increase in deposits. After rising from 9% to 22% of total business deposits between 1987 to 1989, the share of savings banks fell back to 15% in 1990, following an 11% decline in nominal deposits.

Worth noting is the increase in the ratio of deposits taken from enterprises to credits extended to them from 47% in 1987 to-59% in 1990. This ratio, dubbed the borrow-back ratio in this paper, measures what the banks borrow back from their business customers. It is positively correlated with the liquidity of the enterprise sector. The apparent increase in enterprise liquidity is, at first blush, inconsistent with the widely mentioned problem of queuing. However, it may reflect an uneven distribution of liquidity and financial distress among enterprises. For example, distress may be restricted to certain firms in declining industries or in regions facing economic hardship; other firms, especially in export-oriented industries, tourism, construction, and trade, that are not linked to the distress sectors, may be buoyant.

Large banks are reported to still have the lion's share of business checking accounts. According to market estimates, they have over 70% of business bank accounts. The large banks derive substantial profits from operating demand deposit accounts on which they pay low interest rates. The lack of a payment system infrastructure limits the ability of other banks to compete effectively for such accounts.

However, there also appears to be a functional segmentation of the market between large and small banks as it is reported that many firms have accounts with different banks. They presumably use the new banks for trade finance and other self-liquidating short-term credits and the large banks for ordinary transaction purposes.

A segmentation of the banking market along these lines would be unlikely to persist in the longer run. Small and medium size banks are expected to expand their ordinary banking business in order to enhance their real profitability, especially following the creation of a giro payment system that will speed up th- payment process and enable smaller banks to introduce cash management services and othe. payment-related facilities.

# Efrciency and Profitability

Available aggregate data on bank profitability for different types of banks suffer from poor accounting standards and uncertainty about the size of non-performing loans. For what is their worth, the NBH data highlight the following points. First, Hungarian banks operate, in general, with high nominal spreads. Second, for the small and medium size banks, these are explained by the high rate of inflation and their low leverage. Third, for the large commercial banks, the high nominal spreads cannot be fully explained by the high rate of inflation and their moderate level of leverage. These banks either have large volumes of nonperforming loans or earn unusually high profits. Fourth, the small banks earn low real equity returns, but the large banks report high levels of real profitability. The latter may, however, be illusory if nonperforming loans are substantially higher than what is currently provided for.

The NBH data show that the nominal return on assets (ROA), based on average total assets, was around 4% for the whole system. Large banks were very close to the average, but small and medium-size banks earned ROAs of 7% in 1988 and 1989 and 6.4% in 1990. Specialized financial institutions also had high ROAs of over 6%, while the ROAs of savings banks rose from 2.3% in 9