Central European University

Central European University BudapestSmall Post-Socialist States and Global Finance: A Comparative Study of the Internationalization of State Roles in Banking in Hungary and SloveniaDóra PiroskaDissertation submitted in partial fulfillment of the requirement for the degree of Doctor of Philosophy in Political ScienceUnder the joint supervision of Anna Leander and Nicole LindstromSeptember 20052 ACKNOWLEDGEMENTS There is one person whom I would like to thank the most for guiding me through the hurdle of thesis writing: Anna Leander. She was much more than an advisor to me. Her comments, interest and support during the whole thesis were very dear to me. Her impact will be visible not only on this thesis, but on anything, I will ever produce in social sciences. Many thanks go also to my internal advisor, Nicole Lindstrom for providing me support on all aspects of thesis writing. There is a shared characteristic of my two advisors that was extremely important for me throughout writing the thesis: their unique sense of humor. I am sure they are not aware of how much they helped me to overcome the hard times of the last five years. I am indebted to a number of persons at the Central European University. I received a lot of help from the faculty of the IRES and Pol. Scie. departments. I would like to thank especially Mihaly Laki, Michael Merlingen, Ulrich Sedelmeier, László Bruszt, Erin Jenne,Alex Astrov, Bela Greskovits, Zsolt Enyedi, and Dorothee Bohle. At the IRES departmentIren Varga, Julia Paraizs and especially Reka Sipos were doing their best to make smooth my insertion into the academic life of the university; I am truly grateful to them. The CEULibrary, for the first couple of years of my studies, was my home, and the librarians were exceptionally kind to me. They were not only unfailingly friendly and helpful, but they also paid attention to how I feel and at the most critical times urged me to leave the place and have some fresh air. Finally, Robin Bellers, my English professor from the Academic WritingCenter of the CEU, went way beyond his duties in correcting my papers, teaching me the language and refining my style. He is probably the third most important person in helping me finish this thesis and I am indebted to him for this. At the Institute of Economics of the Hungarian Academy of Sciences, where I spent the last period of my doctoral studies, I met people who became crucial in influencing my approach to banking and to the economy. I am especially grateful to Mihaly Laki, who not3 only helped me set me up many of my interviews by providing an extremely useful list of experts, but also gave invaluable advice on many aspects of conducting research in morally changing transition societies. I am also grateful to Maria Csanadi and Laszlo Halpern for their interest in my research. Both in Hungary and in Slovenia, I was lucky to have an outstanding group of interviewees, without their openness and interest, this study would not have been possible. I would like to thank in particular Julia Kiraly, Aniko Szanto, Eva Varhegyi, Katalin Mero,Klara Csoor, and Katalin Botos for their help. From Slovenia, I am especially grateful to JozeMencinger, Zlatko Sabic, Peter Frankl, Velimir Bole, Vida Petrovcic and Andrej Beloglavec.In Slovenia, I also met a few people who became my friends. Thanks go to Tjasa, Matej, andBostjan.Turing to my friends, I thank them for taking their time to listen to my early, unclear and confusing explanations of Hungarian and Slovenian banking. The first place goes to AnnaKhakee and Derek Lutterbeck, without whose help and lengthy discussion over lunch at the tenth floor, this thesis would be incomparably shallower. I am also thankful to Editke andTamara, my dear friends from undergrad years and Liia, Tania, Zsuzsi and Katalin from theCEU, who supported me all along the process. A special “thank you“ goes to Agi, Barna,Lala, Attila, Gyuri, Zsofi and Zsuzsi for being nice to me when I was torturing them with things they were really not interested in. Finally, I am grateful to Robert to make me turning towards much more important things in life than the thesis in the last years of writing it up. Lastly my thanks go to my parents and especially to my brother, Balazs who were supportive all along. My gratitude here becomes difficult to express, because the support I got becomes enormous. Thanks anyway for the lengthy discussions on philosophy, science and life (and everything) we had together. 4 ABSTRACTThis thesis sets out two main objectives of research on the changing role of the state in finance. On the first level of analysis, the thesis highlights and explains the differences in the state functions in banking in Hungary and Slovenia, in two structurally similar, but institutionally different post-socialist states, where better-developed financial markets emerged. On the second level of analysis, the thesis investigates the features of internationalization of the two states, which was brought about by the intensifying globalization of financial markets. Contrary to structure based arguments of IR/IPE, this thesis argues that the different developments (contested liberal in Hungary, and national interest-based gradualist in Slovenia) in the examined state functions (Bank-owner, Regulator and Supervisor), can not be explained by the structural characteristics of the two states.Instead, they may be understood on the basis of their different institutional heritage and content specifying public debates. The emergence of better-developed banking sector is explained in the case of Hungary by the encompassing bank privatization measures of the mid-1990s, in the case of Slovenia by the highly effective bank supervisory practice. In relation to this finding, the thesis emphasizes the importance of the actual configuration of the state in explaining the effectiveness of state ownership of banks. Finally, internationalization of the state functions in both cases is shown to generate conflict of interest among actors and transition-required policies, to be conditioned by the timing of reforms, and enlarge the supply of policy recommendations from outside the national domains. 5 Table of contentsAcknowledgements Abstract Table of contents List of tables List of abbreviationsChapter 1 Introduction and Case Selection...... 12 1. Introduction...... 12 2. The argument of the thesis in short...... 14 3. Expectations and contribution: Why is this study important/interesting?...... 20 4. Case selection: Hungary and Slovenia as cases of concern for the financial globalization literature...... 23 4.1. Structural similarities and differences of Central and Eastern European states...... 23 4.2. The differences in the role of the state in finance in the developed CEECs...... 29 4.3. Foreign indebtedness: definitive or indicative?...... 34 5. The structure of the study...... 36Chapter 2 Applying Financial Globalization Theories to the Central and Eastern European Cases...... 42 1. Introduction...... 42 2. Structuralist arguments: financial market integration and the tightening constraints over state policy making...... 45 3. The institutional underpinnings of deliberate state choices...... 53 4. The research framework of the thesis: state functions as sites of investigation...... 56 5. Selecting post-socialist states’ functions in finance: Regulator, Supervisor, Owner...... 58 6. The IR/IPE financial globalization literature on the Regulatory, Supervisory and Bank- owner functions...... 60 6.1. Global trends in bank regulation...... 61 6.2. Global trends in bank supervision...... 62 6.3. Global trends in bank ownership...... 63 7. The IR/IPE literature meets Central and Eastern Europe cases...... 65 7.1. Hungary: contested liberalization...... 67 7.2. Slovenia, the outlier case...... 82 7.3. Summary on the Hungarian and Slovenian internationalization cases...... 89 8. Conclusion...... 91Chapter 3 Evaluating Foreign Indebtedness...... 93 1. Introduction...... 93 2. External debt in Central and Eastern Europe...... 97 2.1. On data...... 98 3. The debt management of Hungary and Slovenia...... 99 3.1. Hungary...... 99 3.1.1. The debtor history of Hungary...... 100 3.1.2. The debt management of Hungary in the 1990s...... 101 3.2. Slovenia...... 1056 3.2.1. The heritage...... 105 3.2.2. Entering into the International Financial Institutions...... 106 3.2.3. The deal with the Paris Club...... 109 3.2.4. London Club, the commercial banks go hard...... 109 4. Contrast and conclusion...... 112Chapter 4 Bank Ownership...... 116 1. Introduction...... 116 2. International development in bank ownership...... 117 3. Withdrawal of state ownership: the public debates...... 121 3.1. Debates over bank ownership of the state in Hungary...... 121 3.2. Debates in Slovenia...... 128 3.3. Contrasting Hungarian and Slovenia public debates...... 136 4. The Responsibilities of owning banks: restructuring troubled banks...... 138 4.1. Bank consolidation in Hungary...... 138 4.2. Bank rehabilitation in Slovenia...... 142 4.3. Contrasting bank consolidation and bank rehabilitation processes...... 147 5. Elite struggles for controlling the banks in Hungary and Slovenia...... 150 5.1. Hungarian elite struggles for control over state-owned banks...... 150 5.2. Struggle for power over the banks in Slovenia...... 154 6. The actual privatization steps...... 157 6.1. Hungarian bank sale...... 158 6.2. Slovene bank privatization?...... 160 7. Conclusion...... 163Chapter 5 Bank Regulation...... 167 1. Introduction...... 167 2. International development in financial regulation...... 169 3. Banking sector regulation in Hungary and Slovenia in the 1990s...... 172 3.1. Hungarian pre-transition regulatory framework of banking...... 173 3.2. Pre-independence Slovene (Yugoslav) framework of banking...... 175 4. Liberalization and deregulation of the banking sectors: Hungary and Slovenia...... 179 4.1. Regulating the dismantling of state ownership: regulation of bank privatization and bank consolidation/rehabilitation...... 180 4.2 Regulation of the border-crossing: the openness of the domestic financial market. 185 4.3. Alleviating borders among the compartments of finance...... 192 5. Change in the practice and focus of regulation...... 194 5.1. Changes in the instruments of regulation...... 195 5.2. Bank regulation intertwined with the banks’ internal controlling systems...... 197 5.3. Securitization of finance...... 198 6. Conclusion...... 200Chapter 6 Bank Supervision...... 204 1. Introduction...... 204 2. International development in bank supervision...... 205 3. Bank supervision in Hungary and Slovenia...... 210 3.1 Institutional characteristics of bank supervision in Hungary...... 210 3.2. Institutional characteristics of bank supervision in Slovenia...... 213 4. Strength and weakness of bank supervisory institutions’ law enforcement capacity in Hungary and Slovenia...... 2157 4.1. The independence of the bank supervisory institutions from politics...... 216 4.1.1. Legal independence of bank supervisory institution in Hungary...... 217 4.1.2. Legal independence of bank supervisory institution in Slovenia...... 219 4.2. Quality of staff of bank supervision...... 221 4.3. Merged or separated?...... 223 4.3.1. Merged giant supervisory body in Hungary...... 224 4.3.2. Slovenia: separated financial supervisory agencies...... 225 4.4. Supervisory institutions and their relation to other state institutions...... 226 4.4.1. The small room for maneuvering of the Hungarian supervisory body...... 227 5. Internalizing international standards...... 230 5.1. Basle Capital Accord...... 230 5.2. On-site and off-site supervision internationalization of bank audit and data reporting...... 234 5.3. The involvement of private firms in evaluating banks...... 239 6. Connections to International Organizations...... 242 7. Conclusion...... 246Chapter 7 Conclusion...... 250 1. Introduction...... 250 2. Summary of findings: two worlds of finance...... 250 3. The explanatory factors and the evolution of state functions...... 252 4. Explanations for the “success” in state conduct...... 254 5. The internationalization process of the two post-socialist states...... 258Bibliography...... 265Appendix 1: A short note on sources...... 283 Appendix 2: Tables referred to in Chapter 1...... 284 Appendix 3: List of Interviews...... 287 Appendix 4: Legal texts and other primary materials...... 