Business & Economics

Opportunities in the Hungarian Financial Services Sector as Part of the Single European Market

As Hungary became a member of the European Union, much of the legislatory environment for providing financial services has changed, although most of the integration, at least on the legislatory level, was already carried out before the accession. In
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  Opportunities in the Hungarian Financial Services Sectoras Part of the Single European Market  Anita Pelle Institute of Finances and International Economic Relations, Faculty of Economics and Business Administration, University of Szeged, Szeged,Hungary (E-mail:  Abstract.  As Hungary became a member of the European Union, much of the legis-latory environment for providing financial services has changed, although most of the integration, at least on the legislatory level, was already carried out before theaccession. In my study I try to look at the developments this new status quo hasbrought about, even if we are quite sure that the adoption of the common currency  will cause bigger steps forward in the integration process. I also have a look at anotherfactor influencing the financial services almost as much as the European integration,namely, the development of e-finance. Finally, I make an attempt to draw a picture of the Hungarian financial services sector a few years from now. Keywords:  Hungary; financial services; e-finance. Development of EU regulation Integration is probably the most evident among the characteristics of thefinancial services markets. This is especially true for the markets of theEuropean Union. The EU institutions themselves have made great stepsforward to enhance the establishment of the Single European Market of financial services. The Financial Services Action Plan of   1999 , its realisation(at least at the regulatory level) between  2000  and  2005 , the Lamfalussy procedure and, of course, and not only for those countries who take partin it, 1 the introduction of the common currency have all contributed signifi-cantly to the integration of the markets. The main effects of the intro-duction of the euro can be summarised as follows (Marján  2003 , ECB  2005  ).Interdependency of European stock markets has increased, which resultedin the improvement of regulation and the speeding-up of legislatory proce-dures. Transition Studies Review (  2006  )  13  (  3  ):  497 – 510 DOI  10 . 1007  /s 11300 - 006 - 0120 - 1  Transition StudiesReview   Springer-Verlag  2006 Printed in Austria  The issuing of corporate bonds denominated in euro, especially in the firstquarter of   1999 , showed a considerably greater pace than that of thosedenominated in the old currencies.The European integration of government bond markets became faster.The impetus of wholesale markets has to some extent been transferred toretail markets.Domestic orientation of institutional investors has significantly decreased.Demand for cross border and electronic services has increased.On the other hand, these regulatory reforms were inevitable and were‘‘provoked’’ by the development of the markets, the products and services,and the technologies used. The Green Paper published by the EuropeanCommission in the spring of   2005  dealt with the question of what way to goforth (EC  2005 a). It named three main strategic aims for a common financialservices policy: to further develop an integrated, open, competitive, andeconomically effective European financial market; to create a Single EuropeanMarket where financial services can be provided and capital can flow with thesmallest costs possible; to implement, to constantly enforce, and to evaluatethe legislatory framework.The Green Paper was discussed in an exchange of views organised by theDirectorate General for Internal Market of the European Commission (EC 2005 b). The number of participants exceeded  450 . They were representativesof the European Commission, the European Central Bank, the EuropeanParliament, various financial institutions, and industrial and consumer pro-tection organisations. We consider that the major development objectives which participants wish to see in the common financial services policy in thecoming years are the following:– the already existing legislation has to be implemented and enforced;– consumer confidence and information has to be improved;– integration of supervisors has to be carried on, the development of acommon European supervisory culture is necessary;– concentration in the financial markets has to be carried out in line with EUcompetition rules;– there is a single Europan passport, but with a ‘‘visa’’ so national legislationalobstacles have to be removed;– cross border retail services need special attention. According to the EU regulation currently in force, financial market actorshave different possibilities to appear in another member state: by founding asubsidiary, by opening a branch office, or through directly provided crossborder services. At present, opening a subsidiary or a branch are the most popular forms of going international but, in line with the above mentioned objective of payingspecial attention to cross border retail services, let us have a look at the 498  Pelle 26 European Institutions, Enlargement, Wider Integration, World Challenge  situation in this field. According to the World Trade Organisation principles,all financial services should be liberalised. Depending on whether the serviceis provided to a foreign entity in the country of the supplier or it is providedin the country of the client, the World Trade Organisation distinguishes be-tween ‘‘consumption abroad’’ and ‘‘cross border services’’. The EuropeanCommission has also faced the need to distinguish between these in thecourse of its legislative activities. The EU legislation does not extend toconsumption abroad, only to providing cross border services. The problemarises from the development of