Discussion Papers 2004.
New Aspects of Regional Transformation and the
Urban-Rural Relationship 74-104. p.

SPATIAL STRUCTURE AND THE EXPANDING
EUROPEAN INTEGRATION OF THE HUNGARIAN
BANKING SYSTEM
ZOLTÁN GÁL
Introduction
Financial Geography as a newly established sub-discipline of Economic Geogra-
phy deals with the flows and transformation of the money, and the spatial, institu-
tional and regulatory structure of financial capital (Leyshon, 1995, 1997). The re-
cent growth of interest in the Geography of money has been stimulated by an ex-
plosive growth in information technology and financial services and also by the
profound changes, upheavals (crises) that have remapped, and are continuing to
transform financial landscape of the World (Leyshon–Thrift, 1988). These changes
are usually associated with a single word, globalisation. Globalisation –giving a
definition by Ron Martin – refer to the increasing integration of financial markets,
hybridisation, convergence and stretching of economic relationships across the
space, regardless of national borders and institutions, and to the growth of „state-
less monies” that move electronically around the globe at a very high speed, ig-
noring national borders and economic territories (Martin, 1999). Financial global-
isation is inherently geographically constituted, the product of organisational, tech-
nological, regulatory and corporate strategies by individual firms, financial institu-
tions and authorities in specific location. Divergent forces of deconcentra-
tion/decentralisation and concentration/centralisation are consistent with financial
globalisation, which are shaping the evolving geographies of the national, regional
and global finance. Different monetary spaces – national, global and local, regional
– coexist, as it is recognised that globalisation of finance is a global-local process.
These changes have several effects on the emerging single European market,
where finance with the European banking licence lies in the heart of the policy.
The emergence of the European Monetary Union encourages mergers and acquisi-
tion activity across the EU in order to strengthen the position of financial institu-
tions to hold their own in increased competition. While cross-border acquisition
has been limited, the emergence of new large national universal banks, as the
amalgamation of several national or regional institutions, is bound to have impor-
tant spatial consequences, as they are located in the existing financial centres.
These banks will have even more power to dominate the European market

Gál, Zoltán : Spatial Structure and the Expanding European Integration of the Hungarian Banking System.
In: New Aspects of Regional Transformation and the Urban-Rural Relationship.
Pécs: Centre for Regional Studies, 2004. 74-104. p. Discussion Papers, Special
SPATIAL STRUCTURE AND THE EXPANDING EUROPEAN …
75
(Leyshon–Thrift, 1997). Changes which imposing a universal monetary space for
Europe remove a significant element of national and regional autonomy concerning
the monetary control over their economic territory. The consequences of financial
integration will effect regional and local banks as well as different national banking
systems. Small and local banks might suffer a competitive disadvantage initially,
eventually a two-tier banking system would emerge with one tier consisting of
international banks and the second tier consisting of local banks (where local
banks include local, regional and national banks devoted to their domestic mar-
kets).
The accessing countries of Central and Eastern Europe, such as Poland, Czech
Republic, Slovenia, Slovakia and Hungary which followed their reintegration into
the world financial market in the early 1990s. They not only have to adopt new
technologies and the financial behaviour it accommodates, but also have to cope
with a legacy of bad debts and a lack of experience in credit risk assessment. Cen-
tral –Eastern European banking systems are accelerating through some features of
the stages of development as a result of competition with more advanced systems
and state encouragement of banking development. As European Union membership
approaches in Central Europe’s more advanced economies, Western European
banks are aggressively moving to expand into what will soon be a home market for
them. The result is the increasing pressure on margins, as more banks compete for
relatively little business. This results in a reversal process of concentration than in
EU, namely the growing number of institutions. Making matters worse for the lo-
cals, the foreign banks often boast deeper pockets, greater expertise and more solid
reputation (Anderson–Kegels, 1998). All these challenges that are to be faced are
common in these countries, but what could be varied from country to country is the
spatial and institutional structure of the national banking systems.
The first decade of the development in the Hungarian
banking system
The first important step forward in the modernisation of the Hungarian financial
sector was the creation of the two-tier banking system in 1987, which was more
adapted to a market environment. Following this Act, the National Bank of Hun-
gary, performing primarily central bank functions and the institutionally separated
commercial banks were set up in January 1987. Commercial banks who originally
had corporate clientele were admitted to the retail market, while financial institu-
tions were given commercial banking licenses. In contrast to Hungarian traditions,
a specialised rather than universal banking system has been created in 1987, sorting

Gál, Zoltán : Spatial Structure and the Expanding European Integration of the Hungarian Banking System.
In: New Aspects of Regional Transformation and the Urban-Rural Relationship.
Pécs: Centre for Regional Studies, 2004. 74-104. p. Discussion Papers, Special
76 ZOLTÁN
GÁL
different type of banks by functions (34 commercial banks, 8 specialised banks,
mortgage banks and building societies, 236 co-operative savings banks).
Since the reintroduction of two-tier banking (after 40 years discontinuance) the
banking system was opened up to the world as a competitive and rapidly growing
sector. The transformation into a market economy, the radical diminution of the
state's role in the business sector, privatisation, foreign capital inflow, a more in-
tensive participation in the international division of labour and European integra-
tion all provided new opportunities and challenges for banking. The new actors of a
rapidly developing economy, the mushrooming of associations and corporations
and the greater demand for corporate and retail markets will transform the present
banking system. Money markets will undergo radical rearrangements in the future
and the balance of power will change as a consequence of market competition.
Banks struggle for larger shares of the expanding market and for new customers
that require both the expansion of the banking network and the perpetual inno-
vation of banking.
If we take ten years of development in the banking system into consideration it
can be divided into different periods. The short period between 1989–1992 was the
peak time for foundation of new banks. Competition was also increased by the
entrance of the new foreign-owned and joint venture banks founding their own
subsidiary banks in Budapest (Bácskai, 1997).
After the period of rapid and extensive expansion the banking system was char-
acterised between 1992–1995 by the first bankruptcies and failures. Over-geared
expansion of balance-sheets and increasing risk-taking stood in contrast with the
low level of financial standing and the huge sum of inherited debt that was accu-
mulated in the central bank before 1987. This automatically led to the loss of mar-
ket shares of the Hungarian owned banks and strengthened the position of foreign
banks. Pecuniary difficulties of the mainly state-owned banks made inevitable the
restructuring of the Hungarian banking sector, together with the loan, bank and
debtor consolidation. The main purpose of bank consolidation and privatisation
was to decrease the percentage of state ownership in the banking sector to at least
below 25%.
In the third period, commencing in 1995, a stabilised and a more competitive
banking system emerged, characterised by successful privatisation of the banking
system resulting in a slower expansion in the banking from 1996 onward. In this
latter period of development the branch network expansion was one of the major
phenomena. This was due to business policies of banks shifting from the corporate
to the retail market, intending to gain more of the market shares through easier
access to retail customers, and on the other hand strengthening the competition
which force mainly foreign banks without branches to build networks in order to
hold their ground. Growing retail market from the mid–1990s has urged banks to
establish their extensive nation-wide network of local branches. (This occurred

