turing, merging certain functions into back-offices. Network reorganisation is sen-
sitive to geographical variation in profitability, risk, debt and social conditions in
a particular area, resulting in employment loss subsequent to IT-development and
further deepens financial exclusion (Geenhuizen, 1999). Recently committed strate-
gies of retail banks, with closing branches in rural and economically-socially de-
pressed areas, especially in the eastern part of the country, contribute to increasing
spatial disparities (Figure 7). Changes in the organisational system of branch net-
work have also spatial implications as they are space sensitive. In banks’ strategies
elaborated at the turn of the millennium, organisational centralisation was
strengthened, which reinforces the central role of Budapest.
The over-centralised character of the financial market and the lack of decen-
tralised regional financial system can restrain and slow down regional develop-
ment in the long run. Chance for foundations of banks with local residence, which
is one of the criteria of a regional central function, is small in Hungary for simple
reason. Apart from Budapest, especially in the undeveloped regions the conditions
for capital accumulation needed for the establishment and operation of independent
banks (with economies of scale) are very unfavourable. Studies by Nemes Nagy
(1995, 1996) examined economic activity and capital accumulation possibilities of
peripheral regions with the help of indicators of entrepreneurial activity, profitabil-
ity of firms and territorial distribution of personal income tax. Budapest got bigger
share from the dynamics supporting elements of the economic transition, as it
46
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
Figure 6
Expansion and financial exclusion: Bank branches opened by the foreign owned
commercial banks (left) and branch closures by all commercial banks (right)
between 1990 and 1998 in Hungary
Source: Jöns (2001).
47
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
Figure 7
Changes in financial sector employment in the Hungarian
counties, in %, 1996–2002
(Average national decline 13.9%)
1 0 ,0 %
5 ,0 %
0 ,0 %
-5 ,0 %
-1 0 ,0 %
-1 5 ,0 %
-2 0 ,0 %
-2 5 ,0 %
-3 0 ,0 %
-3 5 ,0 %
-4 0 ,0 %
-4 5 ,0 %
-5 0 ,0 %
t
s
t
r
s
s
r
k
n
s
d
e
s
m
m
n
a
l
a
a
y
d
y
a
n
e
a
o
g
u
é
p
e
j
é
o
g
r
é
r
o
V
a
n
l
n
l
é
v
r
á
l
n
r
e
k
k
r
á
a
P
e
o
p
p
Z
o
p
e
g
i
h
o
e
i
s
é
g
d
F
r
g
z
o
r
a
m
T
H
ó
-
B
z
B
n
u
t
e
s
a
o
m
e
N
ú
r
-
B
-
K
o
B
z
e
-
S
B
S
-
S
s
s
s
á
V
n
j
d
n
c
C
o
j
-
Z
a
á
-
E
s
ú
u
H
k
t
m
B
m
o
a
y
a
b
g
z
r
o
a
á
r
-
M
-
A
-
S
ı
s
m
y
d
-
N
l
c
o
o
z
G
s
o
K
r
s
o
á
b
J
a
B
z
S
Source: Edited by Wágner 2004, based on data Regional Statistical Yearbook.
48
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
should have received proportionally to its population, such as from local capital
accumulation, foreign capital investment and development of financial services.
Besides the capital city, dynamic towns in the central and Western regions are the
winners of capital accumulation, and centres of regions and county seats develop-
ing dynamically follow them.
At the same time in 80% of rural villages and in disadvantageous micro regions,
the absence of capital that can be mobilised has become permanent. The low level
of capital accumulation (concentration) in the disadvantageous regions, which
shows the producing capacity of rural economy, is surely related to the lack of
foundation of financial institutions with regional headquarters (Nemes Nagy, 1995).