2898 List of tablesTable I.1: Total population, thousands in 1991 Table I.2: Domestic credit to households and enterprises (per cent of GDP) Table I.3: The 10 largest banks in Central and Eastern Europe 2004 Table I.4: Asset share of state-owned banks in % in CEECs Table I.5: Ownership structure of commercial banks as a portion of registered capital, 2000 (%) Table I.6: Foreign ownership as a proportion of registered capital, 2002 (%) Table I.7: Profitability of foreign and domestic banks, 2002 Table I.8: Gross external debt (USD mn) Table I.9: Level of external indebtedness of Hungary and Slovenia/Yugoslavia pre- transitionTable II.1: Changes in the state functions in finance Table II.2: The bankruptcy and liquidation procedures in Hungary Table II.3: The state of origin of the banks in the Hungarian banking sector in 2000 Table II.4: Two models of state roles in banking in Central and Eastern EuropeTable IV.1: Mapping the debates out in Hungary and Slovenia Table IV.2: Bank consolidation and rehabilitation in contrast Table IV.3: Changing state control over banks in Hungary 1992-1997Table V.1: Dismantling the state ownership of banks Table V.2: Regulatory barrier to investing into the banking sector Table V.3: Change in the practice and focus of bank regulationTable VI.1: Institutionalization of bank supervision in Hungary and Slovenia Table VI.2: Independence of bank supervisory bodies from politics Table VI.3: Internalization of international norms in bank supervision Table VI.4: Influence of IOs on the content of the bank supervisory function9 List of abbreviationsAEB Általános Értékforgalmi Bank (Hungary) APEH Tax and Financial Control Administration (Adó és Pényügzi Ellenőrzési Hivatal (Hungary) APV Rt Hungarian Privatization Agency (1995- ) AV Rt Hungarian Privatization Agency (1991-1995) AVU Rt Hungarian State Property Management Agency (1991-995) BAC Banking Advisory Committee (European Commission) BB Budapest Bank (Hungary) BCBS Basle Committee for Bank Supervision BCD Banking Directive (European Union) BRA Bank Rehabilitation Agency (Slovenia) BSC Banking Supervision Committee BS Bank of Slovenia (Banka Slonevije) BSA Bank Supervisory Agency (Hungary) CAR Capital Adequacy Ratio (Basle I) CAMEL(S) Capital adequacy, Asset quality, Earnings, Liquidity, and Sensitivity to interest rate risk CEE Central and Eastern Europe CEECs Central and Eastern European countries COMECOM Council for Mutual Economic Assistance EBRD European Bank of Reconstruction and Development EU European Union FATF Financial Action Task Force FDI Foreign Direct Investment Fkgp Independent Small Holders’ Party (Független Kisgazdapárt) (Hungary) GdC Groupe de Contact (European Union) FIDESZ Alliance of Young Democrats (Fiatal Demokraták Szövetsége) (Hungary) GDP Gross Domestic Product HFSA Hungarian Financial Supervisory Authority (Pénzügyi Szervezetek Állami Felügyelete, (PSZÁF)) IAIS International Association of Insurance Supervisors IFI International Financial Institution IMAD Institute of Macroeconomic Analyses and Development (IMAD) Inštitut za makroekonomske analize in razvoj (UMAR) IMF International Monetary Fund IOs international organizations (governmental) IOSCO International Organization of Securities Commissions IRA independent regulatory agency KDNP Christian Democratic Party, (Keresztény Demokrata Néppárt) (Hungary) KEHI Government Controlling Office (Kormányzati ellenőrzési Hivatal) (Hungary) LDS Slovenian Liberal Party (Liberalna Demokracija Slovenije) MDF Hungarian Democratic Forum (Magyar Demokrata Forum) MFB Hungarian Development Bank (Magyar Fejlesztési Bank, also see as MBFB)10 MHB Hungarian Credit Bank (Magyar Hitel Bank) MKB Hungarian Foreign-trade Bank (Magyar Külkereskedelmi Bank) MNC multinational corporation NBH National Bank of Hungary (Magyar Nemzeti Bank, (MNB)) NGO non-governmental organization NLB Nova Ljubljansaka Banka (Slovenia) NKBM Nova Kreditna Banka Maribor (Slovenia) OECD Organization for Economic Cooperation and Development OKHB National Commercial and Credit Bank (Országos Kereskedelmi és Hitel Bank) (Hungary) OTP National Saving Bank (Országos Takarék Pénztár) (Hungary) PHARE Poland and Hungary Action for the Reconstruction of the Economy SKB Banka SBK Bank (Slovenia) SLS Slovenian People’s Party (Slovenska Ljudska Stranka) SDR Special Drawing Rights SWB Slovenia Business Weekly SZDSZ Alliance of Free Democrats (Szabad Demokraták Szövetsége) (Hungary) TB State Pension Fund (Hungary) USAID US Agency for International Development VPOP Hungarian Customs and Finance Guard (Vám és Pénzügyőrség Országos Parancsnokság) WB World Bank WIIW The Vienna Institute for International Economic Studies (Wiener Institut für Internationale Wirtschaftsvergleiche) ZLDS United List of Social Democrats (Združena Lista Socijalnih Demokrata )(Slovenia)11 Chapter 1 Introduction and Case Selection 1. IntroductionGiven the importance of banks and finance to the health of an economy, the role of the state in maintaining the efficiency and stability of financial markets has always been considered central by researchers, politicians and businessmen alike (Gerschenkron 1962; Polanyi 1957, c1944; Zysman 1983). The interest in the state’s role in finance has intensified since the1970’s, when the globalization of financial business brought about numerous changes in state functions. By the 1990s, a new financial architecture emerged as states introduced liberalization measures, engaged in the privatization of banks and reorganized financial supervisory institutions. In the early 1990s, when explaining the changing role of the state in finance, global financial market structures were depicted as the most important explanatory factors for state policy choices. International finance was seen to set limits to national policy formation(Strange 1998: 180). The arguments maintained that the opening up of domestic financial markets increased the volatility and volume of capital mobility to a degree that the daily transactions on international financial markets outweighed the yearly gross domestic product of many poor countries (Cerny 1998). In addition, a number of researchers claimed that the emerging global market structure increased the political leverage of capital owners over fixed asset, labor owners and the state (Frieden and Rogowski 1996). Therefore, if states did not follow the logic of market liberalism, the ideology of capital owners (Cox 1996), then financially capable actors became able to exercise power over them by using the leverage of international debt (Stallings 1992: 52). In this kind of arguments, the economic structures of a country are pointed out as the defining factors of the possible pathways of the evolution of12 state institutions. As a consequence, in these arguments, historically developed, domestic political and social factors are rarely considered. Naturally, the above outlined, ‘structuralist arguments’ were criticized from many corners of the field of social sciences. Scholars questioned the magnitude of change in the role of the state (Weiss 1998), the extent of integration and interconnection among the various economies (Wade 1996), the driving forces behind the changes in state role (McNamara1998) and pointed to the importance of historically developed institutions in shaping these transformations (Loriaux 1997; Pérez 1997). Since the end of the 1990s, there is a new consensus emerging in many circles of social science which sees the impact of globalization on the state as one that hinges upon the culturally and socially specific institutional setup of the state. Institutionalist scholars draw our attention to the varieties of capitalism which face the challenge of the increased cross-border flow of capital, people, services and ideas (Hall and Soskice 2001).However, in the scholarship of post-socialist financial transition there are still a number of researchers, who accept structuralist assertions, namely that the most important variables to understand state institutional development are to be found among the state’s economic structures, such as their level of indebtedness, the size of the economy, the relevance of the various sectors, etc. There are only a few illuminating exceptions to this more general trend in the field of finance of the 1990s. These include, for example, the work ofJohnson (2000) on the Russian financial sector; Woodroff (1999) on the money vs. barter- based trade transactions in Russia, the reorganization of Romanian financial markets byCernat (2004), or the historically and politically sensitive writings of Varhegyi (1998, 2000) on Hungary. This thesis, by questioning the validity of the above outlined economic structure based arguments of International Relations and International Political Economy (IR/IPE),13 contributes to efforts to understand the impact of globalization on post-socialist states in two important ways: on the one hand, it evaluates the explanatory strength of the IR/IPE literature of financial globalization in post-socialist developments. On the other hand, it further develops the research on transition from socialism to capitalism through the examination of areas of change in state roles formerly out of sight of transitologists.Thus, this thesis seeks to solve the following puzzle: Although many researchers hold that globalization of finance forces structurally similar states to develop similar functions in the economy in general and in finance in particular, the Hungarian and the Slovenian states, which confronted similar structural constraints in many important ways, showed remarkably dissimilar features in their home financial markets during the 1990s, the period under investigation.2. The argument of the thesis in shortThe impact of the globalization of finance on the state, in this thesis, is characterized, following Sassen’s conceptual recommendations (Sassen 2003: 2) as an internalization process of global trends by the historically developed institutions of the state. In other words, the impact of globalization of finance on state institutions is not seen as a structural constraint, which may hinder or enable actions, but rather as a contested political and economic process, which shapes state institutions in accordance with their historically developed practices.According to this type of understanding of global finance, the considerably different state roles in the banking sectors of the structurally similar Hungary and Slovenia are explained in this thesis by the two countries’ different heritage of socialist institutions and the different political economic identity-forming debates and decisions of the early transition. 14 The case selection of Hungary and Slovenia, two post-socialist states with relatively developed financial markets and economies, and the methodological choice of examining state functions further the path-dependent argument of the thesis in two ways. Through juxtaposing the evolution of three state functions (bank owner, bank regulator, bank supervisor) in the selected countries, the thesis presents and explains alternative pathways to comparatively prosperous banking sectors. Moreover, the thesis points out sites of conflicts and tensions resulting from the internationalization process, hitherto unexplored in detail. In the case of the Hungarian state, the argument embarks from the late socialist period and calls attention to the relative openness of the Hungarian financial sector in the 1980s, compared to the other countries of the soviet block. Still, during socialism, in Hungary, financial intermediation was managed by the planning office, rather than the banks. A two- tier banking system, separating the mono-bank system into a central bank and commercial banks, was implemented as late as 1987. Only in 1991, following the first free election, the public debates over the role of the state in the banking sector culminated in a quick and profound liberalization of the regulatory framework of banking. The early 1990s, was also the period when the foreign debt burden of the country started to threaten economic stability. Yet, the thesis argues that it was not the structural pressure of the foreign indebtedness (Chapter 3), that forced the Hungarian state to open up fully its banking sector. Instead, the inherited institutional set up of banking and the public deliberation over the role of the state in banking are the main explanatory factors for the evolution of the Hungarian state roles in the banking sector. The evolution of the Hungarian state roles was not without discord. The establishment of a highly open regulatory regime by the 1991 Law on Financial Institutions, created conflicts among emerging state functions in post-socialist Hungary. The conflict between the state regulatory function and supervisory function emerged most promptly and rendered15 impossible the operation of the state’s bank-owner function. In the early 1990s, bank supervision – following global trends – was set up as a formally independent regulatory agency. Nevertheless, because of its low actual independence from politics, tight supervision of the banks became impossible to be exercised. The conflict of state functions and the recurrent changes in banking policy during the hard times of the giant “transitional recession”(Kornai 1996) culminated into an untenable situation of frequent and costly bailing out of banks and finally led to the privatization of state-owned banks. Contrary to the generally accepted explanations, this thesis argues that it was not because the state was compelled to liberalize and privatize because of its structural constraints, nor because the state by definition was a “bad-owner” of banks, but rather because the particular institutional implementation of state control in Hungary was detrimental to banking business and to the whole economy. In the second part of the 1990s, the state regulatory role in banking was marked by a reevaluation of the early liberal positions, along the lines of incorporating European Union(EU) directives, the recommendations of the Basle Committee for Bank Supervision (BCBS), and Organization for Economic Cooperation and Development (OECD) rules into the legal framework. Bank supervision was merged together with other financial supervisory institutions into one giant supervisory agency. The new agency was, however, highly politicized and never gained as high a degree of independence from the government as the central bank. Nevertheless, bank supervision as a practice became more efficient by the second part of the 1990s. This was the result of the cut in the network of bank managers, enterprise managers, state officials, and party politicians, brought about by the privatization of the banks. The cutting of dependency lines was, however, not fully achieved, as the politically sensitive scandals of