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Retail Banking in Hungary: A Foreign Affair?

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  • John P. Bonin
  • Istvan Abel

Abstract

Over the last decade, Hungary has experienced more foreign bank entry than any country in world, starting with foreign greenfield operations and then followed by the privatization of four of its largest banks to strategic foreign owners. Currently about two thirds of all banking assets in Hungary are foreign owned; the only major bank without a foreign owner is Orsz??gos Takar??kp??nzt??r ??s Kereskedelmi Bank (OTP). During a decade in which lending to households declined in real terms until recently and household deposits remained relatively steady at around 20% of GDP, OTP lost its monopoly in retail banking to foreign-owned banks. By the end of the decade, OTP held shares of just over 50% in both household deposit and credit markets. In the last half of the decade, foreign banks increased substantially their market shares and currently hold more than 40% of all household deposits and about 40% of all loans to households. In this paper, we identify the important role played by foreign greenfield operations in intermediation within the household sector, especially from 1997. We provide evidence that, once they take control of formerly state-owned banks, strategic foreign investors move aggressively into retail banking. As the decade came to a close, retail banking was a growth industry in Hungary and foreign-owned banks were actively participating in both markets. Foreign entry provided healthy competition to OTP and prodded this widely held domestically controlled bank to develop new products and better services for Hungarian households. Over the last half of the decade, bank cards have been introduced to Hungarian households and transactions using these cards have grown by a factor of more than five. Over half of the population uses bank cards twice a month on average, almost exclusively for cash withdrawals from their current accounts. By investing heavily in information technology and using its extensive branch network, OTP has become the market leader in this new, growing business with more than 40% of all ATMs and bank cards issued in Hungary and more than 70% of all bank card transactions. Our analysis of OTP's behavior indicates that domestically controlled banks with local expertise may have a significant role to play in retail banking in small, open transition (or emerging) economies.

Suggested Citation

  • John P. Bonin & Istvan Abel, 2000. "Retail Banking in Hungary: A Foreign Affair?," William Davidson Institute Working Papers Series 356, William Davidson Institute at the University of Michigan.
  • Handle: RePEc:wdi:papers:2000-356
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    File URL: http://deepblue.lib.umich.edu/bitstream/2027.42/39740/3/wp356.pdf
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    References listed on IDEAS

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    1. B. Gerard Dages & Linda S. Goldberg & Daniel Kinney, 2000. "Foreign and domestic bank participation in emerging markets: lessons from Mexico and Argentina," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 17-36.
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    Cited by:

    1. Buch, Claudia M. & DeLong, Gayle, 2004. "Cross-border bank mergers: What lures the rare animal?," Journal of Banking & Finance, Elsevier, vol. 28(9), pages 2077-2102, September.
    2. Erik Berglof & Patrick Bolton, 2002. "The Great Divide and Beyond: Financial Architecture in Transition," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 77-100, Winter.
    3. Hanneke Bol & Jakob de Haan & Bert Scholtens & Ralph de Haas, 2002. "How Important Are Foreign Banks in European Transition Countries? A Comparative Analysis," International Finance 0209005, EconWPA.
    4. Emilio Colombo & Luca Stanca, 2003. "Investment Decisions and the Soft Budget Constraint: Evidence from Hungarian Manufacturing Firms," Working Papers 68, University of Milano-Bicocca, Department of Economics, revised Dec 2003.
    5. Linda S Goldberg, 2009. "Understanding Banking Sector Globalization," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 171-197, April.
    6. Giannetti, Mariassunta & Ongena, Steven, 2005. "Financial Integration and Entrepreneurial Activity: Evidence from Foreign Bank Entry in Emerging Markets," CEPR Discussion Papers 5151, C.E.P.R. Discussion Papers.
    7. Judit Temesvary, 2016. "The drivers of foreign currency-based banking in Central and Eastern Europe," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 24(2), pages 233-257, April.
    8. Pozzolo, Alberto Franco, 2008. "Bank Cross-Border Merger and Acquisitions (Causes, consequences and recent trends)," Economics & Statistics Discussion Papers esdp08048, University of Molise, Dept. EGSeI.
    9. Liliana DONATH, 2008. "Theoretical Considerations Concerning Foreign Banks Entry on The Domestic Banking Market," Timisoara Journal of Economics, West University of Timisoara, Romania, Faculty of Economics and Business Administration, vol. 1(1), pages 109-119.
    10. Akbar, Yusaf H. & McBride, J. Brad, 2004. "Multinational enterprise strategy, foreign direct investment and economic development: the case of the Hungarian banking industry," Journal of World Business, Elsevier, vol. 39(1), pages 89-105, February.
    11. Ilko Naaborg & Bert Scholtens & Jakob de Haan & Hanneke Bol & Ralph de Haas, 2004. "How Important are Foreign Banks in the Financial Development of European Transition Countries?," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 3(2), pages 99-123, August.
    12. Judit Temesváry, 2014. "Explaining the Differences between Local Currency versus FX-denominated Loans and Deposits in the Central-Eastern European Economies," IEHAS Discussion Papers 1405, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
    13. Linda S. Goldberg, 2004. "Financial-sector foreign direct investment and host countries: new and old lessons," Staff Reports 183, Federal Reserve Bank of New York.
    14. Bonin, John P., 2004. "Banking in the Balkans: the structure of banking sectors in Southeast Europe," Economic Systems, Elsevier, vol. 28(2), pages 141-153, June.
    15. Volkhart Vincentz, 2002. "Entwicklungen und Tendenzen der Finanzsysteme in Osteuropa," Working Papers 237, Leibniz Institut für Ost- und Südosteuropaforschung (Institute for East and Southeast European Studies).
    16. Karligash Kenjegalieva & Richard Simper, 2010. "A Productivity analysis of Eastern European banking taking into account risk decomposition and environmental variables," Discussion Paper Series 2010_02, Department of Economics, Loughborough University, revised Jan 2010.
    17. Linda S. Goldberg, 2007. "Financial sector FDI and host countries: new and old lessons," Economic Policy Review, Federal Reserve Bank of New York, issue Mar, pages 1-17.
    18. Hasan, Iftekhar & Marton, Katherin, 2003. "Development and efficiency of the banking sector in a transitional economy: Hungarian experience," Journal of Banking & Finance, Elsevier, vol. 27(12), pages 2249-2271, December.
    19. Bonin, John & Wachtel, Paul, 2002. "Financial sector development in transition economies : Lessons from the first decade," BOFIT Discussion Papers 9/2002, Bank of Finland, Institute for Economies in Transition.
    20. Claudia M. Buch & Gayle L. DeLong, 2008. "Banking Globalization: International Consolidation and Mergers in Banking," IAW Discussion Papers 38, Institut für Angewandte Wirtschaftsforschung (IAW).

    More about this item

    Keywords

    hungarian banking; retail banking in emerging markets; foreign bank entry;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • P2 - Economic Systems - - Socialist Systems and Transition Economies
    • F3 - International Economics - - International Finance

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