Financial stability and the banking system, or the imbalance of the intermediary system

Abstract

This survey intends to address a special segment in the fiscal imbalance problems of the Hungarian economy, namely the peculiar “balance disturbance” of the banking sector, playing a prominent role in financial intermediation, whose capital structure has been increasingly at the beck and call of foreign funding potential. While alarms have for years been sounding on the back of declining foreign direct investments and an increasing extent of capital income extraction by international owners, public attention has been directed to exchange rate risks related to an increasing bulk of retail debts and also to an increasing role of foreign investors in financing government securities, but it seems that an equally important issue has been addressed at a lesser extent. Namely, the Hungarian banking sector has been increasingly dependant on foreign funding, which has become a factor of growing significance in providing external funds for a capital-hungry Hungarian economy. This becomes a particularly interesting issue because the capital intermediary role of the Hungarian banking sector in the economy is relatively low in comparison to Western European countries, at the same time the number of players on the banking market is comparatively high and they boast exceptionally high profitability.