Posta Bank and K&H Bank of the late 1990s, early 2000s testified.Finally, the bank owner function of the state developed, along the lines of international trends, towards the dominant private control of banks, leaving the state with a mere 3 per cent of total16 bank assets. Nevertheless, by the end of the examined period, the Hungarian banking sector was considered to belong to the better-developed banking sectors, and the role of the state in it was compatible with the Copenhagen Criteria of the European Union. In Hungary in the 1990s, the internalization of global trends into the examined roles of the state was marked by conflict among state functions and resulted in openness in regulation, medium strength of supervision and minuscule bank assets under state ownership by the end of the examined period. The described evolution of state functions in banking, the thesis argues, was a result of the contested process of internalization of global trends into the historically developed state institutions. Although this process was conditioned, it was not defined by the structural constraints of the economy i. e. foreign debt. In the case of Slovenia, the path dependency driven argument of the thesis underlines that Slovenia inherited a banking sector from Yugoslavia, which was in many ways the most liberalized sector of the socialist block. A two-tier banking sector operated since 1965, and the larger commercial banks were allowed to individually initiate business with foreign partners. Nevertheless, the communist party-state interference into banking was indirectly present (mainly through indexation of deposits, credits, wages, etc. to inflation and the withdrawal of foreign exchange from the banks). With regards to bank supervision, the standards of reporting and risk evaluation in Yugoslavia were more in line with the requirements of a market economy than those of the centrally planned economies of the soviet block including Hungary. Finally, banks in Yugoslavia were not directly owned by the state, rather the socially-owned and workers self-managed companies were the controller of the banks. The largely liberal conditions of the 1980s, however, were restrained, in the early1990s, and the internalization of global trends into state roles followed a gradualist course. As a strong consensus prevailed in the Slovene public over the maintenance of the achievements17 of Yugoslavia, the first Slovene Law on Banking of 1991, established a regulatory framework, which kept the existing barriers of entry in place and was generally characterized by a degree of closeness. The bank supervisory standards, being already more in line with the western standards than their Hungarian counterparts, did not have to be changed so abruptly.Moreover, bank supervision was organized inside the Central Bank, which was the most powerful state institution in the banking sector. As a result, bank supervision had been highly effective since the early 1990s throughout the whole period. Nevertheless, even the tighter bank supervision could not prevent the banks from increasing loss making during the“transitional recession”, and bank rehabilitation was needed. In order to execute the bank rehabilitation, the banks first had to be nationalized and the state had to establish full control over the banks’ assets. Only the largest and economically most important banks were included in this process. The bank rehabilitation process was then executed through a BankRehabilitation Agency, specially mandated for this task. The working of this state agency ensured the lawfulness of the use of state capital and resulted in a more prudential practice of credit granting. The state bank-owner function was newly established in the early 1990s, but remained dominant in the banking sector throughout the examined period. The state-owned banks performed in a market like manner and achieved business results, which any private owner would have envied achieving. In the second part of the 1990s, and especially after the signing of the EuropeanAgreement in 1997, the European Union had a more important impact on the development of the state than any other international organization or even private capital holders. The impact of the EU was prevalent in the new Banking Law and Financial Stability Law of 1999, in which all the EU directives applicable before membership were enacted and the general regulatory framework of banking was significantly opened. Bank supervisors also started to get engaged in EU level meetings and discussions. However, the recommendation of the18 Commission to privatize state-owned banks provoked major tensions in the Slovene public sphere. This tension not only prolonged the state’s decision of privatization in time, but also curbed the extent of the selling of the state’s assets to foreign investors. The final privatization decision only considered 33.4+5 per cent of the most important bank’s assets, in other words the state remained the majority owner and thus the controller of the bank’s business. In 2005, the Slovene state controlled roughly 40 per cent of the total banking sector’s assets and it is still to see the course of the economic policy of the new social democrat led government.In sum, in Slovenia, this thesis argues that the internationalization of the state roles in the banking sector was marked by a more gradualist, and less conflict prone process than inHungary. The regulatory framework of banking was rather closed and opened up substantially only after 1999. Bank supervision was very efficient throughout the period, and the total assets controlled by state-owned banks were relatively high and efficient as of the end of the examined period. The relative efficiency and profitability of state-owned banks is explained in this thesis by the formalized cooperation of Slovene state institutions as well as by effective bank supervision. Thus, under the particular Slovene institutional circumstances, we may conclude the state appeared to be if not “good”, at least an acceptable owner of the banks for more than a decade. The findings and limitations of scope of the thesis are the following: First, the thesis demonstrates the importance of the historically developed state institutions to mediate and shape the impact of global trends upon local state developments. Second, the thesis also reveals the sites and nature of conflicts in the two countries brought about by the necessity of fine tuning state institutions to conform to global trends. In other words, it demonstrates the contested nature of globalization and argues against the “natural laws” driven explanations of the internationalization process. In the case of Hungary, the conflicts appeared in the early1990s, and in relation to the simultaneous internationalization of the bank regulatory and bank19 supervisory functions of the state. In the case of Slovenia, conflicts only appeared in the second part of the 1990s, especially in the early 2000s, and created public tensions in relation to the state bank-owner function. Third, in relation to the social effectiveness of the state bank-owner function, the thesis argues for the need of its empirically grounded evaluation.The reason for this is that although in the case of Hungary the particular institutional realization of the state bank-owner function appeared to be detrimental to banking business in the 1990s, in the case of Slovenia, the state was a well-functioning owner in the two largest banks. As the key to the Slovene development, this thesis points to the formal institutions- establishing practice of the state and the tight bank supervisory practice of the SloveneCentral Bank. Finally, the thesis has a number of limitations. It only concentrates on three state functions and leaves unexplored a number of other functions, which were of importance to the development of the role of the state in the banking sector in the two countries in the1990s. These unexplored functions include the state’s fiscal functions, its monetary policy and a number of aspects of the economic policy. Nevertheless, I believe that the thesis provides an alternative frame for understanding state evolution in finance in Central and Eastern European countries. 3. Expectations and contribution: Why is this study important/interesting? Contrasting the institutional development of the state in Hungary and Slovenia in finance in the 1990s is promising for a number of reasons for the IR/IPE scholarship. First, the selection of the field of finance of the 1990s ensures the greatest connection of international and national. In the 1990s, financial markets represented the highest degree of cross-border activities: not only private capital flows increased, but also a high degree of coordination took place among states and a large number of international organizations developed capacities to20 coordinate in common matters. If there is one segment of the economy where the international realm enters and shapes the activities of domestic actors directly, then that it is most probably finance. Therefore, an investigation of the development of different institutional designs in two small Central and Eastern European states in the field of finance represents a crucial test against structure-defined arguments leading to cross-national homogenization of state functions.Second, highlighting alternative pathways to successful post-socialist developments enriches our understanding of the interactions between financial globalization and changing state roles. It is because, in the 1990s, parallel to the Central and Eastern European countries’ engagement with financial market restructuring, many researchers reported an irresistible turn towards liberalization and privatization of financial assets. Together with deregulation, the development of information and communication technologies, and financial innovations, the increased integration of global financial markets presented changes of global financial production that were held to challenge the very possibility of successful alternative national regulations to the liberal economic policy in general and in small Central and EasternEuropean countries in particular. In other words, the comparison of Hungary and Slovenia – two relatively prosperous cases, but featuring liberal and economic nationalist policies respectively – allows to further arguments which accept heterogeneous pathways, but would single out the liberal economic policy as the only successful one. Third, in the late 1990s, parallel to bringing under fire “there is no alternative to liberal economic policy” type of arguments, more and more scholars of IR/IPE engaged in giving a detailed understanding of the institutional reconfiguration of the state. A number of critical sites of the reconfiguration of the state in the financial field were identified. However, these areas of critical changes in state conduct, whose nature is conditioned by the international financial markets, have so far not been thoroughly examined in the post-socialist21 cases. Therefore, applying IR/IPE financial globalization studies to Central and EasternEuropean cases makes room for understanding the transition process from within the international trends. Fourth, with the methodological choice of conducting detailed case studies of theHungarian and Slovenian states’ evolution in the 1990s, the explanatory variables to the differences significantly increase in number and become more diverse in nature. That is, not only structural differences in the economy and narrowly understood institutional configurations come forth as defining differences, but also historically defined practices and discourses. As we will see, especially the often underestimated historical differences of socialist developments will be determinant for the evolution of the state under capitalist conditions. In other words, the detailed case studies open avenues for the consideration of a wide number of actors and processes that allows us considering changes in state roles not as a monolithic self-containing process, but as contested and confronted public deliberations. In sum, Hungary and Slovenia stand as motivating examples for understanding the changing role of the state in banking in the Central and Eastern European countries, while taking the changes of the international financial environment of the two countries seriously. A thorough study of the two cases, however, not only opens up scenes that were hidden from scholars of transition who often very narrowly studied changing state roles only from within the country cases, while disregarding the changing international circumstances. But these different cases also allow us to better grasp the process of the internationalization of the two states. 