technologies: in many of the cases (especially in the case of services provided through the Internet), it is quite difficult totell where exactly the service is provided. The European Commission advisesthe supervisors to consider ‘‘the characteristic performance of the service’’. As for distance banking activities, the European Commission does not regardit as a service provided in the country of the client. Some experts andresearchers, e.g., Harmati and Steiner (  2002  ), do not agree with this approach. According to them, together with the single passport and home country control principles, it puts too big burdens on supervisors and prudency is stillnot guaranteed, unless there is active, effective, and transparent communi-cation among them.In reality, cross border services, especially in the retail sector, do not play asignificant role in the European financial market (see Table  1  ). But, accordingto a Eurobarometer survey (CC-EB  2004  ), interest is rising in practically allmember states. Interestingly, people in the ten new member states seem tobe a lot more open to obtaining cross border financial services (Table  2  ).To sum up, the following are the major characteristics of the Europeanmarket of financial services (Walkner and Raes  2005  ).  Table  1.  Population obtaining financial servicesfrom a firm located in another EU country Financial service % Population of:EU- 15 2004  membersBank account  4 5 Life insurance  1 4 Credit card  2 3 Private pension plan  1 3 Car insurance  2 2 Collective investments  1 1 Stocks/shares  1 1 Mortgage  1 0 Other financialservices 1 1 Source: CC-EB (  2004  ) and SEB (  2004  )Pelle  499 European Institutions, Enlargement, Wider Integration, World Challenge 27  EU banking systems are still remarkably segmented along national borders,especially in the retail sector.The introduction of the single passport in itself has not resulted in EU-wideintegration of the banking sector.The opportunities lying in cross border mergers and acquisitions cannot beexploited because of national legislatory obstacles in the fields of corporatelaw and taxation and the lack of common financial reporting.The major barriers to cross border services appear in the lack of commonEuropean corporate law and in the differences in consumer protectionstandards.The supervisory framework is still not really promoting integration. Main characteristics of the Hungarian financial services sector The Hungarian financial services sector is growing very fast. The annualgrowth rate of total managed instruments in  2004  was  18 %. The profitability of the sector is also outstanding: in  2004  it reached  23 %. Capitalisation isaround  150 % which is about one-fifth of the average of the developed Euro-pean countries but is also rapidly growing (PSZÁF  2005  ).The biggest players in the financial market are banks. Also, the high prof-itability of the whole market is primarily due to the even higher profitablity of the banking sector. The market share of foreign-owned banks is more than 80 %. There is also a high concentration in the sector, with five banks holdingmore than  60 % of the total bank assets. Neither the ratio of foreign owner-ship nor the concentration of the market showed noticeable changes afterthe accession to the European Union.The sector has a strong organisation forthe representation of its interests: the Hungarian Banking Association  Table  2.  Population obtaining financial services from a firm located in another EU country in thenext  5  yearsFinancial service % Population of:EU- 15 2004 membersHungary CzechRepublicPoland Slovakia SloveniaBank account  9 15 18 17 15 11 19 Life insurance  8 12 13 14 12 12 18 Credit card  5 11 7 8 6 6 12 Private pension plan  4 8 8 8 4 4 12 Car insurance  7 8 10 11 7 7 20 Collective investments  7 6 3 5 1 1 8 Stocks/shares  6 6 6 6 3 3 14 Mortgage  5 4 4 6 3 3 11 Other financialservices 3 4 3 4 1 1 5 Source: CC-EB (  2004  ) and SEB (  2004  ) 500  Pelle 28 European Institutions, Enlargement, Wider Integration, World Challenge  (Bankszövetség) accounts for  38  members and takes part in all relevantprofessional organisations at the EU level like the European BankingFederation and the European Mortgage Federation (BSZ  2004  ).The other, extremely rapidly growing sector of the financial markets is theinvestment fund and asset management. As can be seen in Table  3 , theHungarian investment fund market is quite small, but compared with thoseofother new member states, and especially if calculated percapita, it is one of the biggest in the Central Eastern European region (excluding Austria inthese terms).The representative organisation of the sector, the Association of Fund Management Companies of Hungary (Befektetési Alapkezel } ok Mag- yarországi Szövetsége), gathers all the  22  actors of the market and was thefirst in the region to join the European Fund and Asset Management Asso-ciation, whose annual meeting in  2003  was hosted by the Hungarian Associ-ation (Bamosz  2006  ). Investment management companies in Hungary aretypically subsidiaries of domestic or foreign banking or insurance groups(PWC and Bamosz  2003  ).  Table  3.  Total net assets of theEuropean investment fund industry, 2005 ,  2 nd quarterCountry Nr. of fundsNet assets(  10 6 euro) Austria  2046 142546 Belgium  1452 108618 Czech Republic  59 4068 Denmark  575 93393 Finland  389 40045 France  11619 1204800 Germany   6009 915289 Greece  275 30595 Hungary   122 5980 Ireland  3725 513900 Italy   1261 402179 Liechtenstein  231 11323 Luxemburg  8207 1289787 Netherlands  561 91387 Norway   393 25372 Poland  159 11173 Portugal  300 33505 Slovakia  93 2328 Spain  2664 256941 Sweden  498 91942 Switzerland  523 91514 Turkey   294 18501 United Kingdom  2278 542789 Europe  43733 5927975 Source: Efama (  2005  )Pelle  501 European Institutions, Enlargement, Wider Integration, World Challenge 29
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