Gál, Zoltán : Spatial Structure and the Expanding European Integration of the Hungarian Banking System.
In: New Aspects of Regional Transformation and the Urban-Rural Relationship.
Pécs: Centre for Regional Studies, 2004. 74-104. p. Discussion Papers, Special
SPATIAL STRUCTURE AND THE EXPANDING EUROPEAN …
77
partly through acquisition of offices of the liquidated banks and partly through the
opening of new branches). Parallel to stabilisation processes, the growth of newly
established banks halted and the founding of joint-ventures and subsidiaries of
foreign banks were compensated with mergers and liquidations through the
strengthening of concentration in banking. In the last years, new types of banks
were formed, serving the special interest of the money market (mortgage banks,
building societies, land and mortgage bank), but the concentration in banking will
continue.
One of the most important alterations in the Hungarian banking system was that
the role of foreign capital in ownership was determined. As the consequence of
foreign capital inflow into the Hungarian banking, the structure of ownership was
entirely transformed; parallel with the process of the significant decrease in state
ownership (20% recently), shares of foreign capital attained 65% of the banking
system, gaining a majority of market shares within a short time. This very high
proportion of foreign capital is among the highest in the European context. In the
UK 53% of ownership is foreign, but in Finland it is only 1%, in Germany 2%).
The main investors are, according to the portion of invested capital, still the leading
German and Austrian entrepreneurs, following by the American, Dutch, French,
Japanese and Korean investors. Activity of the Dutch banks is indicated by the fact
that all the top-ranking Dutch banks opened subsidiaries in Hungary (ABN Amro,
ING, Rabobank) but British banks are conspicuous by their absence (Várhegyi,
1997).
To summarise the role of foreign capital in the Hungarian banking system it can
be said that such a rapid process of privatisation of banking without foreign capital
inflow would have been impossible. Foreign capital inflow into the banking system
together with the ownership shares from privatisation, comprising a total of 220
billion HUF, that was directly invested into banks based in Budapest but ran
through the channels of a branch network.10 Already in 1995, foreign banks, occu-
pying one fourth of the total market, accounted for 70 % of profit returns due to
their high profitability, which was twice as much as in the Hungarian owned banks.
Foreign capital investment has contributed significantly to the growth of interna-
tional competitiveness of Hungarian banking. (Per capita investment of foreign
capital accounted for 1,950 USD in Hungary, compared to 1,040 USD in the Czech
Republic and 832 USD in Poland till 1999.) (Wachtel, 1997).
In the consequence of successful privatisation competitiveness of the banking
system is strengthened: increased its balance sheet account, improved the quality of
portfolios, but the proportion of the bad debts is still higher than the EU average,
which have increased significantly by certain banks (Postabank, Realbank). By the
end of the 1990s the Hungarian banking system affected by radical legislative,
administrative and institutional changes, such as the privatisation of many banks,
foreign capital inflow, the introduction of a more universal banking model, the

Gál, Zoltán : Spatial Structure and the Expanding European Integration of the Hungarian Banking System.
In: New Aspects of Regional Transformation and the Urban-Rural Relationship.
Pécs: Centre for Regional Studies, 2004. 74-104. p. Discussion Papers, Special
80 ZOLTÁN
GÁL
work, and there were proportionally few branches in banking before World War I,
consequently only 5.7% of the network was concentrated in Budapest), the recent
banking system is characterised by strong spatial concentration (Gál, 1999a).
The fact that all the 41 banks except one are based and headquartered in Buda-
pest results in a deformed structure in the banking system. Banking in Hungary is
still the most centralised branch of the economy with a definite centre in Budapest.
The leading position of Budapest in the financial sectors, especially in banking and
insurance, is more striking than in any other sectors. Consequently local and re-
gional banks are missing from the Hungarian banking system. (However, this
strongly monopolistic structure is more in line with international tendencies, which
are characterised by over concentration at the global level; in contrast to other tran-
sitional economies, such as Poland, where the role of regional banking is signifi-
cant.)
From the deformed spatial structure of the banking network of the early 1990s
arose more difficulties:
Lower density of the network meant both the low level of availability of branch
offices and the higher structural polarisation of the branch network. On the one
hand this meant that the rapid expansion of banking, initially concentrated almost
exclusively in Budapest, was not followed by the extension of the branch network
at a rapid pace in the countryside. On the other hand the new banks established in
1987 inherited a particular branch network from the National Bank of Hungary,
since branches were missing from certain county seats, accompanied with a spatial-
regional asymmetry. The structure was even more distorted by the fact that the
traditional retail bank (OTP-National Savings Bank) had had offices usually in all
settlements where population exceeding 5000, but the dynamically developing
foreign banks just started to expand their branch network in the last few years.
The other marginal pole of the national banking system is the dense network of
the co-operative savings banks scattered throughout the countryside. The most
important disadvantages of these are their weak financial standing (accounting for
only 5% of the total balance sheet of banking) and lack of strong centres or head-
quarters. Despite the number of co-operative savings banks being 1,700, thereby
accounting for 62% of the total national network, most of these small savings
banks situated in the smaller towns and villages have a very low capital circulation
and can supply only a narrow range of services.
The third reason of the polarity is, that branches of banks based in Budapest
have much less room for making independent decisions than the branches of
county seats during the communist period. Since the Hungarian banking system is
characterised by over centralised management, controlling and structural system,
branches are not in a real decision-making position, partly because they have got
only limited information. Most of the banks offer the same services all over the
country and do not have local advertising strategy. Banks usually do not lay stress

Gál, Zoltán : Spatial Structure and the Expanding European Integration of the Hungarian Banking System.
In: New Aspects of Regional Transformation and the Urban-Rural Relationship.
Pécs: Centre for Regional Studies, 2004. 74-104. p. Discussion Papers, Special
SPATIAL STRUCTURE AND THE EXPANDING EUROPEAN …
81
on the uniformal appearance of their branch offices; therefore appearances very
much depend only on the hierarchical position of a certain bank.
The start of the 1980s and 1990s was the first period of boom in the establish-
ment of banks: 17 commercial banks founded about 350 branches, concentrating
85% of the new offices into the provincial cities. During the next period of the two-
tier banking system between 1992–1996 the network was considerably restruc-
tured. Expansion of the banking system was restricted very much by the huge in-
herited debt imposed a large burden on the institutions. The smaller banks went
bankrupt (Ybl Bank), others were liquidated (Dunabank, Iparbankház) or some of
them were merged. The big banks rescheduled their policy of network building and
a few closed some of their branch offices, but the other banks such as Budapest
Bank and Postabank started a spectacular growth in network expansion. Accord-
ingly, between 1992–1996 the number of banking institutions decreased due to the
bankruptcies, mergers and the purchasing processes of privatisation. In only two
years (1995–1996), six banks were liquidated or merged into other commercial
banks.
The foreign-owned banks started to expand their branch network (by purchase
through privatisation and opening new branches) later and more cautiously then
only after 1995. There are different reasons for this more cautious policy. There are
different reasons for this policy. On the one hand, these banks were strong enough
in terms of capital intensiveness, therefore they could adjust the pace of network
building to their own pace of development. On the other hand, foreign-owned
banks were first of all interested in corporate banking supplying services for the
joint-stock companies. The boom period of the establishment of joint-stock com-
panies was in 1990–1991 and afterwards the corporate market started to become
saturated. However, the foreign owned banks switched to rapid expansion through
building their extensive branch network, gaining both larger market shares and
leading positions in terms of profitability, and grew more rapidly than the bigger
banks.
Recently, the tendency of concentration has decreased due to the successful ex-
pansion of the foreign-owned and medium-sized banks. The balance of power in
the banking system which held sway at the end of the first decade of two-tier
banking will be expected to readjust according to growing competition for larger
market shares. According to surveys, a shift from the moderate de-concentration
will emerge and the few large banks (from the group of the medium-sized and the
foreign-owned ones) with considerable financial standing will dominate in the re-
tail market. Besides these, 10–15 banks will play an important role in the banking
system.