For the foundation of a savings bank, there is a requirement of registered capital 1
Million Euro but recently the majority of savings bank cannot fulfil this. The re-
quirement of registered capital 10 Million Euro for founding a bank is even a big-
ger barrier to establish a financial institution in the regions. The changes that have
been experienced in the last few years call attention to the possible danger that new
interdependencies have been formed between the capital city and regions. The
‘Filtering’ role of Budapest has been strengthened primarily by its key position in
the information flow. The conditions of capital concentration are unfavourable out-
side Budapest and the most developed regions of the country. There is a threat of a
new kind of dependence between the capital city and the regions. The Budapest
orientated financial system filters (filtering-down) the most profitable financial
services (firm banking, portfolio and risk management, private banking), making
use of advantages of its location, and directs traditional and less profitable services
to peripheries (Figure 8). Taking into account capital transfers among Budapest
and the regions it can be said that capital transfers at the expense of the regions is
negative.
Resident banks have the potential to build on their advantage in the regional
(retail) markets where they do not face strong foreign competition and could ex-
ploit their knowledge of local conditions and existing client relations. In this area
they have the best chance increasing their markets share due to increasing lending
to borrowers, such as SMEs, that have been redlined in the past. This required a
more comprehensive decentralized organizational structure of commercial banks
and development strategies concerning expansion and to handle the parallel proc-
esses of financial exclusion with care. This implies the question how decentraliza-
tion can contribute to a more efficient operation of the network.
Researches made in the first part of the 1990s’ suggested some possible ways of
development of a more decentralised banking network: widening branch network
of commercial banks, integration of savings banks, founding financial institutions
of municipalities and forming regional development banks (Illés, 1993). Besides
49
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
the lack of equity capital, the sharp competitive situation (the Hungarian financial
market is almost saturated if we consider the number of financial institutions) lim-
its the entrance of new actors. Tendency in the future can be the growing concen-
tration of the banking sector, further decrease (at slow speed) in the number of
independently operating financial institutions and exploitation of potential oppor-
tunities in the integration of the savings bank sector.
In Hungary the local-regional credit supply operates through a centralised na-
tional branch-banking systems, and local savings banks operate in restricted rural
and urban areas. The majority of banking system can be found in bigger or middle-
sized towns. Co-operative savings bank can be regarded as alternative financial
service providers, as they are the only credit institutions in certain areas.
Figure 8
Per capita GDP of the financial sectors as a percentage of the
regional average (=100) in the Hungarian regions, 1997, %
700
600
500
697
400
300
200
100
121
110
106
104
84
81
0
Central Hungary
West
Central
South
South Great
North Great
Norh Hungary
( incl.Budapest)
Transdanubia
Transdanubia
Transdanubia
Plain
Plain
Source: Central Statistical Office (edited by the author).
50
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
Alternative financial infrastructure can supply the basic banking facilities and
low cost credit to households with lower incomes (Leyshon–Thrift, 1997). Thus,
effects of commercial banking system on the smaller towns and bigger villages are
small. (At the same time, 33% of money flows in 2000 occurred in villages, which
do not have any branches.) Strengthening the market position of savings banks
having an expanded rural network is the base for spreading financial services on
the lower level. (In nearly 50% of all Hungarian settlements, in which 15% of the
whole population lives, there are not any financial services). About 2.5–3 million
people live in villages having only a single financial institution, like a savings
bank. The presence of co-operative saving banks significantly improved the supply
ratio in Hungary, which is much better than the average counted on the basis of
commercial banks (3100 inhabitants per branch, it is 2.8 times better) (see also
Table 7). The decentralised feature of savings banks could be a powerful
competitive advantage in the local financial markets but only savings banks’
integration co-ordinated by means of a central “umbrella” bank can produce
profitable operating conditions for the excessively scattered savings banking
system. Because of forming optimal bank size, 70–100 savings banks, instead of
the 190 contemporary, could operate with economies of scale in Hungary (Kiss,
2000). With the balance-sheet footing of the integrated savings bank system, it can
be the fifth largest bank in Hungary. Currently the regional performances of
savings banks are the best in South-Transdanubia and the South Great Plain, where
savings banks building on the strong agricultural basis could obtain powerful
positions in the urban markets. Performance of savings banks in Budapest and the
Central Region is poor, as commercial banks dominate here. For considering
longer period, it is advisable to reduce the polarization of the Hungarian bank
system by the co-operation between commercial banks having a smaller but
spatially more concentrated network and savings banks possessing an expanded
network in smaller towns and villages. The Hungarian banking market cannot be
fully covered without the savings bank sector, as commercial banks would not like
establishing branches in large numbers in smaller towns or villages and at the same
time, the expansion of savings banks in towns can continue.
