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Retail Banking in Hungary: A Foreign Affair?

John P. Bonin and Istvan Abel

No 356, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

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 Országos Takarékpénztár és 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.

Keywords: hungarian banking; retail banking in emerging markets; foreign bank entry (search for similar items in EconPapers)
JEL-codes: F3 G1 P2 (search for similar items in EconPapers)
Pages: pages
Date: 2000-12-01
New Economics Papers: this item is included in nep-eec, nep-ent and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (32)

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