Gál, Zoltán : Spatial Structure and the Expanding European Integration of the Hungarian Banking System.
In: New Aspects of Regional Transformation and the Urban-Rural Relationship.
Pécs: Centre for Regional Studies, 2004. 74-104. p. Discussion Papers, Special
82 ZOLTÁN
GÁL
Spatial development of the Hungarian banking network
Regarding to the diffusion of the banking network, it is very important to survey
the geographical location and the different hierarchical types of settlement where
banks are located.
At the birth of the two-tier banking system the network was characterised by a
certain spatial balance due to the evenly allocated branches of the OTP Bank (Na-
tional Savings Bank), located in more than 270 settlements. After the foundation of
the new commercial banks significant spatial asymmetry occurred within the
country since certain banks were missing from particular regions and county seats:
KHB (Commercial Credit Bank) dominates in the Great Plain region, MHB (Na-
tional Credit Bank) in Northern Transdanubia and BB (Budapest Bank) around
Budapest.
The spatial appearance and the regional diffusion of the new branches of banks
reflected the Hungarian economic processes in the 1990s:
The prevailing majority of economic associations, within it the joint-venture
companies and the accumulated capital outside Budapest flowed into the Transda-
nubian region, firstly into the north-western part. All these are underpinned by
indices of corporations, associations, household savings and figures of indebted-
ness for the population.
The structure of diffusion of the banking network had followed this spatial pat-
tern for the first time by the beginning of the 1990s. At that time banks were inter-
ested mainly in building up branches in the Transdanubian region. This was evi-
dent because the largest unexploited territories of financial services were situated
in Western Hungary.
Significant differences among the greater regions had practically evened out,
except in Northern Hungary, by 1990, and the disadvantage of the Transdanubian
region came to the end. From the mid–1990s, after saturation of Transdanubia, the
larger cities of Eastern and Southern Hungary became the main targets of branch
network expansion (Gál, 1998).
There were significant differences behind the well-balanced greater regions
concerning network density within the regions and counties. In some counties the
number of new branches exceeded ten between 1978–1990 (Győr-Moson-Sopron,
Baranya, Hajdú-Bihar), while in other places only a few branches were opened
(Fejér, Komárom-Esztergom, Tolna) and in some counties exclusively planted only
in the county seats (Borsod, Fejér, Szabolcs-Szatmár-Bereg). An extreme exception
was Esztergom-Komárom County where no branch was opened between 1987–
1990 in Tatabánya, the county seat, where economic depression affected its heavy
industrial background. For instance, during the short period between 1995–1997
there was no increase of the branches in North-Western Transdanubia, as it was
viewed as a saturated region.

Gál, Zoltán : Spatial Structure and the Expanding European Integration of the Hungarian Banking System.
In: New Aspects of Regional Transformation and the Urban-Rural Relationship.
Pécs: Centre for Regional Studies, 2004. 74-104. p. Discussion Papers, Special
SPATIAL STRUCTURE AND THE EXPANDING EUROPEAN …
83
A general characteristic of the period between 1992–1996 was the growing im-
portance of Budapest in the expansion of the branch network (319 bank offices
made up 26% of the national network in 1997). All banks starting to open new
branches have opened 2–3 new offices in the capital city in the past five years, and
last year 20 banks had branches there.
Within Budapest most of the principal offices of banks are based in the inner
districts. The spatial concentration of the institutions gives a strong impetus to the
formation of the central business district, where the office buildings of banks be-
came an important functional-morphological element of the townscape. In 1990
about two thirds of the financial organisations were based in the 5th District,
namely in the core area of the city centre itself which is still the most popular
domicile for new banks. By the end of the 1990s business (financial) functions of
the 5th District had became saturated and a few years ago the financial organisa-
tions started to diffuse towards the surrounding inner city districts. Despite the
expansion of banks the low density of network in Budapest is surprising, namely
one office per 7,758 inhabitants (15,000 without the OTP). This fact unambigu-
ously demonstrates the low level of the extension of the banking network in the
capital city. The lack of banking services is more striking in the outer area of Bu-
dapest, resulting in overcrowded city centre branches.
In Hungary the number of banking institutions is 1,319, together with 1,700 co-
operative savings banks, stands at about 3,100. Taking the figures of the network
density into account, there is one office per 3,200 inhabitants, which is still a much
lower density than in the Western European counterparts, where there is one bank
per 1,400–1,500 inhabitants. In spite of the boom in the foundation of new
branches (last year a branch office opening ceremony took place every week on
average) mainly by the foreign and joint ventures banks. These banks still do not
have enough branches in Hungary, although spectacular progress has been made,
especially since 1996.
Surveying the banking network according to the network density figures we can
find a few counties with lower density of banks. Szabolcs-Szatmár-Bereg and Pest
counties are the most unsupplied areas, accounting for half of the national average
in 1995. In the case of the former, its economic and geographical situation, the
activity of entrepreneurs, the low level of foreign capital inflow etc. would be the
explanation for the smaller interest of the banks. In the case of Pest County, the
capital city causes backwash effects, which influence the development of the
banking network. Relative to population, Hajdú-Bihar, Borsod-Abaúj-Zemplén,
Komárom-Esztergom, Nógrád and Fejér counties were also badly supplied by
banking services. These counties could be the main target areas of expansion in the
near future.
Surveying the distribution of the banking network according to the settlement
types is more expedient than investigating at county level; all the more so as bank-