22 4. Case selection: Hungary and Slovenia as cases of concern for the financial globalization literatureThe thesis’s argument is based on the structural similarity of the two selected countries and their different institutional development, i. e. John Stuart Mill’s theory inspired the most different outcomes type of case selection. This case selection criteria requires selecting cases according to general similarities and different outcomes (Collier 1991), in this case, according to indicators on similar structural characteristics and divergent institutional outcomes. The aim of this section is to provide evidence for the selection of Hungary and Slovenia out of theCentral and Eastern European countries, based on the two countries structural similarities and different financial-institutional developments in the 1990s. 4.1. Structural similarities and differences of Central and Eastern European statesIn discussing structural similarities and differences of the post-socialist countries, this first section narrows down the focus of interest of the case selection. It demonstrates the structural similarity out of the total ten Central and Eastern European countries of Poland, Hungary,Czech Republic, Slovakia and Slovenia and displays Romania, Bulgaria, Estonia, Latvia andLithuania as significantly different countries from the first group. The data analyzed in this section is derived from one of the most comprehensive databases on the Central and Eastern European countries’ economic development, the database of the United Nations Economic Commission for Europe: Statistics for Europe andNorth America. The detailed statistics are presented in the thesis’ Appendix 2. In this online- database, the emphasis is placed on making the data ready for international comparison and23 immediate analytical use, therefore the data on structural development is provided in a number of forms. In the course of the case selection argument, I will rely on both nominal indicators as well as per capita indices. In order to better evaluate the per capita indices, Table I.1. presents total population numbers in thousands for the ten Central and Eastern European countries. In this sample of total population, Poland and Romania are among the largest countries andEstonia, Slovenia, Latvia and Lithuania are the smallest countries. Hungary, Czech Republic, and Bulgaria may be grouped in the middle. Table I.1: Total population, thousands in 1991 Czech Bulgaria Estonia Hungary Latvia Lithuania Poland Ro mania Slovakia Slovenia Republic 8632 10309 1561 10346 2651 3704 38245 23185 5283 2002 Source: United Nations Economic Co mmission for Europe: Statistics for Europe and North America, http://www.unece.org/stats/stats_h.htm, date of access: 15.05.2005 Furthermore, the total population numbers indicate the size of the economy of the ten countries, which is considered influential to the development of the financial sector. The size of the market is an important structural indicator for the development of the financial sector for a number of reasons. Market size conditions the number of business units and business contacts in a country, therefore the number and diversity of financial exchanges as well as their value. Moreover, it shapes these business exchanges inside the country and the number and density of the inside and outside connections. However, the total population number is not an absolute indicator of the market size. The economic potential of a country (the wealth of the population) should be also evaluated in order to form a grounded opinion regarding the size of the market. In other words, the richness of an economy should be also considered. The index of the per capita GDP is the usual estimator of the economic potential. In Appendix 2,Table 1 provides data in US dollars at prices and (Purchasing Power Parity) PPPs as of 2000 for the period of 1991-2004 for the ten Central and Eastern European countries, and comparative data for the EU-15 and CIS-12. During this period, all the countries of Central24 and Eastern Europe were poorer than the average of the European Union-15, and better-off than the CIS-12, Russia included. In this sample of countries, we find among the wealthiest countries Slovenia, Czech Republic, Hungary, Slovakia and Poland, among the middle income countries Estonia, Latvia and Lithuania, and among the poorest Romania andBulgaria. The size of the market of the Central and Eastern European countries has undergone substantial changes during the transitional recession of the 1990s. Changes in market size also conditioned the development potentials of the financial markets. To better understand the dynamic of the changes in the market size, the indices on GDP per capita growth rate during the 1990s appear very informative. As is shown in Appendix 2, Table 2 in the early 1990s all the countries of the region suffered serious losses in their GDP. The down turn in the economic production was the worst in Estonia, Latvia, Lithuania, Slovakia, Romania andBulgaria, on the one hand, and serious but lasting for shorter duration in Czech Republic,Hungary, Poland and Slovenia. Towards the end of the period, however, with the exception ofSlovakia and Romania, all Central and Eastern European countries produced growth rates higher than the average of the EU-15.An additional structural indicator of economic development, which certainly delimits the development of the financial sector, is the yearly growth rates of the consumer price index, an indicator of the yearly inflation rate. Inflation has an impact on financial markets through putting a strain on credit policy (through devaluating the value of deposits and credits), as well as conditioning the exchange rate of the currency and in general through increasing uncertainty in the calculability of business decisions. From the viewpoint of yearly inflation, the early 1990s appears to be a devastating period. Estonia, Latvia, Lithuania,Romania and the then still Yugoslavia-member Slovenia experienced hyper inflation, which not only ruined the financial system, but also had a dreadful social impact. The general25 economic upturn in the second part of the 1990s brought down inflation in all the countries, although, to various degrees. The Latvian and Lithuanian inflation index approached the level of that of the EU-15, in Hungary, Poland, Slovakia, Slovenia and Bulgaria, the inflation index was still roughly five times higher than that of the EU-15.Finally, in order to make the description of those structural characteristics of theCentral and Eastern European countries which were bound to have an impact upon the development of the financial sector complete, it is important to look at the changes in the exports of goods and services. The export rate of a country is influential to its financial sector development not only because external trade to be realized utilizes the channels of the financial sector (to realize payments abroad), but also because in small open economies it is the development of the export sector which is the most influential upon the development of the whole economy. From the point of view of the export rate, the early 1990s indicates the complete collapse of the export market of the former socialist countries, the Council forMutual Economic Aid (Comecom) (See Appendix 2, Table 3). Slovenia, as a member of theYugoslav federation was not a member of the Comecom, however, it also suffered serious losses as a result of the disintegration of Yugoslavia and the war among the seceding states; secession deprived Slovenia of its major export markets. On the basis of the presented data on market size, inflation rates and export growth rates, from the point of view of structural alikeness two countries appear to largely deviate from the rest of the sample, namely Bulgaria and Romania. In the examined period, these two countries had the lowest per capita GDP, presented negative growth rates of GDP even in the second part of the 1990s, and either did not really manage to curb inflation (Romania) or suffered from enormous hyper inflation in the late 1990s (Bulgaria) and, finally, performed very unevenly in the export markets. Therefore, a structuralist explanation would indicate a very different financial sector development in these two countries than in the rest of the26 countries. As this thesis is interested in challenging those arguments, which predict similar outcomes under similar structural constraints, Bulgaria and Romania ought to be excluded from the case selection. With regards to the rest of the countries in the sample, the recovery of the export sector in the second part of the 1990s is usually explained by the inflow of foreign direct investment into the Central and Eastern European countries. The argument generally points out the beneficial impact of FDI on the development of the Central and Eastern European economies and indicates an export led growth (Mihalyi 2000). However, Foreign DirectInvestment was rather uneven in Central and Eastern Europe and what is important from the point of view of the thesis’ argument is that the Baltic states, however small they may be, received on average twice or three times more FDI than the small Slovenia did. Hungary, on the other hand, received one of the largest amounts of FDI. While many researchers consider the received amount of FDI as a structural characteristic of a country, and therefore would point out Slovenia as an outlier from this structural point of view (Hunya 2001), others argue that FDI may not be considered as an exogenous structural factor. This is because the governments may define its very extent more substantially than in the case of other examined structural characteristics. In other words, the amount of FDI a country receives is conditioned by the willingness of a government to allowFDI to enter the country (Bandelj 2003). Given the diverse evaluation of FDI, for the purposes of the case selection of Hungary and Slovenia, from Appendix 2, Table 6, I suggest extracting only the fact that the very small Baltic states received relatively high amount ofFDI during the 1990s. Considering this factor helps question those critics of the selection ofSlovenia, with a dominantly state-owned banking sector, which points to the lack of interest of foreign investors to buy into the banks of such a small country. If the profit opportunities provided by the size of Estonian, Latvian and Lithuanian economies were tempting for FDI,27 there is no ground to question the same attractiveness of the Slovenian economy. In other aspects, I take FDI as a factor that needs to be explained rather than an explanatory variable that defines state development. Having considered three structural factors, such as the size of the market, the inflation rate and the yearly export growth rates and pointed out differences in FDI among the Central and Eastern European cases, according to which I excluded Romania and Bulgaria as significantly different from the remaining eight countries, it is time to narrow down the focus of interest to the financial sector and point out similarities and differences here. In the introduction as the aim of this thesis, I marked out the demonstration and explanation of relatively successful, but alternative development pathways of financial sectors among the Central and Eastern European cases. For this purpose, we have to select cases out of the remaining eight countries, which feature a better functioning financial market. For this end, I suggest first considering the indicator of domestic credit to households and enterprises as a per cent of the GDP. This indicator is one of the most widely used indicators of the development of the financial sector; it shows how well the banks do their jobs in providing finance to the economic actors (Berglof 2002). From this point of view, Estonia, Latvia andLithuania clearly fared worst than the rest of countries (See Table I.2. below). AlthoughEstonia caught up in the later part of the 1990s, it is still among the four worst on average.Moreover, if we consider the development of their financial sector, together with their very different economic heritage as former-Soviet states and the serious down turn of their economies in the early transition period as structural indicators, I suggest excluding the threeBaltic countries from the better developed, and structurally more similar countries of Central and Eastern Europe. 28 Table I.2: Domestic credit to households and enterprises (per cent of GDP) Country 1993 1994 1995 1996 1997 1998 1999 Czech Republic 51.8 55.3 55.5 60.0 61.5 56.1 Estonia 7.3 11.1 12.5 15.1 20.0 24.4 26.4 Hungary 28.7 24.7 22.3 20.8 21.4 22.7 23.4 Latvia 14.7 11.8 7.0 8.5 12.3 15.7 Lithuania 13.4 14.0 11.5 9.4 10.6 12.3 Poland 10.2 10.5 10.7 13.0 15.6 17.4 20.6 Slovakia 25.8 24.3 28.4 36.1 41.7 39.8 Slovenia 23.1 27.5 28.8 28.6 32.8 35.9 Source: IMF International Financial Statistics. As quoted in (Berglof and Bolton 2002)The above presented narrowing down of the population of the sample of the ten Central andEastern European countries, based on structural indicators of the development of their economies, left us with five countries of the region: Czech Republic, Hungary, Poland,Slovakia and Slovenia, with relatively more similar structural characteristics. I turn now to a more thorough investigation of the financial sectors of these countries. 