while that of the small and medium-size banks rose from 5% to 14%. The share of savings banks remained virtually unchanged. SFIs play a very smal1 part in the system, accounting for only 2% of total assets.

Competition has intensified considerably in some areas of corporate banking, especially the provision of working capital and trade finance and related financial services. But because of the high cost of building branch networks and the specialization of most new banks in a narrow range of services, it is less intense, though growing, in services for small and medium-size enterprises and remains quite subdued in retail banking.

The above quoted data on market shares may, however, somewhat overstate the increase in competition in Hungarian banking. First, adding the assets of the NSB to those of the four large commercial banks shows that the concentration ratio of the big five banks fell from 93% in 1987 to 82% in 1990.

Second, despite the expansion of branch networks by the large commercial banks and growing competition from the Postabank and the Bank for Savings Cooperatives, the market for household deposits continues to be dominated by the NSB. There is, thus, a continuing segmentation of corporate and household banking.

Third, the market for corporate banking services is also highly segmented. Foreign trade finance and related services are effectively dcminated by the joint venture banks that offer better and quicker services and have better access to international banking networks and correspondent relationships. There is also some segmentation by clientele. Old companies continue to bank with the large commercial banks, while newer companies tend to deal with the jont venture banks.

Fourth, several of the new domestic commercial banks come from the ranks of SFIs and earlier deposit associations and innovation funds. They are unlikely to be major sources of innovation and operating efficiency and to offer strong competition to the larger banks by charging lower spreads and/or offering a higher quality of service. At present, these banks account for less than 4% of total assets against over 9% for the joint venture banks.

Fifth, the market for payment services and related transaction accounts of the corporate sector is dominated by the large commercial banks. This is mainly due to the underdeveloped state of banking infrastructure, especially the absence of an efficient payment system and active interbank market. This hampers smaller banks in effectively competing with the large banks by offering more sophIsticated payment and cash management services.

The insufficient level of competition and innovation may thus be attributed to the segmentation of the market, the high level of market concentration and the dominant role played by state-owned or state-controlled banks<sup>3</sup> . With regard to market concentration, it is worth emphasizing that oligo,olistic markets need not necessarily imply an uncompetitive or inefficient market. Banking and finance are essentially contestable industries where the threat of potential competition from new

> 3 In Hungary, the banks have been converted into joint-stock companies with considerable nanagerial autonomy, while state participation in their ownership has been reduced. Nevertheless, the banks are still, nominally at least, under state control.

3