Gál, Zoltán : Spatial Structure and the Expanding European Integration of the Hungarian Banking System.
In: New Aspects of Regional Transformation and the Urban-Rural Relationship.
Pécs: Centre for Regional Studies, 2004. 74-104. p. Discussion Papers, Special
84 ZOLTÁN
GÁL
ing institutions have more links to the cities and towns, therefore capital flows is an
important indicator of the different urban processes. Since by the beginning of the
1990s the number of branches had exceeded the number of larger cities, which had
been the main targets of the earlier expanding banks, consequently these banks
turned their interest towards the smaller settlements. The first branches in villages
were also opened .
Those banks just recently started to develop their network – most of them are
foreign owned – situating themselves solely in regional centres. As a consequence
of this, certain larger cities (Pécs, Győr, Szeged, Székesfehérvár), despite not being
seats of a regional bank, have been started to play significant roles in the operation
of financial services in which different organisations of the financial sector (banks,
insurance companies, consulting) attract each other mutually. This also induces
increased competition in the local-regional market.
At the beginning of the 1990s the banking network was rather more polarised,
both hierarchically and regionally, than nowadays. A more developed network
existed in the county seats and in the cities of Western Hungary (which were tar-
gets of foreign companies and banks); while in Northern Hungary and in the north-
ern part of the Great Plain the banking network is less developed than in Pest
county, where the central role of Budapest counterbalances its disadvantage. In
recent years a shift has taken place, levelling out the expansion of the banking net-
work in favour of the eastern parts of the country. During these years the number of
branches in the cities of Eastern and Southern Hungary increased more rapidly than
in the western counterparts which were previously the most saturated parts of the
country, considering the number of branches. It can be said that the network
building expansion of branches initially followed the pattern of the spatial-eco-
nomic division of the country, as banks mainly were opening branches in Western
Hungary. Since the mid–1990s, after the relative saturation of West-Hungary and
owing to the process of nivellation, banks have started their expansion towards the
eastern and southern parts of the country along the urban hierarchy. Two years ago,
Győr, Pécs, and Székesfehérvár were considered the largest financial centres out-
side Budapest, while recently Miskolc gained the leading position in the number of
branches (37), followed by Győr and Kecskemét (each with 32 branch offices),
then Pécs and Szeged (31–31), and finally by Debrecen (28). The main targets are
the large cities in East and South Hungary, such as Miskolc, Szeged, Debrecen,
Nyíregyháza gained a temporary leading position in size of the local network (Fig-
ure 3).

Gál, Zoltán : Spatial Structure and the Expanding European Integration of the Hungarian Banking System.
In: New Aspects of Regional Transformation and the Urban-Rural Relationship.
Pécs: Centre for Regional Studies, 2004. 74-104. p. Discussion Papers, Special
86 ZOLTÁN
GÁL
The Hungarian banks, because of the centralised structure of banking, aim at
completely covering the relatively small banking market. This tendency promotes
equalisation among the different parts of Hungary. However, differences occurring
in the number of branches do not mean differences in the quality of banking ser-
vices. This latter one is much more dependent upon the territorial embedded ness,
which can induce mutual attractiveness toward the other types of financial, and
business services. The agglomeration of financial services not only generates the
competition in the local market but might result in the performance of certain re-
gional financial centre functions in larger cities despite the lack of locally based
institutions.
In conclusion it can be seen that different banks are situated on different levels
of network construction in the recent period of development. The share of the lar-
ger cities from the banking network intensively increased from 35–40% to about
50% (with Budapest 66%) between 1987 and the early 1990s owing to the fact that
at least a dozen new banks entered the market and started their network develop-
ment. Bankruptcies and the rationalisation policy of network development in the
following period mainly affected these larger cities as the major beneficiaries of the
boom in banking expansion. Despite several new branches opening, the proportion
of larger cities within the banking network fell to 43% (or 63% including Buda-
pest), parallel with the network diffusion towards the smaller settlements.
Taking the expansion of the banking network into account, some experts believe
that the spread of electronic home banking will counterbalance the traditional way
of branch office building. According to others, whose opinion I share, there is a
brighter future for the traditional expansion of the branch network since customers
are much more devoted to a personal style of administration and rely more on
branch offices. Despite the probability that virtual banking will be widespread in
the future, building a more cost-intensive branch network is still very important. In
addition, about 40% of the population has as yet no contact with banking. The fig-
ures for the year 1998 justify both these theories of the future prospects of banking
(Bonin et al. 1998).
The challenges of regional banking
Study of banking history reveals a wide variety of the development of different
national banking systems. These systems currently experience spatial diversity,
arising from the particular location of a distinctive financial centre and from the
differences in spatial structure and in the origins of particular national and regional
banking. The Hungarian banking system is characterised by the lack of regional
banks and by the strong agglomeration of the services in the financial centre of

Gál, Zoltán : Spatial Structure and the Expanding European Integration of the Hungarian Banking System.
In: New Aspects of Regional Transformation and the Urban-Rural Relationship.
Pécs: Centre for Regional Studies, 2004. 74-104. p. Discussion Papers, Special
SPATIAL STRUCTURE AND THE EXPANDING EUROPEAN …
87
Budapest, that can be partly explained by the accommodation to the conditions of
the more concentrated international financial markets, which currently undermin-
ing and diminishing the role of the local markets. However, recent moves, both
toward supra-national economic, political and monetary unions and towards seces-
sion and regional autonomy, have tended to undermine the usefulness of the nation
state and simultaneously strengthen the role of locally based regional units. In con-
trast to the concentration processes in the global markets the growing significance
of European regionalism requires establishment of the regional money markets and
institutions financing regional policies. Globalisation and the emergence of global
financial spaces may actually serve to open up opportunities for local-regional
alternatives (Lee, 1999; Porteous, 1996):
–  Money is sensitive to local differences in economic return (crises still have a
distinctly local origin) and local, regional banking systems tend to be more
rooted in and committed to the local economy and community than local
branches of centralised national or international banks.
–  The effects of the financial crises increase the instability of global markets
and seriously questioning the regulative and controlling role of the nation-
state over capital flows.
–  Decentralised banking systems have been important in certain European
countries, such as Germany, Italy, France, and Poland.
–  The boom of private enterprise, privatisation, the necessity of their presence
in the local markets and competition for the retail markets also requires the
expansion of the banking network in the regions. Regional banks may well
be serving the interests of local economies and SMEs better than financial-
centre banks whose priorities relate more to national and international
markets.
–  Besides the corporate and the retail market project financing will be one of
the another businesses for banks which have to support the regional devel-
opment programmes through financing infrastructure, power and telecom-
municational investment and co-operating with regional and local admini-
strations.
To survey how the money moves between locations and regions raising the
problems of integration between the global and local level, or between centre and
periphery that concerns an irregular financial division of labour between central
and peripheral areas. Emergence of uneven economic development among regions
large extent is caused by the uneven interregional capital flows. Capital is mobile
across regional boundaries and usually flows from the regions with lower profit-
ability into the regions offering higher rate of return. Consequently capital is con-
centrated into the financial centres of the core areas, which can be resulted in re-