51
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
7 Impact of European integration on the Hungarian
banking sector
Hungary has one of the best performing banking and financial systems in the post-
communist CEEs region. The reasons behind this are the following (Várhegyi,
2002b):
– Hungary was the first to abandon the mono-bank system recreating a two-tier
system (Hungary already had a two-tier banking system when the Berlin
Wall came down);
– It was the first to repair the mistakes of the early transition years: loan &
debtor consolidation and re-privatisation programme;
– By 1997 Hungary had opened the doors to a higher proportion of foreign
banks than in any other post-communist country (the ratio of state owned
shares had fallen to 11% by 1997).
Despite of its relative small size of economy, the banking sector dominates
Hungary’s financial system. The quality of the portfolio of the Hungarian bank
sector improved much in the second half of the 1990s (bad debts have fallen to less
than 3%) and the average capital adequacy has been around 15–17%, pointing to a
well-capitalised banking sector. The structure of banks’ balance sheets has become
similar to it has been observed in the EU. Since foreign (mainly EU) investors
dominate the banking sector (two-third of the total registered capital and 90% of
the banking assets) they have contributed to a great extent to the modernisation of
banking. Therefore the entry of foreign green-field banks, bank restructuring and
bank privatisation to strategic foreign investors has strengthened the stability of the
Hungarian banking sector (Várhegyi, 2002b). While Hungary has been successful
in creating a functioning banking system, bank intermediation has not grown as
fast as most observers predicted it in the early 1990s. The role and the capitalisa-
tion of the banking sector in the economy are rather limited and remain low by
international standards. This is largely due to substantial competition from other
foreign capital sources such as FDI, direct lending by non-resident banks, inter-
company loans, and non-banking funds. Taking the example of the stock of cross-
border loans to firms in Hungary, which amounted to 11.5 billion euro and it was
almost as high as the amount of company debt owed to the Hungarian banks (12
billion euro).
In the advance assessment of the European integration we have seen that the
Hungarian financial integration – comprising the activities of foreign investors and
the availability of foreign finance for domestic borrowers – will have a significant
impact on the Hungarian banking sector.
To assess the advantageous and disadvantageous impacts of the EU integration
we have to face that the common monetary framework and the liberalised capital
52
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
flows will be beneficial only in the long run as they create more severe competition
from the date of accession. EU accession may influence net capital inflow to Hun-
gary, but the possible effects are ambiguous. On one hand, diminishing sovereign
risk may raise inflows into the banking and corporate sector. On the other hand,
Hungarian banks will be in a better position to diversify assets geographically and
they will benefit from their local knowledge. It seems to be unlikely that Hungarian
banks will target advanced EU markets, but it is possible that they will expand their
market scope in other accession countries as a few examples already demonstrate
this aspiration (Várhegyi–Gáspár, 1997).
The banking network will continue to change as the number of universal banks
will decline, but on the other hand the number of specialised institutions may rise.