4.2. The differences in the role of the state in finance in the developed CEECsIn the early 1990s, in all the five selected countries of Central and Eastern Europe, the new governments had to engage in various types of financial sector reorganization in order to help the recovering of their economy from the shock of the transitional recession. The measures taken by governments included the issuing of privatization or restitution vouchers, which also aimed to revitalize the newly founded stock exchanges. The stock markets were also trusted to restitute for bank finance and create the basis of stock driven finance in the longer run.However, stock exchanges, after a short upheaval in the early 1990s, have not gained significance in any of the Central and Eastern European countries and only played a marginal role as financial intermediaries in the late 1990s (Varhegyi 2002). If not stock exchanges, then banks and the state had to take on smoothing the difficulties of transition. Therefore, in order29 to examine the changing role of the state in finance in the selected Central and Eastern Europe countries, one naturally has to exclude the stock exchanges and narrow down the investigation to the banking sector, which was the prime site of financial intermediation in these countries in the 1990s.In this section, the focus is on the banking sector of the five selected countries, and data is presented to support the case selection of Hungary and Slovenia as the most promising countries to conduct in depth case studies in relation to the role of the state in their banking sectors in the rest of the thesis. As I argued above, from the economic structural side, the Czech Republic, Hungary, Poland,Slovakia and Slovenia are more similar to each other than other countries of the total population of the ten Central and Eastern European countries. They are also more similar to each other as the largest and better-rated commercial banks of the region operate in these countries. As Table I.3. shows, according to Moody’s ratings, Kommercni Banka from theCzech Republic is the best performing bank, the second best are CSOB from Czech Republic,Bank Pekao and CityBank Handlowy from Poland and Nova Ljubljanska Banka fromSlovenia. The share of non-performing loans in the total loan is a further indicator of success, in this respect the best banks are OTP from Hungary, BHP-PBK from Poland and NovaLjubljanska Banka from Slovenia. It seems from this sample that not only privately owned banks, but also state-owned banks made it among the better banks of the region. The relatively better rating of the majority state-owned Slovene Nova Ljubljanska Banka is especially interesting.30 Table I.3: The 10 largest banks in Central and Eastern Europe 2004 Ranking by Moody’s Share of non- Majority Owner performing loans PKO BP (PL) n.a. n.a. Polish state 100% CSOB (CZ) A2 5.9 KBC (Belgium) 82.24% Ceska Sporitelna A2 4.69 Erste Bank (Austria) (CZ) 97.9% Bank Pekao (PL) A2 22.23 Unicredito (Italy) 53.17% Kommercni Banka A1 18.93 Societe General (CZ) (France) 60.35% OTP Bank (H) A2 2.71 Portfolio Investors, No majority BPH-PBK (PL) A3 2.23 HVB (Austria- Germany) 77.07% Nova Ljubljanska A2 4.4 Slovene state 61% Banka (SL) KBC 34%, EBRD 5% Citybank Handlowy A2 30.78 Citibank (USA) (PL) 89.33% BRE Bank (PL) A3 19.03 Commerzbank (Germany) 72.16% Source: (Banyar 2004/2)When further concentrating on the evolution of the role of the state as bank-owner in these five countries, that is in the Czech Republic, Hungary, Poland, Slovakia and Slovenia throughout the 1990s, different strategies emerge in Slovakia and in Slovenia as compared to the other four cases. Namely, that the role of the state as a bank-owner remained significant in these two countries by the end of the period, whereas in the Czech Republic, Hungary andPoland, the dominant share of banking assets were sold to private investors (See Table I.4.).Table I.4: Asset share of state-owned banks in % in CEECs 1993 1994 1995 1996 1997 1998 1999 Czech Republic 11.9 17.9 17.6 16.6 17.5 18.6 23.1 Hungary 74.9 62.8 52 16.3 10.8 11.8 9.1 Poland 86.2 80.4 71.7 69.8 51.6 48.0 24.9 Slovakia 70.7 66.9 61.2 54.2 48.7 50.0 41.7 Slovenia 47.8 39.8 41.7 40.7 40.1 41.3 41.7 Source: Various EBRD Transition Reports31 Furthermore, looking at the whole picture of the ownership structures in these five countries, a new aspect of difference comes to light, namely the different balance between domestic bank-owners and foreign bank-owners, which is indicative for the state regulatory functions.As Table I.5. and Table I.6. indicate, by 2000, while domestic ownership decreased in the cases of the Czech Republic, Hungary, Poland and also in Slovakia, in Slovenia it remained important until the end of the period. The Slovene state’s role in finance in the 1990s presents an outlier to the other four cases. Table I.5: Ownership structure of commercial banks as a portion of registered capital, 2000 (%) Country State Other Domestic Foreign Dispersed Ownership Domestic ownership Ownership holdings total Czech Republic 23.6 21.9 45.5 54.5 Hungary 19.3 13.1 32.4 67.6 Poland 14.9 17.4 32.3 56.6 11.1 Slovakia 50.9 21.0 71.9 28.1 Slovenia 36.8 51.2 88 12 Source: ECB (2001) as quoted in (Mero and Valentinyi 2003) Table I.6: Foreign ownership as a proportion of registered capital, 2002 (%) Country Czech Republic 81.9 Hungary 78 Poland 60.5 Slovakia 85.3 Slovenia 32.5 Source: National Central Banks as quoted in (Mero and Valentinyi 2003)Whereas Slovenia is clearly an outlier case, Hungary represents a typical case of the four other countries. Hungary is a typical case as the state owned banks’ assets share diminished substantially, by the end of the examined period, the total domestic share was on the level ofPoland, but lower than in the Czech Republic or in Slovakia. In 2002, the foreign ownership share in the country was below the Czech and Slovak level, but higher than the Polish index.The fact that Hungary is a typical case is also true for the ways in which the state allowed for the entering of foreign banks into the banking sector. As Mero and Valentinyi (2003)32 revealed, from the second half of the 1990s in Hungary, the Czech Republic and Poland and from early 2000 in Slovakia, foreign banks’ market penetration was carried out through participation in the privatization of banks. However, unlike in these four countries, inSlovenia there was only one example of entry by a foreign bank into the market through privatization. In Slovenia, in most cases, foreign banks bought existing, privately owned banks.Moreover, Mero and Valentinyi looked at the ownership of the three largest banks in these five countries. They found that the three largest banks of the Czech Republic, Hungary and Slovakia are in foreign ownership. Poland’s largest bank is still state-owned, while the second and third largest Polish banks are under foreign strategic owners’ control. In this respect, Slovenia is again an outlier, as its largest bank is in majority state ownership, while the second and third largest ones are in domestic private hands. Finally, Slovenia appears as an outlier with regards to the differences in the profitability of the domestic and foreign owned banks. As Table I.7. shows, the return on equity (ROE) of foreign banks is significantly higher in the Czech Republic, Hungary, andSlovakia, whereas in Poland and Slovenia, domestic banks are more profitable. However, asMero and Valentinyi argue in the relatively more homogeneous period between 1998 and2002, in Hungary and Poland, foreign banks alternated with domestic banks in achieving higher ROE values and it was only in Slovenia in the examined period that the foreign banks had a significantly higher overhead costs-to-total assets ratio than domestic banks. While the role of the state in understanding the differences in profitability of foreign banks may not be evident, we may hint at least, that the not so foreign investor friendly regulatory environment of Slovenia in the early 1990s might have contributed to this situation.33 Table I.7: Profitability of foreign and domestic banks, 2002 Country ROE Domestic Foreign Czech Republic -1.8 28.9 Hungary 1.7 18.1 Poland 8.1 4.6 Slovakia 0.9 31.9 Slovenia 14.9 5.1 Source: National Central Banks as quoted in (Mero and Valentinyi 2003)Thus while Slovenia is an outlier to the general trend in the evolution of the state role of the more developed Central and Eastern European countries, Hungary represents a case which typifies to some degree the other three cases. As the above tables show, the role of the state in finance in Hungary is typical to the degree that state ownership significantly reduced to the end of the period and regulation was developed into a direction which clearly favored the entry of foreign investors. Therefore, the selection of Hungary and Slovenia for a case study oriented comparison, which at the same time presupposes structural similarities and institutional differences (John Stuart Mill’s method of most different cases), seems to be satisfied1. 4.3. Foreign indebtedness: definitive or indicative?There remains one more structural difference in Central and Eastern European countries that is often invoked to explain different institutional developments, namely the level of external indebtedness of the state. On the one hand, especially in the case of Hungary, a number of researchers employed the high level of indebtedness as “the explanatory factor” for the dominantly liberal economic policy the Hungarian state pursued in the 1990s (Kornai 1996).While it is an important explanatory variable, Chapter 3 argues that it only indirectly1 Clearly, I select cases on the dependent variable, which is not recommended by KKV (King, Gary, Robert O. Keohane, Sidney Verba. 1994. Designing Social Inquiry: Scientific Inference in Qualitative Research. Princeton: Princeton University Press.). However, they also neglect the discussion of Mill’s method of most different cases which prioritizes, in the case of two countries’ comparison, the selection on dependent variable. 34 constrained Hungarian policy makers when deciding about the faith of the banks in their hand. On the other hand, the available data on external debt of Slovenia (See Table I.8.) clearly favors a structuralist explanation, namely that the reason for the gradualist alternative path of economic development Slovenia pursued, became possible as the state was not forced to promptly meet the demands of foreign creditors. Table I.8: Gross external debt (USD mn) Country 1992 1993 1994 1995 1996 1997 1998 1999 Slovenia 1741 1873 2258 2970 4010 4176 4959 5491 Hungary 21644 24566 28526 31660 28043 24395 27280 29279 Notes: In the case of Slovenia unallocated debt of Yugoslavia is not included till 1995 Source: WIIW (2000): Countries in Transition 2000, Handbook of Statistics, WIIW, Vienna and WIIW (1996): Countries in Transition 1996, Handbook of Statistics, WIIW, ViennaHowever, the data presented in Table I.8. suffers from a number of short-comings, most importantly because the Slovene debt issue - the amount of money Slovenia was responsible to finance from the total Yugoslav debt - was simply not resolved till 1995. Therefore, theSlovene policy makers whenever asked by think tanks or International Financial Institutions(IFIS) provided data which favored their own interpretation of the debt issue, the share ofSlovenia from the total Yugoslav debt. Therefore declaring Slovenia free of debt burden in the early 1990s seems to be a too quick conclusion. Rather, what seems crucial for understanding state development in the two cases is that of the level of indebtedness in the pre-transition era (See Table I.9.). Table I.9: Level of external indebtedness of Hungary and Slovenia/Yugoslavia pre- transition Banking Sector Policy Hungarya Slovenia/Yugoslaviab Level of external indebtedness 21.5 billion USD in 1990 21 billion USD in 1987Source: a WIIW: Countries in Transition 2000, Handbook of Statistics, WIIW, Vienna, p 443. b OECD Development Center, Technical Paper N° 54 “Debt Conversions in Yugoslavia”, by Mojmir Mrak, Research Program on Financial Policies for the Global Dissemination of Economic Growth, Head of Project: Jean-Claude Berthélemy, February 1992, p. 48.While there is no place here in the introduction to clearly explain the Slovene case with the external debt, nor clarify the link between Hungarian policy makers’ choice to privatize the35 banks and the external indebtedness of the country, Chapter 3 takes on both issues in a more thorough manner. To sum up the discussion on case selection, the aim of this section was to support the case selection of Hungary and Slovenia with data for studying the role of the state in structurally similar, but institutionally different Central and Eastern Europe countries in the1990s. Out of the ten Central and Eastern European countries, Poland, Hungary, CzechRepublic, Slovakia and Slovenia were singled out as structurally alike and relatively more developed than other countries of the region. Through studying the available macro level data on state roles in these five countries, Hungary appears to epitomize a liberal to typical development pathway of the more developed post-socialist countries. Slovenia, on the other hand, turns up as a clear outlier to the general trend. Given the spelled differences in state roles, the selection of Hungary and Slovenia out of the Central and Eastern European countries also ensures a relatively similar structural background. Yet, throughout the 1990s, the transition process in the economy and the financial sector exhibited important differences, which this thesis aims to highlight and explain.5. The structure of the studyThe thesis starts out in Chapter 2 by addressing the puzzle of different state conducts in finance under similar international and structural conditions and develops a research design based on a literature survey of two main bodies of scholarly interests: international political economy of globalization of finance and political economy of transition. The research design identifies three state functions in banking as the most promising sites of study, namely bank- owner, bank regulator, and bank supervisor as well as draws up two evolutionary pathways36 for the selected sate functions, which stand to distil the Hungarian and Slovenian developments in the 1990s. Before examining the evolution of the three selected state functions, the thesis turns to the exploration of the most important alternative, economic structure-based explanation for the differences between the two institutional developments. Namely, Chapter 3 evaluates those arguments that put a direct causal link between the inherited huge foreign