regulatory and supervisory system remains to be tested in practice. Implementation is gradual and is constrained by the absence of well trained and experienced staff.

Under the recently approved Banking Act, banks are allowed to operate as universal institutions. The large banks have extensive equity holdings in industrial and commercial companies, but otherwise most banks are universal banks on paper only. They lack the financial and especially hiuman resources to play an active part in such areas as investment banking and securities trading. Even in the area of privatizations, the role of the large banks is constrained by the absence of skilled staff.

The licensing of new banks is based on authorization criteria that include a minimum capital of 1 billion HUF (about 15 million US dollars). Following the enactment of the Securities Markets Act it is now possible to establish institutions specializing in investment banking or securities trading with a much smaller initial capital of only 50 million HUF (700,000 US dollars). Several specialized institutions have been created, including Credit Suisse First Boston, and these play an active part in promoting joint ventures in industry and commerce and facilitating the privatization process.

Based on data compiled by the NBH, year-end total assets of commercial banks and SFIs increased from 1,004 billion HUF in 1987 to 1,621 billion HUF in 1990 or by 61%. This is less than the cumulative rate of consumer price inflation, which totalled _75%_ between 1987 and 1990. Thus, despite the large increase in the number of banks, the real stock of bank assets suffered a significant decline. Average total bank assets also fell from 72% of GDP in 1988 to 70% in 1990 (Figure 1).

In contrast, reported equity more than doubled from 60 to 123 billion HUF. However, because of poor accounting standards, it is doubtful that this reprwsents true equity. The NBH data are derived from financial statements prepared under Hungarian accounting standards. These are less rigorous than generally accepted international accounting standards in treating, inter alia, loan loss provisions and interest accrual on nonperforming loans. Available financial statements for the four large commercial banks that have been prepared :nder international accounting standards (IAS) corroborate the impression of overstated equity. The adjusted equity ratio of the four banks under LAS data was 4.8% against a reported equity ratio of 7.8% under NBH data.

Although problem loans are likely to be significant, there is considerable uncertainty over their magnitude and their effect on finarcial performance ratios. Problem loans are, in part, a legacy of banking practices during the old economic regime and, in part, a result of massive structural changes currently taking place in the Hungarian economy. Since the three new large banks inherited the portfolio, customer base and staff of the old state monobanking system, problem loans tend to be concentrated in these banks. Furthermore, problem loans are unevenly distributed among the large banks, reflecting the original division of assets. Additional problem loans have arisen from the collapse of the CMEA trade area and the abrupt reorientation of industry and commerce towards Western markets. New banks may also be experiencing nonperforming loans arising from this, though hard evidence on their size is not readily available.

# Competition

Competition in the banking market has undoubtedly increased as a result of new entry. Thus, the share of the four large commercial banks in total assets fell from 58% in 1987 to 48% in 1990, 2