The Development of the Hungarian Banking Sector Prior to Basel II

Although the economic transition started in the early of 1990s, Hungary had a pioneer role in introducing the two-tier banking system within the former Soviet Eastern Block. The modernization of the banking system was unexpectedly far-reaching as Western banks were allowed to participate in the market. The Hungarian banking system was widely government run before the first commercial bank was opened by the National Bank of Hungary and five foreign commercial banks were established in 1979. The pioneer role was maintained even during the transition years when foreign-owned commercial banks could establish their subsidiaries. This paper attempts to examine the performance of the Hungarian banking sector once foreign investments occurred, and its functions as well as its stability in the transition period before the implementation of the Basel II Accord. It also reveals the doubts policy makers had about the Basel II Accord and its affect on the lending behavior of banks.