Hungary under Orban: Back to State Banks

March 12, 2015 9:30 AM

Prime Minister Viktor Orban of Hungary, who took office in 2010, has embarked in the last few years on a policy of increasing the role of state-owned banks. The stated purpose has been to reduce the dependence of the Hungarian economy on foreign banks. But while solving one issue, Orban is creating another, potentially bigger problem. Increasing the role of state-owned banks raises the possibility of politically-directed lending. State-owned banks tend to favor lending to companies that are close to politicians in power.

Such lending is not usually based on sound banking principles and breeds inefficiency as well as corruption. In some countries in Eastern Europe, it has led to the collapse of the banking system—for example in Lithuania in 1995–96, Bulgaria in 1996–97, and Croatia in 1998–99. Croatia and Slovenia have skirted disaster more recently.

In an earlier blog post, I summarized the recent research on the negative effects of an excessively high share of foreign-owned banking in Eastern Europe. The argument against foreign banks has been that they have not serviced the small business sector well and sharply curtailed their lending during the euro area crisis. During the euro area crisis, mother banks in Western Europe shored up their home bases at the expense of their East European subsidiaries. The so-called Vienna Initiative, an effort by the European Bank for Reconstruction and Development, tried to lessen the impact of capital outflows from Eastern Europe but managed to do so only for the period 2009–11. Hence the conclusion that over-reliance on foreign banks hurts the economies of Eastern Europe.

Orban's solution is an age-old one: to reestablish the state as a significant owner in the banking sector. Starting at the end of his second term in power (2010–14), the government extended its ownership in the Hungarian banking sector. The first step was the acquisition of stakes in two small banks—Széchenyi Bank and Gránit Bank—in late 2013. In 2014, the government bought MKB, Hungary's fifth largest commercial bank, from Germany's Bayerische Landesbank. In February 2015, it acquired Budapest Bank, the eighth largest commercial bank, from GE Capital. Overall, these acquisitions account for 13 percent of bank assets.

In parallel to this acquisition spree, during Orban's third term in power (2014–) the Hungarian government is attempting to develop an extensive bank branch network to reach smaller clients. The effort centers around the Hungarian Post with its 2,700 units nationwide. In September 2014, the Hungarian Post acquired a minority stake in FHB Bank to use its lending know-how. The government is also restructuring the system of savings associations, with their nearly 1,600 branches, as well as opening new branches for the Hungarian Development Bank Group, until recently Hungary's only state-owned bank. With these plans, the share of bank assets in the government's hands will likely rise to 20 percent by the end of 2015.

Hopefully, the Hungarian Central Bank is keeping a watchful eye.