The Development of the Hungarian Banking Sector Prior to Basel II

While its comprehensive economic transition started only in the early 1990s, Hungary had played a pioneering role in introducing a two-tier banking system if compared to other countries in the former Soviet bloc. The modernization of the banking system was unexpectedly far-reaching as Western banks were also allowed to participate in the market. The Hungarian banking system was mainly government run before the first commercial bank was opened by the National Bank of Hungary, and five foreign commercial banks were established in 1979. Hungary’s pioneering role was maintained even during the transition years when foreign-owned commercial banks could first establish their subsidiaries. This paper attempts to examine the performance of the Hungarian banking sector in the period of the first major foreign investments, describing both its functions and its stability in the transition period before the implementation of the Basel II Accords. It also reveals the doubts which policy makers had about the Basel II Accords and their effects on the lending behavior of banks.