1993-807-07-2-Abel | Interest

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  TITLE: Bank Recapitalization   Hungary s Second Attempt a t Resolving Its Credit Market Crisi s AUTHOR : István Ábel and John P  Bonin THE N TION L COUNCI L FOR SOVIET ND E ST EUROPE N RESE R H 1755 Massachusetts Avenue N  W   Washington D   . 20036  PROJECTNFORMATION   CONTRACTOR   Wesleyan Universit yPRINCIPAL INVESTIGATOR   John P  Boni   COUNCIL CONTRACT NUMBER   807-0 7 DATE   August 1 1 199 3 COPYRIGHT INFORMATION Individual researchers retain the copyright on work products derived from research funded b   Council Contract . The Council and the U .S . Government have the right to duplicate written report s and other materials submitted under Council Contract and to distribute such copies within th   Council and U .S . Government for their own use and to draw upon such reports and materials fo   their own studies ; but the Council and U .S . Government do not have the right to distribute o   make such reports and materials available outside the Council or U .S . Government without th   written consent of the authors except as may be required under the provisions of the Freedom o   Information Act 5 U .S .C . 552 or other applicable law   The work leading to this report was supported by contract funds provided by the National Council fo r Soviet and East European Research  The analysis and interpretations contained in the report are those of th   author  BANK RECAPITALIZATION   HUNGARY'S SECOND ATTEMPT AT RESOLVING ITS CREDIT MARKET CRISI   Istvan Ábel* and John P . Bonin Budapest Bank and Budapest University of Economic s Department of Economics, Wesleyan University, Middletown, C T Contract 807-07 Abstrac t The large public Hungarian commercial banks are, as a group, insolvent by interna- tional standards . In an attempt to resolve the problem, the government implemented a loa n consolidation scheme with multiple objectives, namely, recapitalize the banks, consolidat e and work out the loans of troubled companies, and facilitate the restructuring of loss-makin   companies . The program failed because its design was flawed . Hence, the Hungaria n government is considering a second scheme based on recapitalization to resolve the financia   crisis of the banks . For any program of financial sector reform, we argue that the thre e objectives pursued in the first Hungarian scheme should be separated and that recapitalizatio n is the appropriate focus for the first step. Programs for the consolidation and work out o f bad loans and for enterprise restructuring should be financed transparently in the fisca   budget where the tradeoffs can be analyzed carefully    The Hungarian government's loan consolidation program of 1992 (LCP) failed t o recapitalize the major state-owned commercial banks and did not put in place a mechanis m for using the banks' information on their clients to work out the bad loans removed . Th e core of the problem is the financial situation of three large public commercial banks, i n descending order of asset size, Hungarian Credit Bank (HCB), Commercial and Credit Ban k (CCB), and Budapest Bank (BB) . The addition of a fourth public bank which is financiall y sounder, the Foreign Trade Bank (FTB), captures the bulk of the commercial banking secto r in Hungary . The largest Hungarian bank, the National Savings Bank (NSB), accounts fo r about forty percent of all bank deposits and is also on shaky financial grounds . Th e government is currently considering a second program to improve the financial health of th e banks . The urgency of doing so is underscored by recent disintermediation   Although the final details are still to be decided, the Ministry of Finance (MoF   announced that two aspects of the 1992 LCP will be altered . First, the stabilization ta x which allowed the MoF to recapture up to fifty percent of the interest payments made to th e banks on the loan consolidation bonds (LCBs) is to be rescinded . Second, LCBs will n o longer be divided into two series, A and B . The LCP treated capitalized interest arrear   differently from loan principal in that series A bonds were issued to replace loan principa l whereas series B bonds were issued for interest arrears . Series B bonds paid only fift y percent of the series A interest which is equal to the average yield on 90-day Treasury Bills   The potential for levying the stabilization tax and the fact that series B bonds earned less tha n a market interest rate led to an estimated write down of the face value of LCBs from HUF ' For an analysis of this program, see Abel and Bonin, From Bad Loans To Tainte   Bonds : The Credit Market Crisis In Hungary , August 1993  
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