The major effect of integration is that the number of current subsidiaries of foreign
banks will be turned into foreign bank branches according to the non-discrimina-
tion principle of the place of origin of the capital and newcomers may open
branches. This could further diminish the role of resident banks and decrease the
bank capitalisation subsequent to EU accession. To open cross- border branches by
foreign banks requires much lower capital adequacy ratios, which will be compen-
sated for the unlimited liability of the foreign parent bank. The accession can be
expected to promote further competition, resulting in a bank margin and operating
cost decline. Competition will be stronger in corporate markets, where the compe-
tition has already driven down margins and where rivalry will certainly intensify
after accession. However there is a good potential for resident banks to benefit
from their local knowledge in the lending to the SME sector. In retail markets
where resident banks already exploit their knowledge they do not face strong com-
petition. Although in retail segments with the increasing numbers of non-banking
actors, they may divert some resources from the established banking network (Vár-
hegyi, 2002a).
Generally we conclude that one hand, accession should further enhance the in-
tegration of Hungary’s banking system with those of the EU making the banking
more stable and efficient. On the other hand, we have seen that the high spatial and
structural polarity within the banking sector,7 which in some remote provincial
areas may have a lesser capacity to promote their economic development. These
areas might experience certain disadvantages as a result of the financial integration
in Europe. In the consequence of the European integration the Hungarian banking
will face very similar structural issues as its Western counterparts, namely the
widespread of universal banking, mergers & acquisition fostering by increasing
competition not only within the banking sector but also from the side of non-
banking players. Globalisation and integration of financial spaces open up oppor-
7 Characterized by “redlining” policy of the recent years on the side of the SME segment especially in
the periphery.
53
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
tunities for both local-regional and large pan-European financial alternatives (uni-
versal multi-country and global banks), and consequently the major losers of the
integration will be the medium-sized domestic banks. All these challenges facing
the Hungarian financial system require new structural and regional policy from the
banking side and a more efficient co-ordination and supervision from the regula-
tors’ side.
8 Predictable regional impacts of financial
integration
There is currently considerable interest in debate over the impact of increasing
European economic and monetary integration on the regions of the EU. Opinion is
sharply divided whether EMU is leading to regional economic convergence or
regional economic divergence. Ron Martin’s recent comprehensive paper exam-
ined the theoretical arguments and empirical evidence of these opposing views
(Martin, 2001). Among these theories, the Optimum Currency Area (OCA) stresses
the need for economic homogeneity across regions as a precondition for establish-
ing a unified monetary space. Neoclassical models predict that the European cur-
rency area should lead to regional economic convergence of the sort implied by
OCA theory (Cohen–Wyplosz, 1989). On the other hand, theories of regional
growth based on localised increasing returns and endogenous growth, predict that
EMU will lead to regional divergence, which is counter to the requirements of the
OCA model. Recently, regional economies across the EU do not appear to have
moved significantly nearer to those conditions. The empirical evidence on regional
trends suggests that while “regional convergence took place some extent between
1950s and the mid–1970s, since then, as the process of European integration itself
has deepened, regional convergence has slowed and ground to halt” (Martin,
2001).
In the mid–1990s, little argument predicted that the prospect of greater
integration between Eastern Europe and Western Europe will be limited and may
prove illusory (Budd, 1997). One of the major arguments of these critical outsider
views is that the lack of properly functioning financial systems will be unlikely to
serve and fulfil the wide range of economic and financial requirement (inherited
bad debt issue, state budget constraint, risk-related capital adequacy ratios, and
EMU’s convergence criteria) before the integration takes place. The domestic
capital markets in the CEE countries are unlikely either to develop sufficient ma-
turity or to overcome considerable difficulties in the short to medium term to pro-
vide an adjustment role of the integration criteria (Budd, 1997). As we have seen in
the previous chapter of this paper Hungary (and most of the other accession coun-
54
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
tries as well) very rapidly and successfully has overcome of structural adjustment
problems of the financial, in particular banking sector at national level. Such an
unpredictable rapid pace of successful privatisation and following modernization of
the banking sector together with the appropriate adoption of the EU directions for
the financial markets and state supervision surpassed even the most optimistic ex-
pectation of the observers.
