Coping with the legacies of subsidized mortgage credit in Hungary

The authors examine alternatives for dealing with the initial conditions of housing finance facing countries making the transition to a market economy and moving toward a more efficient and equitable system. They focus on the problem of restructuring the stock of housing loans that exist at the time a new regime is implemented. Almost without exception, the stock of housing loans is yielding heavily subsidized rates, and its market value is significantly below its book value. Hungary makes an interesting case study. The mortgage portfolio inherited from past regimes makes especially clear the perverse implications of housing finance systems based on across-the-board subsidized interest rates. The authors propose a general approach to finding options to reduce the fiscal burden implicit in the subsidized housing loan portfolio. They identify mechanisms to reduce the interest subsidy embodied in that portfolio as well as mechanisms to spread the associated losses among those benefiting from the subsidies as well as among other parties. Clearly any residual subsidy must be absorbed by the government and ultimately by the population in the form of increased taxation or decreased availability of public services. The problem is complex and no obvious, easily implementable solutions emerge. But delaying action could hardly improve the situation.Banks&Banking Reform,Economic Theory&Research,Public Sector Economics&Finance,Housing Finance,Urban Economics

Hungary : financial sector reform in a socialist economy

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. And the reforms must be designed to facilitate the conduct of monetary policy under rapidly changing economic circumstances. To fulfill this role, financial reforms should: (1) provide the authorities with monetary policy instruments that contribute to short-term stabilization; and (2) provide the incentives for inducing a more efficient intermediation of savings though the financial markets. In this context, the authors identify the main tasks and targets of financial reform and comment on the key development of the Hungarian process. Hungary has made substantial progress, they conclude, but macrofinancial indicators suggest that administrative and technical obstacles remain and that supporting measures must be deepened. The four steps needed are: (1) the ability of the monetary authority to conduct monetary policy must be enhanced; (2) the operating and financial condition of financial intermediaries must be improved; (3) healthy competition among financial intermediaries must be encouraged; and (4) a prudential regulatory framework that does not discriminate against the development of securities market must be established.Banks&Banking Reform,Financial Intermediation,Environmental Economics&Policies,Economic Theory&Research,Financial Crisis Management&Restructuring

International trade in financial services

The issue of trade in services is the subject of increasing interest. Evidence of this is its inclusion in the Uruguay Round of GATT negotiations. As a contribution to the analysis of the issue, this paper analyzes the influence of a country's resource endowments on its net trade in financial services. A modified version of the Heckscher-Ohlin model is developed, which allows for technological differences across countries. The paper reaches the conclusion that skilled labour is a source of comparative advantage in financial services. Future research should focus on the implications of restricting trade in financial services. If financial services are considered as inputs in the provision of goods and services, might barriers to trade in financial services result in inefficient allocation of productive resources, distorted consumption patterns, and significant welfare losses?Economic Theory&Research,Banks&Banking Reform,ICT Policy and Strategies,Health Economics&Finance,Environmental Economics&Policies