Lending to local governments: Risks and behaviour of Hungarian banks

Dániel Homolya () and Gábor Szigel ()
Additional contact information
Gábor Szigel: Magyar Nemzeti Bank (central bank of Hungary)

MNB Bulletin (discontinued), 2008, vol. 3, issue 2, 20-29

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.

Keywords: banks, state and local borrowing, bankruptcy; liquidation. (search for similar items in EconPapers)
JEL-codes: G21 G33 H74 (search for similar items in EconPapers)
Date: 2008
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.mnb.hu/letoltes/mnb-bull-2008-09-daniel-homolya-gabor-szigel-en.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mnb:bullet:v:3:y:2008:i:2:p:20-29

Access Statistics for this article

More articles in MNB Bulletin (discontinued) from Magyar Nemzeti Bank (Central Bank of Hungary) Contact information at EDIRC.
Bibliographic data for series maintained by Maja Bajcsy ( this e-mail address is bad, please contact ).