Hungary: the initial stages in the financial sector reform of a socialist economy in transition

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Abstract
Financial reforms in formerly centrally planned economies take a different form than in market economies because they imply not only liberalizing the system but also reshaping the structure and functioning of financial markets. The reforms must also be designed to facilitate the conduct of monetary policy under rapidly changing economic circumstances. To fulfil this role, financial reforms should provide the authorities with monetary policy instruments that contribute to short-term stabilization and provide the incentives for inducing a more efficient intermediation of savings through the financial markets. In this context, the main tasks and targets of financial reform are identified and the key developments of the Hungarian process examined. Hungary has made substantial progress, but macrofinancial indicators suggest that administrative and technical obstacles remain and that supporting measures must be deepened. Four steps in particular are needed: (i) The ability of the monetary authority to conduct monetary policy must be enhanced (ii) The operating and financial condition of financial intermediaries must be improved (iii) Healthy competition among financial intermediaries must be encouraged (iv) A prudential regulatory framework that does not discriminate against the development of a securities market must be established.

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