ABSTRACT
The Act on Financial Institutions (AFI), passed in 1991, outlined the main guidelines for the development of the Hungarian banking system. The AFI required that the fundamental norms of international banking regulation be met over a relatively short three-year period of adjustment. The AFI also laid out the framework for the establishment of new banks and mandated that state ownership of existing banks be reduced over time. The banking system continued to cleanse its portfolio, a development that was begun in 1994. With respect to the composition of the banking system in terms of size and majority ownership, large banks with a majority of state ownership lost market share between 1994 and 1995 and small- and medium-size private banks moved in to benefit. The operating costs of the banking system increased at a slightly lower rate than inflation. The banking system continued to cleanse its portfolio, a development that was begun in 1994.
