Hungary was the first of the Eastern European countries to crate a two-tier banking system in 1987. It has then chosen an anglo-saxon style separation of commercial and investment banking activities. Despite this early start in transition, the Hungarian banking sector is still characterized by inefficiencies : shortage of credits for the emerging private sector, high interest margins and rapid deterioration of banks’ profitability. The aim of this paper is to analyse the main problem which prevent the development of a modern financial sector. The first part of the paper analyses the functions generally assumed by banks in a market economy and examines the evidences on how well these functions are fulfilled by the Hungarian banking sector The aim structural obstacles to efficiency of the financial system and the measures already taken or scheduled by the authorities are examined in the final parts of the paper.