debt ofHungary and its liberal economic policy and the lack of foreign debt in the case of Slovenia and its more gradualist economic policy. The hint of many researchers was that the heavy indebtedness of Hungary is accountable for the greater scope and speed of liberalization of the financial sector as compared to Slovenia. In other words, the issue of foreign debt stands as the most important competing explanation for the different institutional development.Therefore, Chapter 3 thoroughly investigates the debt management practices of the two countries before and after the transition process. This investigation reveals the different style of debt management in the two countries. The chapter argues that these political decisions were responsible for the evolution of the constructing feature of Hungarian debt and the manageable and politically negotiable characteristics of the Slovene inherited foreign debt.The thesis argues that the foreign debt issue is unable to explain the political decisions and institutional development, rather the very management of foreign debt may be derived from the distinct institutional and political set ups of the two countries, which are the key explanatory factors proposed by this thesis. In the second part of the thesis, I turn to the examination of the three selected state functions: bank owner, bank regulator and bank supervisor in separate chapters. In relation to each function, the global trends are shortly introduced. Naturally, the time spread of the international changes encompasses a larger period than the 1990s, and traces the evolution of state conduct in finance from the 1970s. 37 Chapter 4 on the bank-owner function of the two states explores the explanatory potential of the thesis’ argument on the mediating character of public deliberation and inherited institutions in two policy areas: bank restructuring and bank privatization. The two policy areas were selected as being representative of the state’ bank-owner activities worldwide in the 1990s. The chapter starts out by contrasting the most important public debates in relation to the role of the state in finance in Hungary and Slovenia. The major differences are depicted in the timing of the debate (early 1990s in Hungary and early 2000s in Slovenia), in the underling conceptions of the characters of a market economy (private actors dominated in Hungary and national interest preserving in Slovenia), in the future role of the state as a bank-owner (ruled out as a possibility in Hungary, seen as second best to domestic ownership in Slovenia), in the qualities of potential investors considered (strategic vs. portfolio in Hungary; foreign vs. domestic in Slovenia), and in the international organizations having an impact upon the content of the debates (World Bank, IMF inHungary and the European Union in Slovenia)Having outlined the public debates, which set the discursive boundaries of possible state actions, the chapter turns to the investigation of the institutional realization of bank restructuring. In this case, not only the marked difference in the state institutions are outlined(decrees in Hungary, laws in Slovenia; no consolidation agency in Hungary, specially mandated Bank Rehabilitation Agency in Slovenia), but also the elite struggles for control over the banks. These struggles are examined in the case of bank privatization policies as well. The chapter concludes with the linking of the public debates over the role of the state as a bank-owner to the realization of the tasks of the state as bank-owner (bank restructuring). It also draws attention to the fact that the Hungarian state’s bad performance as a bank-owner, which was not able to prevent the network of state officials, bank managers and enterprise managers from withdrawing capital from the banks, is connected to the depiction in38 Hungarian circles of the state as a “bad-owner” of the banks. In parallel, the Slovene state’s better performance as bank-owner seems to be connected to the Slovene public spheres contention that saw the state-ownership of banks in the long run as a second best solution. Chapter 5 on bank regulation furthers the thesis’ argument about the mediated impact of global trends even in small structurally similar countries. In the focus of the chapter stands the formal institutional realization of the different positions in the public debates as manifested by bank regulations. This process, designing bank regulation, is understood as being conditioned by the institutional heritage of the two countries, as well as by the public debates depicted in Chapter 4. With regards to Hungary, the chapter depicts a rather centralized regulatory framework under socialism, that operated in a politically oppressive and economically inefficient institutional regime, which inspired the regime changing state actors to break as many ties with the past as possible. This resulted in the establishment of an open regulatory design of finance in the early 1990s, which was at the time more open than that of many Western European states. Chapter 5 highlights a number of aspects of the open regulatory design and evaluates the impact of international trends upon the regulatory framework. In relation to Slovenia, the chapter identifies the key elements of the inheritedYugoslav, slowly upgraded Slovene regulatory design through which the Slovene regulators kept foreign capital inflow at a minimum, yet maintained an efficient banking sector. Finally, the role of international organizations appears important in both cases, yet the role of the IMF and World Bank, in the early 1990s is emphasized in the case of Hungary and the influence of the European Union in the case of Slovenia in the late 1990s, which further explains the different degree of liberalization in the two states. In Chapter 6 on bank supervision, the thesis’ argument is furthered through considering the formal institutional characteristics of the two states as mediating sites of the internationalization process. Most importantly, Chapter 6 reveals, in relation to the political39 strength of the Supervisory Agency, a decisive variation in the two countries. In Hungary, bank supervision was organized independently (in line with most recent international trends).However, contrary to expectations of the independent regulatory agency literature’s suggestions, the Supervisory Agency could not build a good reputation comparable to the central bank. But rather it became a politically weak institution and could not recommend regulatory solutions against the liberal views of the central bank and the Ministry of Finance of the second part of the 1990s. In Slovenia, the location of bank supervision in the heart of the central bank permitted central bankers to maintain tight scrutiny over state-owned and private banks, which together with a special cartel-like arrangement initiated by the central bank on interest rates, kept inflation down and generated growth. The broader political and theoretical implications of the research are discussed in the concluding chapter. Moving beyond the demonstration of variance and local mediation,Chapter 7 recapitulates the major characteristics of the internationalization process in the two cases. Among the political implications, the local conflicts of interest generated by the process of the internationalization of the state are highlighted. They were the result of the difficulty to change the already established position inherited from the socialist past. Internationalization was especially conflict prone in post-socialist states, because these states faced the challenging task of internalizing global norms, which were developed for other purposes than to mitigate the transition from plan to market economy. An additional political implication of the internationalization process, the shift in the source of financial policies, is also discussed.Finally, the connection between the growing technicality of financial matters and the discursive framing of financial issues by local actors is emphasized. The theoretical implications accentuate the importance of the time dimension of institutional development and of the conceptualization of the state as a set of institutions as opposed to one unified entity. In sum, the thesis concludes by pointing out the importance of understanding40 globalization of finance as an actors-driven, contested and mediated process, as opposed to a structurally determining constraint. Chapter 7 Conclusion1. IntroductionThis thesis set out two main objectives of research on the changing role of the state in finance in two institutionally differently organized post-socialist countries. First, on the immediate level of analysis the thesis aimed to explain the differences in the state functions in banking inHungary and Slovenia, in two post-socialist countries, where better-developed financial markets arose. Second, on the more abstract level of analysis, the thesis investigated the features of internationalization of the two states, which was brought about by the intensifying globalization of financial markets. Internationalization was defined following Saskia Sassen(Sassen 2000: 164) as the process when global norms and practices materialize in local institutions, through rearranging local institutions both towards compliance with global norms as well as with national institutional heritage. As a conclusion to this research, I recuperate on these two main objectives, introduce the findings and point out promising areas for further research. 2. Summary of findings: two worlds of financeThe thesis started out by framing my puzzle within the politics of finance literature: why did two similarly situated states develop different financial institutions in the 1990s? Indeed, difference among state conduct may not be considered a great puzzle in itself. However,41 because numerous scholars of financial globalization (introduced in Chapter 2), would have predicted similar institutional development in structurally similar countries, the fact, thatHungary and Slovenia developed quite different institutional patterns, raises a puzzle that requires further research. This thesis engaged in the inquiry with the aim of depicting in detail the two states’ developments as well as to examine the explanatory potential of two factors to the different outcomes. The sites of inquiries were three state functions, namely bank owner, regulator and supervisor, and the two explanatory factors were the differences in institutional heritage and the differences in the public debates over the desired role of the state in a market economy.In the 1990s, the Hungarian state’s characteristics, along the selected functions, were depicted (1) as liberal in terms of regulation, (2) loose in supervision, and (3) diminishing in ownership share of banking. The Slovenian state conduct in the areas of the three functions was found to be (1) more closed in terms of regulation, (2) rather strict in supervision and (3) stable and important as bank owner. In searching for an explanation for the different evolutions of state functions, the thesis first engaged the most powerful structure-based alternative explanation. This alternative explanation causally connected the huge foreign debt burden of Hungary to its liberal banking design and the lack of such foreign obligations in Slovenia to the more closed regulatory financial regime. The thorough examination of the debt issue of the two countries disclosed two main findings. First, Hungary and Slovenia had a comparable amount and structure of inherited foreign obligations. Second, each state pursued a fundamentally different style of debt management, which further explained the rise of a constraining nature of the Hungarian obligations and a politically manageable character of the Slovene debt issue. In other words, foreign indebtedness as such is unable to explain the institutional choices of the two countries’ policy makers. Instead, I argue that the evolving feature of foreign debt42 management could be linked to or indeed explained by the inherited institutional designs and early transition public debates over the role of the state in the economy. 