Gál, Zoltán : Spatial Structure and the Expanding European Integration of the Hungarian Banking System.
In: New Aspects of Regional Transformation and the Urban-Rural Relationship.
Pécs: Centre for Regional Studies, 2004. 74-104. p. Discussion Papers, Special
88 ZOLTÁN
GÁL
gional inequalities within the single European markets as well (Porteous, 1996,
Leyshon–Thrift, 1997).
The extremely concentrated national and international financial markets and the
lack of strong regional markets might slow down regional economic development
in the long run because of different factors stated below:
Certain national and international banking centres discriminate against particu-
lar regions. This refer to usually credit discrimination which means that nationwide
banks are less prepared to make credit available to agents in the periphery because
they allocate loan able funds based on an implicit regional reserve ratio. Core re-
gions and financial centres through the centralised branch banks may invest the
savings drained out of the peripheral regions in favour of lending in core regions,
slowing down the development in the peripheries and resulting in spatial polarisa-
tion of the regions (Chick–Dow, 1988).
National banks can only slowly acquire local embedded ness. The distance be-
tween decisional and operative centres within a national branch bank structure
reduces the availability of information about local firms and local growth pros-
pects. The uniform lending standards by nationwide banks disproportionally affect
certain regions. Credit is made available on the same terms in different locations
through the branch system regardless the specific regional requirements and condi-
tions.
In a national branching system, local branches may adopt more cautious and re-
strictive lending policy, as they are likely to be constrained by head office in the
degree of freedom as most of the strategic decisions are made at headquarters of
banks. Because of the centralised structure the decision-making autonomy is lim-
ited therefore large loans require head office approval. Local branch management
of national banks is often in the hands of directors only temporarily committed to
that branch who tend to be very risk averse, opting for safe large investment, rather
than riskier smaller investment, even to the detriment of important innovative pro-
jects for the growth of the local economy. On the other hand, if a national bank is
seeking to rationalise its operation, it is likely that the branches in peripheral and
economically declining areas are the first to be closed down (Porteous, 1996).
Within the centralised banking network information asymmetries are often oc-
curred: the headquarters very often assess higher risk due to poor information on
small borrowers in remote or peripheral regions, and because of market segmenta-
tion. Larger distance between peripheral regions and the core centres cause larger
cost of transactions and monitoring and may result in a more expensive credit
(McKillop–Hutchinson, 1990). Information and transaction costs of the supply side
are higher in relatively isolated regions for lenders based in the core. Although the
cost of credit may be equalised across regions in an integrated banking system, the
availability of credit may differ, which continue to limit the access to the credit
supply.

Gál, Zoltán : Spatial Structure and the Expanding European Integration of the Hungarian Banking System.
In: New Aspects of Regional Transformation and the Urban-Rural Relationship.
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The solutions in a longer term should be the reorganisation of the institutional
and managerial structure of the banks and to find what kind of banks (local, re-
gional or national) are the best suited to foster development of peripheral regions.
On the other hand there is a strong need to create decentralised financial sources
and establish regional financial centres in order to serve interests of local econo-
mies better. The regional banking systems represent a link between local econo-
mies and national, international financial centres. This highlights the problems of
integration between the global, national and regional level. The integration model
is a kind of reaction on theories exclusively focusing on „localism” and „global-
isation”. In the first, it is considered to be detrimental to set up of banks from out-
side of the region, through opening of branches, mergers, or the purchase of local
banks. The localism theory based both on the notion of local segmentation of fi-
nancial markets and on the idea of keeping the savings of a region within the
boundaries of the region. This latter can be counterproductive as savings must be
free to move in search of the best investment opportunities and returns in a wider
unified monetary system. Local banks have smaller ability to invest savings in the
same area where they were collected, as local banks very often tend to have grater
willingness to export and invest capital – under better conditions of returns – out of
the region than do local branches of external banks. Therefore, the main challenge
for a region is to offer the best opportunities for investment, attracting capital. On
the other hand, the theory on globalisation, leads to the argument that global inte-
gration of the financial markets removes regional disparities in financial structures
and capital availability. In fact, advantages of globalisation are not distributed
evenly among regions, as they tend to be located in the stronger and better organ-
ised ones. So, in the absence of corrective policies, regional disparities could be-
come wider rather than narrower (Alessandrini–Zazzaro, 1999).
The best way to solve the integration problems is the co-existence, comple-
mentarity and interaction between different regions and between the centre and the
periphery. This reorganisation can be take place through passive integration that
arises from outside of the region and means not only capital inflow, but also the
entry of non-resident banks opening new branches or incorporating local banks. On
the other hand, regional, local banks, in an active way, can participate in inter-
regional expansion, which allows local banks to open up to the outside without
abandoning their own regional hinterlands. It is important for regional banking
system to compete with other areas in order to gain benefit of both regional and
sectoral diversification. The inter-regional integration of banking system is the
most suitable model for the future development in Europe and this model can be
partly adopted by the Hungarian banking. It offers perspective of the development
of regional finance partly through branches of national banks channelling the inno-
vation and providing wider range of services and strong equity background in order
to protect less prosperous local branches. On the other hand, the modernisation of

Gál, Zoltán : Spatial Structure and the Expanding European Integration of the Hungarian Banking System.
In: New Aspects of Regional Transformation and the Urban-Rural Relationship.
Pécs: Centre for Regional Studies, 2004. 74-104. p. Discussion Papers, Special
90 ZOLTÁN
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the existing local banks and the creation of new institutions in the regions meet the
challenges posed by technological, institutional and regulatory changes that trans-
form the world of finance serving the needs of local economy and communities.
The most important step towards this system is the establishment of a strong re-
gional financial centre that can serve the interests of a particular region:
Regional centres have an ability to capitalise on localised information spillovers
that reduce the costs of local lending, and are closer to the actors of the local econ-
omy. The more centralised firms loose their competitive edge if their headquarters
are located far from the region where they intend to operate.
Prosperous regional centre can prevent capital drainage from the region by the
national financial centre.
Regional financial centre, which is closer to its hinterland, may have lower
fixed costs and therefore it is able to serve better SMEs.
The traditional national financial centres face to decentralisation forces as their
costs of operation are increasing (expensive labour cost, high real estate and rent-
ing prices), and the rapid development of communication technology appears to
strengthen the forces favouring decentralisation since large volumes of information
may increasingly be accessed from remote locations at low cost.
The Hungarian banking system is characterised by a strong spatial concentra-
tion. The leading role of Budapest is unique even in European context. The fact
that every bank is headquartered in Budapest results in a deformed structure in the
banking system. Banking in Hungary is still the most centralised branch of econ-
omy. The conditions of capital concentration are unfavourable outside Budapest
and the most developed regions of the country. There is a threat of new kind of
dependence between the capital city and the regions: filtering-down persists, the
central region, making use of advantages of its location, filters the most profitable
lines of banking (corporate, portfolio management, risk management, private
banking) and diverts to the peripheries the traditional, uniformed and less profitable
services. Taking into account capital transfers (regarding to banking capital and the
central budget flows) among Budapest and the regions it can be said that capital
transfers at the expense of the regions is negative (Figure 3).
There are four principal tasks on the agenda of the development of a more de-
centralised banking network in Hungary. First, it is necessary to expand further the
density of the branch network and to extend the range of branch services of the
commercial banks in the regions. Second the formation of regional and municipal
banks. The third one is the establishment of regional branches of the Hungarian
Regional Development Bank. Fourthly, one must ensure the institutional connec-
tion of Budapest to international money markets (Gál, 1999a).

