1887

OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.

English, French

Enhancing Financial Stability Through Better Regulation in Hungary

The global crisis exposed weaknesses in the Hungarian financial system that pose risks to financial stability. Excessive risk-taking by banks and households had been masked by relatively stable exchange rates, the expected early adoption of the euro and unusually lax credit conditions in international markets. With credit becoming scarcer and dearer, the domestic economy was hit through multiple channels. The steep depreciation of the forint boosted households’ debt burden, while banks were hit by the drying up of liquidity, including in swap markets for Swiss francs. A major lesson learnt from the crisis is that the approach to household lending needs to change: a stronger protection for borrowers should be combined with a tighter regulation of lenders. Enhancing competition in the banking market would also impose discipline on lending behaviour. Financial supervision should be strengthened by enhancing the powers of the financial supervisor to avoid abusive practices and excessive risk taking. A better early-warning system needs to be created for the monitoring and assessment of systemic risks, in which a more formal Financial Stability Council should play a prominent role. This Working Paper relates to the 2010 OECD Economic Survey of Hungary (www.oecd.org/eco/surveys/hungary).

English

Keywords: Hungary, financial crisis, bank, financial markets and the macroeconomy, government policy and regulation
JEL: G21: Financial Economics / Financial Institutions and Services / Banks; Depository Institutions; Micro Finance Institutions; Mortgages; E44: Macroeconomics and Monetary Economics / Money and Interest Rates / Financial Markets and the Macroeconomy; G18: Financial Economics / General Financial Markets / General Financial Markets: Government Policy and Regulation; G01: Financial Economics / General / Financial Crises
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