Economy 26 February 2026, 4:10pm

Single-tier banking system with a handful of players

Although the new banking system established at the beginning of the [Mátyás] Rákosi regime was in line with the centralised planned economy, the quality of retail financial services declined compared to the pre-war period. Furthermore, there was no real securities or capital market in socialist Hungary. Individual banks operated within a state monopoly, ruling out competition and market-based development.

The central bank's team of experts played a key role in preserving professional knowledge and meeting the needs of the planned socialist economy. The establishment of independent institutions for specific tasks also contributed to this. For example, in 1950 the Hungarian Foreign Trade Bank was founded to specialise in financing foreign trade.

Its creation was partly justified by the freezing of Hungarian claims ("arrest") in the atmosphere of the Cold War, particularly in the United States and Switzerland. This new institution was less vulnerable legally and could be used to carry out sensitive international financial transactions, circumventing embargoes and ensuring the protection of export revenues.

According to Éva Várhegyi's book Bankvilág Magyarországon (The Banking World in Hungary), in the post-1948 system, only a few financial institutions with special tasks were allowed to operate alongside the centralised central bank.

1. The National Savings Bank (OTP) managed retail savings;
2. the Hungarian Foreign Trade Bank (MKB) financed foreign trade;
3. the State Development Bank backed state investments;
4. the General Banking and Trust Co. Ltd. (Általános Értékforgalmi Bank or ÁÉB) handled foreign-related financial transactions; and
5. the Financial Institution Centre performed regulatory functions.

Although the system was highly centralised, it became necessary to maintain certain specialised institutions to address economic and foreign trade issues.

We are not in 1948

If the above reminds anyone of the current idea, it may not be a coincidence. However, in the interests of fairness, it is worth mentioning that

Márton Nagy does not want to abolish the two-tier banking system. In fact, based on his arguments, he would like to improve the way it functions even further.

The Economy Minister is not talking about five banks in general, but rather the five major banks. His idea is not to prevent anyone from entering or remaining in the market, as was the case in the early days of socialism. After 1957, savings cooperatives gradually began to appear in rural areas.

The minister's arguments for a market structure different from today's are not ideological, but primarily based on economies of scale, i.e., economic considerations. This could be achieved through mergers, even if these are not exactly market-friendly, according to the current government's approach, rather than through nationalisation and the closure of financial institutions.

The state is talking about efficiency, while it is reducing effieciency

Based on examples from Sweden and Austria, which have a similar population to Hungary, these countries have far fewer large banks. Economies of scale are a legitimate professional argument, as banks are capital-, technology- and cost-intensive operations. Higher fixed costs are typically accompanied by higher revenues and greater cost efficiency. The most common way to increase size is through acquisitions and mergers, which would allow the Economy Minister to achieve his goal of having 'five big banks'.

At the same time, in addition to the four major banks identified by Márton Nagy on Monday as being among the five most desirable — OTP, MBH, K&H and UniCredit — there are a number of other highly profitable and efficient credit institutions in Hungary that offer competitive prices (see retail loans, for example). The size of a bank does not necessarily equate to cheaper services – in fact, the larger branch network that often accompanies a larger size can enable market dominance, especially in rural areas, reducing price competition.

Although low efficiency is occasionally a problem for some banks, this has not typically been the case in the higher interest rate environment of recent years. It is usually caused by

the highest tax burden in Europe and state intervention in Hungary,

rather than by small size or excessive competition. These factors lead to distortions in institutional efficiency (e.g. bank tax, extra profit tax, interest rate and fee caps) and service pricing efficiency (e.g. transaction fees).

Therefore, when the state demands operational and market efficiency from the banking system, it is worth examining what it is doing to achieve this, or rather, what it is doing to undermine it.

Cover photo: Wikipedia Commons