3. The explanatory factors and the evolution of state functions In my case studies, I demonstrate how the above-identified explanatory factors – (1) differences in the inherited state institutions and (2) differences in public debates over the role of the state in finance – shape the evolution of the examined three state functions, bank owner, regulator and supervisor. The character of the institutional set up of finance of socialistHungary was a more centralized organization than that of the socialist Yugoslavia, which was far more liberal. The thrust of the public debate in Hungary was marked by a desire to cut as many lines with the socialist past as possible. The dominant and expert-backed positions pointed to the full liberalization of banking as the most efficient way to achieve transition from plan to market economy. In Slovenia, in contrast, the more liberal framework of banking inherited from Yugoslavia not only seemed for the actors to function relatively well; it also conformed to common perceptions of the “national interest,” namely that Slovenian owners would play a central role in the Slovenian economy. The two assertions jointly led to a very cautious and gradualist approach to state institutional reforms in Slovenia. The public deliberations in the two countries over the desired role of the state were depicted in depth in relation to the owner function of the state. This was the case as the public debates in both countries mainly focused upon the ownership question of the banks.Meanwhile, bank regulatory and supervisory issues were regarded as too technical in nature and, thus, left to a smaller circle of experts to be specified. Nevertheless, the public discussions over the role of the state as a bank-owner had serious repercussions over the content of the other two functions. In the Hungarian public debates, the role of the state in the43 economy was approached from the negative side. That is the major concern of the debates was what the state ought not to do in the economy, rather than what it may reasonably do better than other actors. In Hungary, the state was regarded as an institution, which already proved its incapability to manage and control banks during the socialist past. In the Slovenian public debates over the role of the state in finance, the thrust of the arguments underlined the importance of preserving the “national interest”, which also implicitly implied that until no adequate Slovene national owner appears to buy banks, the Slovene state should take the task of managing banks. The state as a bank-owner in Slovenia was regarded by most actors as a rather capable owner. These assertions were then in the chapter on bank-ownership further expanded and a number of links with actual bank regulation and bank privatization steps established. These included in the case of Hungary the early regulatory commitment to privatize state-owned banks in 1991 and the mass privatization of banks to foreign investors in 1995. In the case of Slovenia, I pointed to the prolonged state ownership of banks and to the late and partial privatization of state-owned banks in 2003. The chapter on bank regulation thoroughly investigated the exact ways in which the two explanatory factors shaped the particular role of the state as bank regulator in the two countries. In Hungary, the establishment of a highly open regulatory framework was conditioned by the actors’ dissatisfaction with past regulatory institutions and the discursive dominance of liberal regulatory solutions as compared to “etatist” alternatives. By contrast, inSlovenia, the evolution of the initially closed and gradually opened regulatory framework may be understood on the basis of the comparatively open, inherited regulatory framework and the Slovene state actors’ rather satisfactory perceptions of its functioning. Keeping the inherited regulatory institutions in place also allowed the Slovene actors to define the contours of the Slovene market economy, to be established on the longer run, with the dominance of Slovene national owners. 44 Finally, an additional aspect of the institutional design of the two states was highlighted in relation to the bank supervision function of Hungary and Slovenia. Namely, the formal institutional realization of the supervisory function: as an ‘Independent’ RegulatoryAgency in Hungary and as a Department of the Central Bank in Slovenia. The chapter on bank supervision explains why the two countries preferred different supervisory institutions.The Hungarian choice was conditioned by two main factors, the pre-transition institutional solution that established a bank supervisory department in the Ministry of Finance in 1986 and the desire to follow international trends of the institutional organization of bank supervision. The chapter on bank supervision emphasizes the weak actual independence of the formally independent Hungarian supervisory agency and the comparatively looser conduct of bank supervision (law enforcement) of the Hungarian state. In Slovenia, and in contrast the choice of policy makers to retain bank supervision within the Central Bank, I argue, was also a choice to continue the Yugoslav practice. Moreover, because retaining bank supervision in the Central Bank assured a high prestige to the bank supervisors, it also contributed to the very effective bank supervisory (law enforcing) practice of the Slovene state.4. Explanations for the “success” in state conductHaving deciphered causes for the different developments, there remains the question of the reasons for the similar effectiveness of the two regimes in finance. This question is connected to the initial puzzle that appeared between the expectations of convergence of the early 1990s’ scholarship and the outcome: a liberal institutional design in Hungary and a state-dominated institutional design in Slovenia. The connection is that in the early 1990s a number of scholars and especially policy advisors (see Chapter 2) not only predicted convergence of state conduct in the economy and especially in the globally most connected financial sector. They also45 argued that the liberal organization of the state is the only way in which economic growth on the long term may be assured. The thesis contrasted these liberal predictions with the success of the closed Slovene banking sector over the whole decade of the 1990s.The definition of success of a banking sector performance should be addressed with caution. In this thesis, I drew on three sets of indicators to measure the better development of the financial sector. These indicators marked a better-developed financial sector in fiveCentral and Eastern European states: Czech Republic, Hungary, Poland, Slovakia andSlovenia as compared to the rest of the region: Bulgaria, Estonia, Latvia, Lithuania, Romania.First, ‘the ratio of domestic credit to households and enterprises’, showed comparatively good scores in Hungary and Slovenia. This ratio is considered as the best indicator of the development of the banking sector as it shows how well the banks in a country are able to fulfill their intermediary function (how effectively they channel savings to investments, thus how the banks promote economic growth) (Berglof 2002). In the second part of the 1990s, both states reached higher than 20 per cent of the GDP scores on this indicator, which ratios although are significantly lower than that of western European states, still put Hungary andSlovenia among the better developed countries of the CEECs. Latvia and Lithuania never achieved higher than 16 per cent and the banking sectors of the Baltic states often provided finance to household and enterprises below 10 per cent of the GDP during the 1990s. Second, also considered were the ratings of each state’s largest banks by two rating agencies: Moody’s and Standard and Poors. Both agencies rated the Hungarian privately-owned and Slovene state-owned banks satisfactory: both OTP, the largest Hungarian private bank and the largestSlovene, in majority state-owned bank, Nova Ljubljanska Banka were rated A2 and BBB in2004 (Banyar 2004/2). Finally, I considered ‘the bad loan/total loan ratio’ as an indicator of the functioning of the banks. Again, this indicator showed comparable numbers in 1999: 2.846 per cent in Hungary and 10.2 per cent in Slovenia, which are relatively good scores as compared with the CEECs’ average of 17 per cent (Berglof and Bolton 2002). For some analysts, Hungary’s success can be explained by their faithful adherence to policy advisor’s reform packages, which comforted to the 1990s tenets of the WashingtonConsensus. Hungary was heralded by the EBRD as a success case of the liberal policy advice of the Washington based institutions in the early 1990s (Allsop 1997: 20; EBRD 1998; WorldBank 1999). However, in evaluating the liberal reform packages we have to be selective. AsVarhegyi (2004) points out, the key to the success of the Hungarian banking sector was not the radical liberal regulatory measures of the early 1990s. Rather the regained efficiency ofHungary’s banking sector can be attributed to privatization decisions in the mid-1990s, which increased competition and assured growth in the financial sector (Varhegyi 2004). According to Varhegyi, the liberal regulatory measures appeared insufficient to create a well functioning financial market. Although these measures opened the financial market to foreign owners, they failed to assure the dominance of profit seeking management of the large state-owned banks. Varhegyi attributes the poor performance of state-owned banks to the inappropriate owner character of the state. Rather than focusing on profit seeking, the state fulfills a number of other socially important objectives, such as bailing out loss making enterprises, providing cheap credit to small and medium size enterprises, financing infrastructure development, etc.Because these tasks were not genuine tasks of banks, according to Varhegyi, this inevitably led to inferior business performance of state-owned banks as compared to what they could have achieved under a private owner’s control (Varhegyi 2004). Moreover, in Varhegyi’s explanation until privatization, Hungarian state-owned banks’ managers, state-owned enterprises’ managers and politicians jointly exercised what she called “state capture” through their network type alignment. State capture prevented the development of the banks’ profit seeking management, since instead of efficiently managing47 the banks, bank managers could rely on the continuous supply of state money in case of the banks’ liquidity and solvency problems. This resulted in misuse of banks’ credit, on the one hand, and the subsequent waves of bank consolidation measures, on the other hand. These networks could only be cut by the drastic change in the controlling power of the banks, which was indeed achieved after the privatization of state-owned banks in 1995-96. In other words, the Hungarian state freed itself from its own banks, which at the same time allowed for the banks’ more efficient functioning and the lessening of the burden on the state’s budget in the second part of the 1990s. Although network relations not completely dismantled, as was clear by the bank scandals of Posta Bank and K&H, in the second part of the 1990s, the banks’ profitability increased and competition strengthened on the corporate segment. The retail segment of the market, however, remained dominated by one bank (Varhegyi 2004). The argument of this thesis while accepts the depiction of the near state capture like situation in banking, it engages Varhegyi’s claims regarding the causes of the deteriorating state of affairs until mid-1995. Contrary to Varhegyi’s claim that the “bad” owner character of the state inevitably led to strengthening of the network of state-actors, private actors, politicians to realize rent seeking, this thesis points instead to the particular Hungarian organization of the state institutions in the banking sector. Specifically the thesis argues that it was the very weak potential of bank supervisory institutions and the general non-cooperative relation among the formal state institutions in banking, i.e. the Ministry of Finance, the central bank and the various Bank Supervisory Agencies, which contributed to the inappropriate management of state-owned banks. In other words, the thesis argues that the reason behind the inadequate and indeed detrimental state control of banks is in the particular institutional realization of state control, and not in the fundamental anti-market like motivations of the state. 48 This argument is supported by the Slovene example, where the banking sector’s performance in terms of the above-mentioned indicators was comparably successful. This was the case despite the fact that the Hungarian type radical privatization steps were never made inSlovenia. The state remained an important owner of banks until the end of the 1990s.Moreover, the non-liberal organization of the Slovene banking sector together with the better performance of the Slovene banks, present a puzzle for the early 1990s’ policy advisors, who accepted only liberal solutions as successful (growth generating) developmental pathways. In order to explain the “success” of the Slovene state performance, this thesis emphasizes the particular characteristics of the state institutional set up in Slovenia. That is the rather strong and efficient bank supervisory function of the state and the cooperative nature of the relation among the formal state institutions in the banking sector including the Ministry of Finance, the Bank Rehabilitation Agency and the central bank. 5. The internationalization process of the two post-socialist states The further investigation of the initial puzzle, this thesis set out to resolve, helps to make a few more conceptual points about the impact of increased global interconnectedness upon small states’ institutional development. As mentioned above, the initial puzzle appeared in the disharmony of economic structure-based arguments, which assigned explanatory privilege to economic structures in directly causing state institutional choices and the different institutional developments of two, small, structurally similar states. In resolving the puzzle, the thesis questioned the direct explanatory potential of structural factors and argued instead for the mediated character of their impact. In this section, I recapitulate on the major findings of the investigation of this mediation process, the process of internationalization of state49 institutions in the two countries in the 1990s. These points also open up new avenues of research into the changing role of the state in finance.This thesis, from the outset, has put a major emphasis upon the international environment of the two states’ development. In the case of each examined function, the analysis started out by a short depiction of the internationally more apparent changes.Throughout the case studies, I matched the international developments to their local manifestations. This methodology