Hungary : financial sector reform in a socialist economy

Financial reforms in formerly centrally planned economies take a different form than in market economies because they imply not only liberalizing the system but also reshaping the structure and functioning of financial markets. And the reforms must be designed to facilitate the conduct of monetary policy under rapidly changing economic circumstances. To fulfill this role, financial reforms should: (1) provide the authorities with monetary policy instruments that contribute to short-term stabilization; and (2) provide the incentives for inducing a more efficient intermediation of savings though the financial markets. In this context, the authors identify the main tasks and targets of financial reform and comment on the key development of the Hungarian process. Hungary has made substantial progress, they conclude, but macrofinancial indicators suggest that administrative and technical obstacles remain and that supporting measures must be deepened. The four steps needed are: (1) the ability of the monetary authority to conduct monetary policy must be enhanced; (2) the operating and financial condition of financial intermediaries must be improved; (3) healthy competition among financial intermediaries must be encouraged; and (4) a prudential regulatory framework that does not discriminate against the development of securities market must be established.