Privatizing a Banking System:

This paper reviews and assesses the privatization of the banking sector in Hungary. Most of the important developments in the area took place in the period between 1995-98. Nevertheless, the choices made by Hungarian policy makers reflect both internal constraints stemming from the end of central planning to the adoption of market-determined mechanisms as well as external macroeconomic shocks at the time. Hungary chose a path that has led to a relatively large degree of foreign ownership in the banking sector. In so doing it is among a small group of countries that have allowed such a development and it is certainly the first socalled transition economy to have adopted this option for its banking sector. While there is a growing literature on the question of foreign ownership in a nation’s banking sector there has been relatively little thought given to the manner in which foreign ownership should be allowed to proceed. The Hungarian experience is especially interesting in this regard since policy makers chose not to follow some of the recommendations made by western financial institutions. Instead, the vehicle that led to foreign ownership was the search for “strategic foreign partners”. Under certain conditions this approach has much to be recommended for emerging market economies. * This paper was partially written while Siklos was Wilfrid Laurier University Research Professor 2000-01 and Visiting Scholar at the National Bank of Hungary. He is grateful to CIDA and Wilfrid Laurier University for financial support. The first author was Director of Banking Sector Privatization for the Hungarian Privatization and Holding Company (199596). The views expressed in this paper are the authors’ and not necessarily those of the National Bank of Hungary or CIDA. 1