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Lending to local governments: Risks and behaviour of Hungarian banks

Author

Listed:
  • Dániel Homolya

    () (Magyar Nemzeti Bank (central bank of Hungary))

  • Gábor Szigel

    () (Magyar Nemzeti Bank (central bank of Hungary))

Abstract

Over the past one and a half years, the amount of credit granted by banks to Hungarian local governments has doubled, and the gap between their cash deficit and net additional indebtness has increased. This borrowing boom is not the result of a drastic change in the financial management of local governments, but stems primarily of the fear of statutory tightening of borrowing conditions and their propensity to hold reserves. As the current statutory regulation does not represent an effective restriction on debt, indebtedness in the sector is limited only by the market – i.e. banks’ lending propensity. Although it is not unprecedented in international practice that this kind of market coordination may – with minor fluctuations – be able to keep indebtedness at an acceptable level, the uncertainties in the financial management of local governments and the weak transparency related to their long-term or contingent liabilities mean that the conditions for this kind of coordination are not fully in place in Hungary. Our survey of banks underpins this assumption, revealing that due to the sharp competition between banks, local governments are in a strong bargaining position vis-a-vis credit institutions, as – due to the lack of information and a high level of uncertainty – credit institutions are limited in the use of more sophisticated risk assessment techniques generally used in the corporate sector, and thus their lending is based on the expected continuity of local government operations.

Suggested Citation

  • Dániel Homolya & Gábor Szigel, 2008. "Lending to local governments: Risks and behaviour of Hungarian banks," MNB Bulletin (discontinued), Magyar Nemzeti Bank (Central Bank of Hungary), vol. 3(2), pages 20-29, September.
  • Handle: RePEc:mnb:bullet:v:3:y:2008:i:2:p:20-29
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    File URL: http://www.mnb.hu/letoltes/mnb-bull-2008-09-daniel-homolya-gabor-szigel-en.pdf
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    Citations

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    Cited by:

    1. Vasvári, Tamás, 2012. "The deficit mechanism of the Hungarian municipalities," MPRA Paper 40357, University Library of Munich, Germany.
    2. Erzsébet Gál, 2011. "Is It Necessary to Regulate Local Governments’ Borrowing?," Public Finance Quarterly, State Audit Office of Hungary, vol. 56(1), pages 125-146.
    3. Szabolcs Szikszai & Tamás Badics & Csilla Raffai & Zsolt Stenger & András Tóthmihály, 2013. "Studies in Financial Systems No 8 Hungary," FESSUD studies fstudy08, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    4. Aczél, Ákos & Homolya, Dániel, 2012. "Risks of the indebtedness of the Hungarian local government sector from a financial stability point of view," MPRA Paper 40345, University Library of Munich, Germany.

    More about this item

    Keywords

    banks; state and local borrowing; bankruptcy; liquidation.;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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