Gál, Zoltán : Spatial Structure and the Expanding European Integration of the Hungarian Banking System.
In: New Aspects of Regional Transformation and the Urban-Rural Relationship.
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1) In Hungary the local-regional credit supply operate through the centralised
national branch-banking system, and local savings banks operate in restricted rural
and urban areas. National banks with branches usually do not provide adequate
credit supply for the local SMEs and do not finance municipal projects and infra-
structural investments in the regions. National banks are not interested in these less
profitable and prudent businesses as they have different orientation of profile and
tasks. Therefore they often seem to discriminate against particular regions. Re-
cently, commercial banks with larger network reorganise their institutional and
managerial structure forming a hierarchically built domestic network of branch
offices, decentralising certain control functions (Figure 4). Banks are starting to
pay much closer attention to the geography of their distribution networks. Besides
national head office they form regional control offices and local branch offices
with various functions in order to rationalise their dispersed structures and to take
the first steps towards decentralisation and inter-regional integration of banking, in
order to use their resources in a more productive way. Regional control offices play
the role of intermediate tiers between head office and local branches, having au-
thority over local branches in their geographic areas. These newly created region-
ally controlled territories of large banks are different from each other, and have not
been overlapped the territories of the statistical regions, but their regional head-
quarters, in the most cases, have been concentrated in regional centres. Recently
banks are in the expansion phase of their branch building process. In a few years
time they have to concern about network restructuring which is sensitive to geo-
graphical variation in profitability, risk, debt and social conditions in a particular
area (Geenhuizen, 1999).
2) Within the banking system the formation of locally based regional and mu-
nicipal banks independent from the national branch network would be very impor-
tant in order to serve regional interests of that region where they operate and as-
sisting in the regional economic development. This require the amendment of the
Banking Act, which would allow municipalities, chambers of commerce, economic
organisations and private enterprises to establish banks with a strong state support
in order to make provision of public duties derives from the state commission. This
can be financing public investment, credit supply for local governments, and the
intermediation of EU structural funds. These banks can be followed the pattern of
the German volksbanke or sparkasse and might be based on the stronger Hungarian
co-operative savings banks. These institutions will be the major financial agents of
municipalities, and will be able to serve smaller businesses better and to promote
the direct integration of regions, located in longer distance from the cores, into the
global economy. Only a strong regional bank can ensure an adequate credit circu-
lation and can prevent mass capital outflow from a particular region (Illés, 1993).

Gál, Zoltán : Spatial Structure and the Expanding European Integration of the Hungarian Banking System.
In: New Aspects of Regional Transformation and the Urban-Rural Relationship.
Pécs: Centre for Regional Studies, 2004. 74-104. p. Discussion Papers, Special
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3) Because of the different interests of commercial banks were stated above,
only a decentralised regional developing bank network can promote effectively
regional development. Therefore, the establishment of regional branches of the
Hungarian Development Bank Ltd (“MFB”) is necessary. MFB, formed on 1 Janu-
ary 1997, has been the leading institution as the legal predecessor of the wholly
state-owned credit institution formed in 1991. MFB' s original task is to facilitate
the modernisation and invigoration of the Hungarian economy, to participate in
regional development, to manage and mediate state funds and allocated for devel-
opment purposes, and to raise funds in international markets and financing of re-
gional development programmes of municipalities. Furthermore, MFB pays special
attention in supporting small and medium-sized enterprises, a sector that plays an
important role in the development of the Hungarian economy carrying out large-
scale capital expenditure projects in the fields of infrastructure, telecommunication,
and the energy sector.
The banks, operating and mediating regional development funds (PHARE,
ISPA, SAPARD etc), have to form a network of the regional development banks
on regional level in order to mediate European development funds into the level of
use. Here it is not enough to create different frameworks of support; there is a
strong need to establish institutions mediating funds between the EU/ state level as
the provider and the regional levels as the destination. In addition, one of the main
tasks of the regional development banks is the promotion of the regional projects
and investments from the financial side. This includes the provisions of medium
and long-term loans for SMEs, portfolio management and investment advisory
services, promotion of the creation of technology centres, incubators and innova-
tion oriented enterprises.
4) Concerning the question whether Budapest will become a real financial cen-
tre by international standard. Recently, large cities and different regions rather than
simply different nations are in competition with each other in the field of the global
world economy in order to gain investment capital, and to connect with the sources
of information. As a consequence of rapid restructuring and modernisation of Bu-
dapest’s economy, the capital city has become one of the most important innova-
tion-centres of the region, which might play an important bridge-head in foreign
capital inflow and investment within Central and East European countries. Buda-
pest has a traditional metropolitan townscape, adequate infrastructural background
and stable economic environment, which are quite important attractive forces for
the investment of multinational companies. Lots of multinational companies (Pepsi
Co., Kodak, Nestle, Xerox, Shell) built regional bridgeheads facing Eastern Europe
from Budapest. On the other hand, there are certain limits to the growth of such
international financial functions in Budapest since telematically based concentra-
tion processes, which are characteristic of global money markets, could overcom-

Gál, Zoltán : Spatial Structure and the Expanding European Integration of the Hungarian Banking System.
In: New Aspects of Regional Transformation and the Urban-Rural Relationship.
Pécs: Centre for Regional Studies, 2004. 74-104. p. Discussion Papers, Special
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pensate the advantages of geographical proximity. Multinational companies most
likely to utilise only the simpler financial services in the Central European region,
and the services requiring more resources, will utilise in traditional Western Euro-
pean and overseas financial centres in the future, too. In addition, the smaller size
of the national financial market, the weakness of domestic capital (the activity of
the black economy), the low level of economic interactions within the regions, the
small activity of banking system abroad and the consequently smaller size of banks
(smaller provisions for expected liabilities), Budapest is not suitable for the role of
regional financial centre. Foreign banks that opened their subsidiary banks in Hun-
gary established branches and subsidiaries in other Central European countries, too.
Consequently, foreign banks concentrate more on covering each national market
rather than on establishing a single regional banking centre, for instance, in Buda-
pest.
According to some banking experts, Budapest could successfully apply only for
the position of a subordinate offshore like regional financial centre specialised in
certain services. Subject to these conditions, services, which require smaller
amounts of capital and highly qualified employees will come into prominence. To
carry out all these, it is necessary to strengthen the banking system with the busi-
ness-like intervention of the state, but the exact date of integration into the EU and
EMU may influence the development of the Hungarian banking system and the
international role of Budapest (Bellon, 1998).
Impact and financial integration on the Hungarian banking sector
Hungary has one of the best performing banking and financial system in the post-
communist CEEs region. The reasons behind this are the following:
–  Hungary was the first to abandon the mono-bank system recreating two-tier
system (Hungary already had a two-tier banking system when the Berlin
Wall came down).
–  It was the first to repair the mistakes of the early transition years: loan &
debtor consolidation and re-privatisation programme.
–   By 1997 Hungary had opened the doors to a higher proportion of foreign
banks than in any other post-communist country (ratio of state owned shares
had fallen to 11% by 1997).
Despite of its relative small size of the economy, the banking sector dominates
Hungary’s financial system. The quality of the portfolio of the Hungarian bank
sector improved much in the second half of the 1990s (bad debts has fallen to less
than 3%) and the average capital adequacy has been around 15–17 percent, point-