However, this exaggerated pessimistic view of modernization prospect of the
CEECs is acceptable in the case of regional impacts of the accession. That argu-
ment predicts that the fiscal adjustment to fulfil the EMU convergence criteria will
have a greater impact on the regions of these accession economies, and may in-
crease the regional differences and the economical vulnerability of the regions. The
imposition of monetary and fiscal convergence criteria may put up a further barrier
to the wider integration of Europe in the case of the too rapid accession process of
CEECs to the EMU. This latter might reinforce the problem of uneven develop-
ment and may strengthen the core-periphery regional structure within the new ac-
cession countries.
There is no doubt the main cost of joining the Union and later to the common
currency area together with the loss of the national monetary instruments is that
accession countries might experience certain disadvantages because of the financial
integration. Several studies have examined an asymmetric monetary shock so far at
national level (Krugman, 1992; Eichengreen, 1992; Masson, 1996; Cohen–Wy-
plosz, 1989; Wyplosz, 1997) but only very few have done at regional level and none
of them surveyed the possible reaction of the financial sectors in the case of the
accession countries’ regions (De Nardis et al.. 1996; Ramos et al. 1999).
In the following, we analyse the possible macroeconomic effects of the EU and
EMU integration at regional level in Hungary using national and Eurostat Data-
bases. The methodological approach following some previous surveys’ methods,
based in the Theory of OCA, has consisted in comparing the values of correlation
coefficients for different economic variables among every region, national and
European aggregates (Ramos et al. 2001). The analysis of asymmetric shocks at a
regional level is related with the degree of concentration of economic activity. The
consideration of the fact that European regions did not have sovereignty to apply
their own autonomous policy implies that inside every national state regions could
have been adversely affected by the national single monetary policy in the emer-
gence of the asymmetric shocks. In this sense, the consideration of the effects of
accession into the European Union and the Economic & Monetary Union neces-
sarily involves taking account to the relative situation of every region inside their
own country. The methodology used in this section consists in comparing the value
of the correlation coefficients between the growth rate of the same variable (GDP
per capita growth rate) for four different territorial levels such as the Hungarian
regions, the nation state level and the European level. Two different definitions of
55
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
the European aggregates are considered in the study: EU–15 and the EMU–12 lev-
els. The comparison of these values permits to assess the advantages and disad-
vantages (the macroeconomic cost) for every Hungarian region, which will be par-
ticipating in the EMU in the future. If the relationship between every region and
the European aggregates are as intense as the relationship with the pervious na-
tional aggregate, the relative position of the region in this new macroeconomic
framework will be similar to the previous one. The disadvantageous effects will be
negligible and namely there will be no additional macroeconomic costs for the
given region8. The previous surveys assessing the degree of symmetry of economic
shocks experienced by the EU regions and states have focused on the evolution of
GDP, prices and wages, which are strongly correlated to the objectives of the
monetary policy (Ramos et al. 2001). We survey analyses the relationship among
the growth rates of per capita GDP at market prices (PPP) in all Hungarian NUTS
II-regions from the period 1996–2000.
In general, it can be said that most regions keep the same relative status inside
the country when comparing the previous situation with the European aggregates
(Table 12).
Table 12
Correlation coefficients among per capita GDP growth rates between
1996 and 2000 in Hungary
Regions
EU
EMU
HUN
Hungary
0,80
0,85
–
Central Hungary
0,89
0,90
0,92
Central Transdanubia
0,81
0,70
0,87
West Transdanubia
0,19
0,48
0,70
South Transdanubia
0,45
0,69
0,83
North Hungary
0,45
0,60
0,89
North Great Plain
0,81
0,75
0,91
South Great Plain
0,70
0,84
0,96
2/√(5)yr
0,89
Source: Calculation by the author.
8 To distinguish between the significant and non-significant correlation the Brander and Neuser
(1992) model were used suggests that at a 5% level of significance the values obtained from the
expression is 2/√n, where n is the number of observation of the considered series.