Gál, Zoltán : Spatial Structure and the Expanding European Integration of the Hungarian Banking System.
In: New Aspects of Regional Transformation and the Urban-Rural Relationship.
Pécs: Centre for Regional Studies, 2004. 74-104. p. Discussion Papers, Special
SPATIAL STRUCTURE AND THE EXPANDING EUROPEAN …
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ing to a well-capitalised banking sector. The structure of banks’ balance sheet has
become similar to it has been observed in the EU. Since foreign (mainly EU) in-
vestors dominate the banking sector (two-third of the total registered capital and 90
percent of the banking assets) they have contributed to a great extent to the mod-
ernisation of banking. Therefore the entry of foreign green-field banks, bank re-
structuring and bank privatisation to strategic foreign investors have strengthened
the stability of the Hungarian banking sector (Várhegyi, 2002). While Hungary has
been successful in creating a functioning banking system, bank intermediation has
not grown as fast as most observers predicted it in the early 1990s. The role and the
capitalisation of the banking sector in the economy are rather limited and remain
low by international standards. This is largely due to substantial competition from
other foreign capital sources such as FDI, direct lending by non-resident banks,
intercompany loans, and non-banking funds. Taking the example of the stock of
cross-border loans to firms in Hungary, which amounted to 11.5 EUR billion and it
was almost as high as the amount of company debt owed to the Hungarian banks
(12 billion EUR).
In the advance assessment of the European integration we have seen that the
Hungarian financial integration – comprising the activities of foreign investors and
the availability of foreign finance for domestic borrowers– will have a significant
impact on the Hungarian banking sector.
To assess the advantageous and disadvantageous impacts of the EU integration
we have to see that the common monetary framework and the liberalised capital
flows will be beneficial only in the long run as they create more severe competition
from the date of accession. EU accession may influence net capital inflow to Hun-
gary, but the possible effects are ambiguous. On the one hand, diminishing sover-
eign risk may raise inflows into the banking and corporate sector. On the other
hand, Hungarian banks will be in a better position to diversify assets geographi-
cally and they will benefit from their local knowledge. It seems to be unlikely that
Hungarian banks will target advanced EU markets, but it is possible that they will
expand their market scope in other accession countries as few example already
demonstrate this aspiration.
The banking network will continue to change as the number of universal banks
will decline, but on the other hand the number of specialised institutions may rise.
The major effect of integration is that the number of current subsidiaries of foreign
banks will be turned into foreign bank branches according to the non-discrimina-
tion principle of the place of origin of the capital and newcomers may open
branches. This could further diminish the role of the resident banks and decrease
the bank capitalisation subsequent to EU accession. Foreign bank cross-border
branching out require much lower capital adequacy ratios, which will be compen-
sated for the unlimited liability of the foreign parent bank. The accession can be
expected to promote further competition, resulting a bank margin and operating

Gál, Zoltán : Spatial Structure and the Expanding European Integration of the Hungarian Banking System.
In: New Aspects of Regional Transformation and the Urban-Rural Relationship.
Pécs: Centre for Regional Studies, 2004. 74-104. p. Discussion Papers, Special
96 ZOLTÁN
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cost decline. Competition will be stronger in corporate market, where the competi-
tion has already driven down margins and where rivalry will certainly intensify
after accession. However there is a good potential for resident bank to benefit from
their local knowledge in the lending to the SMEs sector. In retail markets where
resident banks already exploit their knowledge they do not face strong competition.
Although in retail segment with the increasing numbers of non-banking actors may
divert some resources from the established banking network (Várhegyi, 2002).
Generally we conclude that the one hand, accession should further enhance the
integration of Hungary’s banking system with those of EU making the banking
more stable and efficient. On the other hand, we have seen that the high spatial and
structural polarity within banking sector1, which in some remote provincial areas
may have a lesser capacity to promote their economic development. These areas
might experience certain disadvantage as a result of the financial integration in
Europe. In the consequence of the European integration the Hungarian banking will
face very similar structural issues as its Western counterpart, namely the wide-
spread of universal banking, mergers & acquisition fostering by increasing compe-
tition not only within banking sector but from the side of non-banking players.
Globalisation and integration of financial spaces open up opportunities for both
local-regional and large pan-European financial alternatives (universal multi-
country and global banks), and consequently the major losers of the integration will
be the medium size domestic banks. All these challenges facing the Hungarian
financial system require new structural and regional policy from the banking side
and a more efficient coordination and supervision from the regulators’ side.
Predictable regional impact of the financial integration
There is currently considerable interest in debate over the impact of increasing
European economic and monetary integration on the regions of the EU. Opinion is
sharply divided whether EMU is leading to regional economic convergence or
regional economic divergence. Ron Martin’s recent comprehensive paper exam-
ined the theoretical arguments and empirical evidence of these opposing views
(Martin, 2001). Among these theories the Optimum Currency Area (OCA) stresses
the need for economic homogeneity across regions as a precondition for establish-
ing a unified monetary space. Neoclassical models predict that the European cur-
rency area should lead to regional economic convergence of the sort implied by
OCA theory. On the other hand, theories of regional growth based on localised

1  Characterized by “redlining” policy of the recent years on the side of the SME segment especially
in the regions.

Gál, Zoltán : Spatial Structure and the Expanding European Integration of the Hungarian Banking System.
In: New Aspects of Regional Transformation and the Urban-Rural Relationship.
Pécs: Centre for Regional Studies, 2004. 74-104. p. Discussion Papers, Special
SPATIAL STRUCTURE AND THE EXPANDING EUROPEAN …
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increasing returns and endogenous growth, predict that EMU will lead to regional
divergence, which is counter to the requirements of the OCA model. Recently,
regional economies across EU do not appear to have moved significantly nearer to
those conditions. The empirical evidence on regional trends suggests that while
“regional convergence took place some extent between 1950s and the mid–1970s,
since then, as the process of European integration itself has deepened, regional
convergence has slowed and ground to halt” (Martin, 2001).
In the Mid–1990s few argument predicted that the prospect of greater integra-
tion between Eastern Europe and Western Europe will be limited and may prove
illusory (Budd, 1997). One of the major argument of these critical outsider views is
that the lack of properly functioning financial system will be unlikely to serve and
fulfil the wide range of economic and financial requirement (inherited bad debt
issue, state budget constraint, risk-related capital adequacy ratios, EMU’s conver-
gence criteria) before the integration take place. The domestic capital markets in
the CEE countries are unlikely either to develop sufficient maturity or to overcome
considerable difficulties in the short to medium term to provide adjustment role of
the integration criteria (Budd, 1997). As we have seen in the previous chapter of
this paper Hungary (and most of the other accession countries as well) very rapidly
and successfully has overcome of structural adjustment problems of the financial,
in particular the banking sector at national level. Such an unpredictable rapid pace
of successful privatisation and following modernization of the banking sector to-
gether with the appropriate adoption of the EU directions for the financial markets
and state supervision surpassed even the most optimistic expectation of the observ-
ers.
However this exaggerated pessimistic view of modernization prospect of the
CEE countries is acceptable in the case of regional impacts of the accession. That
argument predicts that the fiscal adjustment to fulfil the EMU convergence criteria
will have a greater impact on the regions of these accession economies, and may
increase the regional differences and the economical vulnerability of the regions.
The imposition of monetary and fiscal convergence criteria may puts up a further
barrier to the wider integration of Europe in the case of the too rapid accession
process of CEE countries to the EMU. This latter might reinforce the problem of
uneven development and may strengthen the core-periphery regional structure
within the new accession countries.
There is no doubt the main cost of joining the Union and later to the common
currency area together with the loss of the national monetary instruments accession
countries might experience certain disadvantage as a result of the financial integra-
tion. Several studies have examined asymmetric monetary shock so far at national
level, but only very few have done at regional level and none of them surveyed the
possible reaction of the financial sectors in the case of the accession countries’
regions. In the following we analyse the possible macroeconomic effects of the EU