56
Gál, Zoltán :
Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
Although in Hungary there are significant regional differences, the data of GDP
per capita growth rate between 1996 and 2000 (in the period of economic recovery)
represent slight spatial equalization within the country.
West Transdanubia was the only region, which in the consequence of the higher
level of its state of development has differed from the more fluctuating general
national and regional tendencies. However, it is important to remark that the aver-
age correlation with the national level is always higher than average correlation
with the European aggregates, but correlation with EMU aggregates are usually
expected to be higher than correlation with the EU aggregates.
In general terms the standard deviation of the correlation coefficients also
increase when considering the European aggregates. In the case of our preliminary
surveys we have to consider that in the period of examination Hungary was still not
part of the EU and the optimal date of the accession to the EMU is still under
debate. Therefore our survey has to be considered as a speculative prediction of the
impact of integration. From this table we can conclude that:
– It is predictable that most Hungarian regions will keep the same relative
status within the country after the European integration they had previously.
– Regions with low correlation with the national level might have still low
correlation with the European aggregates. For example: the West and the
South Transdanubian regions therefore demonstrate a more resistant position
in terms of the integration.
– There are some regions with high correlation with the state level that show
quite low values with the examined European aggregates (they demonstrate
less significant correlation with the European aggregates. This means that the
majority of the Hungarian regions might be the potential losers in the
integration process (North Hungary, North-Great Plain and the South Great
Plain regions respectively).
– The only regions which might keep its relatively stable and well developed
situation is Central-Hungary with the metropolitan district of Budapest and
the Central Transdanubian region might experience only a slight vulnerability
after the integration.
Further research is required in order to analyse ex-post the consequences of the
stable regional differences and the real impacts of the integration in the future.
Although there are pessimistic arguments, which predict that the integration of the
newly accession countries (with the incorporation of a ‘new periphery’) will distort
the “prospects for a comprehensive Europe of the regions” (Budd, 1997), regional
economies of the EU have shown large differences in the recent years and do not
appear to have moved nearer to the monetary convergence conditions.
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9 Conclusions
Economic changes are very much dependent on financial services, which reflect
the nearly two decades of processes of the Hungarian economic transformation.
Surveying the almost two decades of development of the Hungarian banking it can
be concluded that financial services, including the banking sector, strongly influ-
enced the spatial pattern of economic transformation. With the earliest establish-
ment of the two-tier banking Hungary acquired considerable competitive advan-
tage. The development of the banking system directed by the market requirement
and the decision of foreign investors even in the early stage of transition due to the
intense pressure of capital shortage in the post-socialist economy. The banking
system is characterised by a strong centralisation in management and spatial po-
larization, which the most well known feature of Budapest’s predominance. After
the decade of spatial diffusion of the branch network resulting in not only the de-
concentration of the service units, but the decentralization of certain management
level, nowadays seems to the organizational centralization has been gaining
strength again. The strong predominance of Budapest cannot be explained solely
with the small size of the country and neither the adaptation to the global financial
structures.
The framework conditions rooted in the debt crisis of the 1980s were at least so
much a determining factor. The institutional and the legal frameworks of the over-
centralized banking structure created by the reform elite, conducting the change of
regime. It was based upon the principle of concentration of the economies of scale
and its was largely determined by the economic crises accompanied by capital
shortage, which did not encourage the formation of decentralized structures. In the
partly ready-made banking structure obtained by foreign investors, the expansion
of network has started from the mid–1990s. Banks struggled for larger shares of the
expanding market and for new customers in order to channel resources through the
bank intermediation. This required both the expansion of the banking network and
the perpetual innovation of banking, which resulted in certain spatial levelling up.