Gál, Zoltán : Spatial Structure and the Expanding European Integration of the Hungarian Banking System.
In: New Aspects of Regional Transformation and the Urban-Rural Relationship.
Pécs: Centre for Regional Studies, 2004. 74-104. p. Discussion Papers, Special
98 ZOLTÁN
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and EMU integration at regional level in Hungary using national and Eurostat Da-
tabase. The methodological approach following some previous surveys’ methods,
based in the Theory of OCA, has consisted in comparing the values of correlation
coefficients for different economic variables among every region, national and
European aggregates (Ramos–Ollero–Surinach, 2001). The analysis of asymmetric
shocks at a regional level is related with the degree of concentration of economic
activity. The consideration of the fact that European regions did not have sover-
eignty to apply their own autonomous policy implies that inside every national
state regions could have been adversely affected by the national single monetary
policy in the emergence of the asymmetric shocks. In this sense, the consideration
of the effects of accession into the European Union and the Economic & Monetary
Union necessarily involve to take account the relative situation of every region
inside their own country. The methodology used in this section consists in com-
paring the value of the correlation coefficients between the growth rate of the same
variable (GDP per capita growth rate) for four different territorial levels such as the
Hungarian regions, the nation state level and the European level. Two different
definitions of the European aggregates are considered in the study: EU–15 and the
EMU–11 levels. The comparison of these values permits to assess the advantages
and the disadvantages (the macroeconomic cost) for every Hungarian region,
which will be, participate in the EMU in the future. If the relationship between
every region and the European aggregates are as intense as the relationship with the
pervious national aggregate, the relative position of the region in this new macro-
economic framework will be similar to the pervious one. The disadvantageous
effects will be negligible and namely there will be no additional macroeconomic
cost for the given region2. The pervious surveys assessing the degree of symmetry
of economic shocks experienced by the EU regions and states, have focused on the
evolution of GDP, prices and wages, those are strongly correlate to the objectives
of the monetary policy (Ramos–Ollero–Surinach, 2001). Our survey analyses the
relationship among the growth rates of per capita GDP at market prices (PPP) in all
Hungarian NUTS II region from the period 1996–2000.
In general it can be said that most regions keep the same relative status inside
the country when comparing the previous situation with the European aggregates.
Although in Hungary there are significant regional differences, the data of GDP
per capita growth rate between 1996 and 2000 (in the period of economic recovery)
represent slight spatial equalization within the country.

2 To distinguish between the significant and non-significant correlation we used the
Brander and Neuser model (1992) suggests that at a 5% level of significance the values
obtained from the expression 2/n, where n is the number of observation of the
considered series.

Gál, Zoltán : Spatial Structure and the Expanding European Integration of the Hungarian Banking System.
In: New Aspects of Regional Transformation and the Urban-Rural Relationship.
Pécs: Centre for Regional Studies, 2004. 74-104. p. Discussion Papers, Special
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Conclusion
In evaluating the competitiveness of the Hungarian banking system, it can be said
that the banking sector has been strengthened since 1994 and it has become a
more profitable sector. However, progress in banking is significant only
comparing to the previous state of the banking system: by international standards
the capitalisation of the sector is still low. The quality of the portfolio of the
Hungarian bank sector improved much in the second half of the 1990s (bad debts
has fallen to less than 3%) and the average capital adequacy has been around 15–17
percent, pointing to a well-capitalised banking sector. The structure of banks’
balance sheet has become similar to it has been observed in the EU. The role of the
Hungarian banking system in the economy lags behind the more developed
countries. The ratio of balanced-sheet footings to GDP is 72%, which is a very low
percentage, but it indicates an enormous opportunity for progress in the banking
market. Hungary decided earlier than many other countries to privatise state-owned
banks to foreign strategic investors who not only injected capital but also a wealth of
expertise into the banking sector. In 1995, banks with foreign ownership that
accounted for one quarter of the market produced 70% of profit after taxes. Their
profitability and efficiency was twice higher than at banks of Hungarian ownership
(Várhegyi–Gáspár, 1997). Until now, the activity of foreign banks depends on their
subsidiary companies, which have to be established before starting their operation.
Despite the general recovery of banking, the sector has remained polarised in
many ways. The Hungarian banking exemplifies a pre-eminent position of the na-
tional financial centre (Budapest) partly due to Hungary’s much smaller market
size and the weakness of the regional economies. It seems plausible that there is no
place for such strong regional financial centres in a small domestic market and the
small geographical areas of the created regions, but to find the right way of certain
decentralisation in the banking sector is inevitable. One of the marginal poles of
the national banking system is the dense network of the co-operative savings
banks scattered throughout the countryside. Summarising the experiences of
Hungarian banking, it can be said that the openness of this sector compared to
others contributed more to the modernisation and competitiveness of the overall
banking system.
Surveying the spatial characteristics of the Hungarian banking system, it can be
stated that economic changes are very much dependent on financial services, which
reflect the processes of economic transformation. Financial services became the
key sector of business services differentiated by spatial and regional development
characteristics as well. The spatial structure of the banking sector in Hungary is
characterised by a large-scale concentration in Budapest, but the foundation boom
of branch offices is also typical in the countryside, as the necessity of presence on

Gál, Zoltán : Spatial Structure and the Expanding European Integration of the Hungarian Banking System.
In: New Aspects of Regional Transformation and the Urban-Rural Relationship.
Pécs: Centre for Regional Studies, 2004. 74-104. p. Discussion Papers, Special
102 ZOLTÁN
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the local markets (collections of resources and credit allocation etc.), as well as the
competition for the retail market stimulate banks to build out their national net-
works.
The presence of the centralised capital market and the lack of decentralised re-
gional financial (banking) system can restrain and slow down regional develop-
ment in the long run3. Local and regional credits can only be received in Hungary
through the centralised network of bank offices and through, in limited extent, the
weak local co-operative saving banks. Within the centralised banking structure, the
regional decentralisation of certain commercial banking services is possible, with-
out questioning the pre-eminent role of the national banking centre, but contribut-
ing to a more efficient operation of the network. In the last instance, the question
becomes whether the national banking system with this over-centralized character
is ready to be fully liberalised and able to withstand increasing competition (with
the introduction of cross-border financial services) within the European Union.
Regions of Hungary do not have sovereignty to apply their own autonomous
policy implies therefore different regions could have been affected adversely by the
national monetary policy and might be affected similarly by the adoption of the
criteria of the EMU’s monetary policy. In the case of Hungary it can be said that
the national monetary policy were not appropriate for most of the regions within
the country. As we have seen the conditions of uneven capital concentration are
unfavourable outside Budapest and the most developed regions of the country.
There is a threat of new kind of dependence on the one hand between the national
capital and the regions, and on the other hand between the Hungarian regions and
the European financial space resulting in capital drainage and net capital loss in
most of the regions. With this background the adoption of the single currency and
European monetary policy will change the relative situation of the regions. Al-
though these changes will not be equal for every region, and most of the Hungarian
regions will be among the losers unless more active government participation in the
support of local-regional finance might diminish the certain disadvantageous ef-
fects of integration on the regions.
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