Structural challenges characteristic of the global markets, such as the competi-
tion of the non-financial intermediaries, spread of the universal banking, M&A
activities, introduction of IT and the requirement of cost-efficiency, resulting in
organisational centralisation and the decline in employment, are having similar
effects on the Hungarian banking system, which is almost fully integrated into the
global financial markets. It has also significant impact on the growth of the spatial
differences. The organisational centralisation of certain service functions accompa-
nied by the branch closures, which is a more frequent phenomenon in peripheral
areas, asserts the newly emerging tendency of financial exclusion. These processes
not only deepen the gaps in territorial development but are reinforcing the tradi-
58
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Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
tionally centralised practices in credit granting. Branch closures and reductions of
employees are mainly affecting the settlements with lower hierarchy, socially seg-
regated residential areas, while organisational centralisation mainly having an ef-
fect on the regional control offices in the larger cities. These negative processes,
comparing to their West European counterparts, had begun before the size of bank
network would have been reached its maturity stage. Despite the general recovery
of banking system, its organisational and territorial structure has remained polarised.
The Hungarian banking exemplifies a predominant position of the national finan-
cial centre and the weakness of the regional economies. It seems plausible that
there is no place for such strong regional financial centres in a small domestic mar-
ket and the small geographical areas of the created regions. The presence of the
centralised capital market and the lack of a decentralised regional financial (bank-
ing) system can restrain and slow down regional development in the long run.
In conclusion, it can be argued that the introduced bank strategies and the
managerial decisions notably contributed to the growth of regional inequalities.
Considering the low internal capital accumulation abilities of the regions, there is
no early possibility to found well-equipped and locally based financial institutions
outside Budapest and to establish functioning regional financial centres. Within the
centralised banking structure, the regional decentralisation of certain commercial
banking services might be possible, without questioning the pre-eminent role of the
national banking centre and contributing to a more efficient operation of the net-
work. Even in the centralised banking structure some regional decentralisation of
certain banking functions is possible, without questioning the pre-eminent role of
the national banking centre. The integrated network of co-operative savings banks
might be one solution for the problem. The Hungarian banking market cannot be
fully covered without the savings bank sector. The locally, regionally embedded
co-operative savings banks with capital adequacy, meliorating both the local and
the market principles, might perform as important role as its German counterparts
in modernization. Branch network building of commercial banks will continue to
grow, although less dynamically than previously. Especially in local retail markets,
there is a good chance to raise further market share, if banks can exploit their
knowledge of local conditions and the existing client relations.
Besides the endogenous disparities characterising the national banking system,
Hungarian regions facing EMU integration within a decade could have been af-
fected adversely by the by the adoption of the criteria of EMU’s monetary policy.
In the case of Hungary it can be said that the national monetary policy were not
appropriate for most of the regions within the country. As we have seen the condi-
tions of uneven capital concentration are unfavourable outside Budapest and the
most developed regions of the country. There is a threat of a new kind of depend-
ence on one hand between the national capital and the regions, and on the other
hand between the Hungarian regions and the European financial space resulting in
59
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Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
capital drainage and net capital loss in most of the regions. With this background
the adoption of the single currency and European monetary policy will change the
relative situation of the regions. Nevertheless, these changes will not be equal for
every region, and most of the Hungarian regions will be among the losers unless
more active government participation in the support of local-regional finance might
diminish the certain disadvantageous effects of integration on the regions.
60
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Spatial Development and the Expanding European Integration of the Hungarian Banking System.
Pécs : Centre for Regional Studies, 2004. 64. p. Discussion Papers, No. 45.
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Discussion Papers /Specials
BENKİNÉ LODNER, Dorottya (ed.) (1988): Environmental Control and Policy:
Proceedings of the Hungarian–Polish Seminar in the Theoretical Problems of
Environmental Control and Policy
OROSZ, Éva (ed.) (1988): Spatial Organisation and Regional Development Papers of the
6th Polish–Hungarian geographical Seminar
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of the 7th Polish–Hungarian Seminar
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Proceedings of the 11th Polish–Hungarian Geographical Seminar (Mátraháza,
Hungary 17–22 September, 1998)
GÁL, Zoltán (ed.) (2001): Role of the Regions in the Enlarging European Union
HORVÁTH, Gyula (ed.) (2002): Regional Challenges of the Transition in Bulgaria and
Hungary
KOVÁCS, András Donát (ed.) (2004): New Aspects of Regional Transformation and the
Urban-Rural Relationship
Discussion Papers
No. 1
OROSZ, Éva (1986): Critical Issues in the Development of Hungarian Public
Health with Special Regard to Spatial Differences
No. 2
ENYEDI, György – ZENTAI, Viola (1986): Environmental Policy in Hungary
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HAJDÚ, Zoltán (1987): Administrative Division and Administrative Geography
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PÁLNÉ KOVÁCS, Ilona (1988): Chance of Local Independence in Hungary
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FARAGÓ, László – HRUBI, László (1988): Development Possibilities of
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SZÖRÉNYINÉ KUKORELLI, Irén (1990): Role of the Accessibility in De-
velopment and Functioning of Settlements
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ENYEDI, György (1990): New Basis for Regional and Urban Policies in East-
Central Europe
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RECHNITZER, János (1990): Regional Spread of Computer Technology in
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SIKOS T., Tamás (1992): Types of Social Infrastructure in Hungary (to be not
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HORVÁTH, Gyula – HRUBI, László (1992): Restructuring and Regional Policy
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ENYEDI, György (1998): Transformation in Central European Postsocialist
Cities
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HAJDÚ, Zoltán (1998): Changes in the Politico-Geographical Position of Hun-
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HORVÁTH, Gyula (1998): Regional and Cohesion Policy in Hungary
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NAGY, Erika (1999): Fall and Revival of City Centre Retailing: Planning an
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BELUSZKY, Pál (1999): The Hungarian Urban Network at the End of the
Second Millennium
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RÁCZ, Lajos (1999): Climate History of Hungary Since the 16th Century: Past,
Present and Future
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RAVE, Simone (1999): Regional Development in Hungary and Its Preparation
for the Structural Funds
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BARTA, Györgyi (1999): Industrial Restructuring in the Budapest
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BARANYI, Béla–BALCSÓK, István–DANCS, László–MEZİ, Barna (1999):
Borderland Situation and Peripherality in the North-Eastern Part of the Great
Hungarian Plain
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RECHNITZER, János (2000): The Features of the Transition of Hungary’s
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MURÁNYI, István–PÉTER, Judit–SZARVÁK, Tibor–SZOBOSZLAI, Zsolt
(2000): Civil Organisations and Regional Identity in the South Hungarian Great
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KOVÁCS, Teréz (2001): Rural Development in Hungary
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PÁLNÉ, Kovács Ilona (2001): Regional Development and Governance in Hun-
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NAGY, Imre (2001): Cross-Border Co-operation in the Border Region of the
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BELUSZKY, Pál (2002): The Spatial Differences of Modernisation in Hungary
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BARANYI, Béla (2002): Before Schengen – Ready for Schengen. Euroregional
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gary
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KERESZTÉLY, Krisztina (2002): The Role of the State in the Urban
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HORVÁTH, Gyula (2002): Report on the Research Results of the Centre for
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SZIRMAI, Viktoria–A. GERGELY, András–BARÁTH, Gabriella–MOLNÁR,
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tion and/or Co-operation? (A Hungarian Case Study)
No. 42
CSATÁRI, Bálint–KANALAS, Imre–NAGY, Gábor –SZARVÁK, Tibor
(2004): Regions in Information Society – a Hungarian Case-Study
No. 43
FARAGÓ, László (2004): The General Theory of Public (Spatial) Planning (The
Social Technique for Creating the Future)
No. 44
HAJDÚ, Zoltán (2004): Carpathian Basin and the Development of the Hungarian
Landscape Theory Until 1948