was applied in order to avoid a too strong and too quick division between internal and external causes of state institutional choices. On a more general level of the analysis, and thus common to all three selected functions, I found the following features of the internationalization process. (1) The implementation of global norms into practice generated severe conflicts of interest among the actors and institutions. Thus, the global norms of good financial practice, instead of contributing to the stabilization of the local financial sphere, brought about conflicts which in the short run created deteriorating business practices in both countries. In the case of Hungary, the most severe conflict appeared in the early 1990s, between the state’s fiscal needs to finance its foreign debt and to help revitalize the economy under the transitional recession, on the one hand, and the implementation of global norms in the bank supervisory and regulatory functions, on the other hand. Concretely, the eight per cent provisioning requirement of the Basle Accord was for long the neuralgic point of banking inHungary. As state-owned banks paid in taxes half of the total yearly revenue of the Hungarian state, their contribution was so important that it could not be jeopardized by forming provisions against doubtful assets. In that case, a too large and too important share of state revenue would have stayed with the banks. As bank supervision - law enforcement - was weakly institutionalized, in an Independent Regulatory Agency, and the Minister of Finance50 insisted on the tax contribution of the banks, a state-supported violation of state laws ensued during the first few years of transition. In the case of Slovenia, as a result of implementing global norms the most acute conflict among local actors and institutions occurred when the Slovene state committed itself joining the European Union and thus satisfying the Copenhagen Criteria. Although not on paper, in practice it meant a commitment to privatize a certain share of state-owned banks.Privatization of state-owned banks, however, provoked heated debates in the Slovene public sphere. Civil actors, economic experts and politicians jointly opposed the government plans to sell banks, as they framed it, “to foreigners”. The conflict between the desire to join theEuropean Union and the unwillingness to sell banks to foreign investors, was temporarily solved by a sale contract that limited the purchasable shares to 34+5 per cent of the largest bank’s total shares. In both of the above described cases, the two states faced a paradoxical situation in which they at the same time aimed at introducing and satisfying norms of international organizations, yet this desire was in conflict with the interest of the already established positions. Both cases thus testify to the underestimated stickiness of established positions and point to the importance of incorporating the time dimension into the investigation of institutional changes. A dimension, which although plays an important role in shaping the final outcome, is often neglected by structuralist or liberal arguments that emphasize the irresistible forces of the markets. (2) It is worth elaborating on the time dimension of the changes a bit further as it is one of the major differences in the two states’ institutional development. First, take the timing of the debates over the privatization of banks. In Hungary, these debates took place in the first part of the 1990s. Thus, the local issues were explored in an international environment where the Washington based international financial institutions were very active in disseminating the51 then current norms of state conduct in finance. In Slovenia, the debates over the role of the state in banking heated up in the early 2000s, when the most important international organization to influence the policy formation in the region was the European Union, which had somewhat different policy recommendations than the Washington based IOs. The difference in the influence of the Washington based IOs and the EU may be seen both in content and in process. The Washington based IOs put major emphasis upon the soundness of the macroeconomic policy, that is they prioritized the soundness of macro indicators, such as debt record, inflation rate, FDI, flexibility of the exchange rate, etc. Therefore, they paid little attention to the institutional underpinnings of such macro results. The EU, in contrast, evaluated the well functioning of the market economy in more general institutional terms. As a result, it was rather open to accept variation in the macro indicators and focused its recommendations instead more on particular institutional solutions of the emerging capitalisms of CEECs.Moreover, the timing of the debates over the desired role of the state was important not only from the point of view of the international environment. But it was crucial also because the time spent on a certain issue defined, among other things, the types of political actors who may have voiced opinion, the number of issues that may have been considered and thus ultimately the shape of the final policy decisions. In the case of Hungary local social actors had relatively little time to organize, as the institutional reform became pressing by mid-1990s. Therefore, in Hungary, those actors became more influential, which had the clearer pre-established policy suggestions. In the mid-1990s, in Hungary it meant the immense influence of liberal economic experts’ universal arguments upon the state’ banking sector policy. In Slovenia, throughout the 1990s there was a strong domestic consensus around keeping banks in state hand. During this period, local actors with diverse views – within the range of the dominant discourse – gained time to strengthen their non-liberal52 arguments, so that when a more immediate pressure was exercised by the European Union, the Slovene actors were able to articulate convincingly their locally more specific arguments in relation to bank reform. Needless to say, there is nothing new in these observations about the importance of time, nevertheless the two countries’ development aptly exemplify the importance of the time dimension of social change, so often put on the margins of social inquires. (3) An additional feature of the internationalization process of state institutions comes to light if we further investigate the relation between the nature of the global norms and the exigencies of the post-socialist transition from plan to market. That is the heightened need to learn to balance between the universally valid and particularly appropriate institutional designs. Under post-socialist conditions, the above described conflicts of interest did not only arise as a result of the rigidity of established positions, which were indeed important explanatory factors, but also because of the different exigencies of the local market and the globally developed norms of good financial practice. As Borak explained (2000), neither theBasle Accord nor the European Union bank directives were designed to help establish market like practice on the basis of socialist planning. The Basle Accord was designed to harmonize internationally active banks’ prudential lending standards, and the EU bank directives to help integrate the member states’ market economies. As such, although their implementation was promoted and indeed demanded by international organizations, they were largely inadequate to regulate the particular transition processes of Central and Eastern European states. As a result in Hungary and Slovenia, their immediate implementation contributed to the prolongation of the transitional recession, increased the cost of institutional reconfiguration(bank consolidation), and curbed the range of choices of the local policy makers to find adequate regulatory solutions. This is of course not to suggest that the requirement of their implementation was in any way directly influenced by the above-described consequences,53 nevertheless, the a priori evaluation of these consequences seems to be missing from the international organizations’ accounts. (4) This leads to a further point on the shift in the source of policy as a characteristic of the states’ internationalization process. As more and more international organizations formulate best practice advice and recommendation to good financial regulation, there is less and less room for maneuvering to local policy makers to design both locally and internationally appropriate regulatory frames. In other words, the locally negotiable character of financial regulatory designs is diminishing. In addition, this is an important point if we recognize the growing localized dissatisfaction with market economies in Central and EasternEurope, and the increasing need to be able to locally specify the practice of the state. As the internationally recommended details of the policy package are locally non-negotiable, the likelihood of a more abrupt rejection of the whole of the reform package increases. Naturally, there are important and expensive constraints on such local actions; nevertheless, it is worth a mentioning when discussing the internationalization process. (5) Finally, because of the growing technicality of international financial business, the local policy makers’ capacity to discursively frame financial issues to the wider public, in line with the politicians’ local interest and understanding is an increasingly apparent element of the state’s internationalization. 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In Slovenia, theBanka Slovenije (Bank of Slovenia), and the Ministrstvo za Finance Republike Slovenije(Ministry of Finance). In addition to these regular publications, use also has been made of the information issued on the official websites of the agencies as well as their annual reports.A third source of information was interviews conducted with prominent figures of the two banking sectors. In Hungary and Slovenia, I have conducted over 60 interviews, not only with state officials, but also financial journalists, bankers, academic experts, lawyers, and politicians. All interviews are listed in the bibliography. Apart from the sources mentioned above, this thesis also relies on a broad range of newspapers and other journalistic accounts. In relation to Hungary, the principle newspapers were HVG, Figyelő, Bank és Tőzsde, Magyar Hírlap, and Népszabadság, with regards toSlovenia the major source was the official English language weekly of the Chamber ofCommerce and Industry of Slovenia, Slovenian Business Weekly, as well as the SlovenianTimes, but I also made use of translations from Finance, a Slovene language financial daily. Finally, I have collected a large number of reports from the banks themselves that were active in these two countries in the 1990s.74 Appendix 2: Tables referred to in Chapter 1 Table 1: GDP per capita, US$, at prices and PPPs(US) of 2000 Country 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 European Union- 25285 25451 25556 26029 15 20886 21031 20872 21397 21868 22197 22732 23354 23964 24761 Czech Republic 13075 12997 12989 13270 14066 14673 14583 14427 14619 15203 15678 15948 16458 17187 Estonia 8412 7359 6909 6945 7391 7840 8764 9309 9373 10150 10842 11674 12321 13080 Hungary 9605 9331 9304 9609 9782 9948 10442 10995 11506 12038 12421 12891 13309 13906 Latvia 8704 5990 5412 5624 5651 5932 6487 6858 7148 7697 8369 8971 9695 10578 Lithuania 9577 7549 6355 5774 6119 6454 6957 7518 7443 7789 8329 8924 9831 10545 Poland 6655 6808 7049 7400 7910 8378 8941 9366 9753 10244 10349 10496 10902 11491 Slovakia 9816 9148 8779 9284 9797 10380 10839 11280 11437 11657 12146 12709 13276 14005 Slovenia 13538 12836 13236 13953 14536 15038 15788 16386 17270 17900 18363 18939 19407 20284 Bulgaria 5979 5605 5566 5687 5876 5351 5083 5323 5476 5799 6231 6573 6905 7332 Romania 6468 6003 6120 6384 6872 7185 6787 6489 6444 6607 7014 7399 7804 8475 CIS-12 8304 7115 6424 5501 5192 5018 5099 4946 5212 5687 6054 6368 6845 7415 Source: United Nations Economic Commission for Europe: Statistics for Europe and North America, http://www.unece.org/stats/stats_h.htm, date of access: 15.05.2005Table 2: GDP per capita at prices and PPPs(US) of 2000, growth rate Country 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 European Union-15 1,4 0,7 -0,8 2,5 2,2 1,5 2,4 2,7 2,6 3,3 1,9 1,1 1 2,3 Czech Republic -11,2 -0,6 -0,1 2,2 6 4,3 -0,6 -1,1 1,3 4 2,6 1,5 3,2 4,4 Estonia -9,5 -12,5 -6,1 0,5 6,4 6,1 11,8 6,2 0,7 8,3 6,4 7,2 5,1 6,2 Hungary -11,7 -2,9 -0,3 3,3 1,8 1,7 5 5,3 4,6 4,6 3,8 3,5 2,9 4,2 Latvia -12,2 -31,2 -9,6 3,9 0,5 5 9,4 5,7 4,2 7,7 8 6,4 7,5 8,5 Lithuania -5,8 -21,2 -15,8 -9,1 6 5,5 7,8 8,1 -1 4,7 6,4 6,8 9,7 6,7 Poland -7,3 2,3 3,5 5 6,9 5,9 6,7 4,8 4,1 5 1 1,4 3,8 5,3 Slovakia -14,4 -6,8 -4 5,8 5,5 5,9 4,4 4,1 1,4 1,9 3,8 4,6 4,5 5,5 Slovenia -9,1 -5,2 3,1 5,4 4,2 3,5 5 3,8 5,4 3,6 2,7 3,3 2,5 4,6 Bulgaria -7,5 -6,3 -0,7 2,2 3,3 -8,9 -5 4,7 2,9 5,9 4,1 4,9 4,5 5,6 Romania -12,8 -7,2 1,9 4,3 7,7 4,6 -5,5 -4,4 -0,7 2,5 5,7 5,1 5,2 8,375 CIS-12 -6,5 -14,3 -9,7 -14,4 -5,6 -3,3 1,6 -3 5,4 9,1 6,1 5,2 7,6 8,1 Source: United Nations Economic Commission for Europe: Statistics for Europe and North America, http://www.unece.org/stats/stats_h.htm, date of access: 15.05.2005 Table 3: Consumer price index, growth rate (%) 199 199 199 200 200 200 200 200 Country 1991 1992 1993 1994 5 1996 1997 8 9 0 1 2 3 4 European Union-15 5 4,4 3,5 3 3 2,5 2,1 1,7 1,3 2,3 2,4 2,1 2,2 2,2 Czech Republic 56,7 11,1 20,8 10 9,1 8,8 8,5 10,7 2,1 3,9 4,7 1,8 0,2 2,8 Estonia 202 1076 89,8 47,7 29 23,1 11,2 8,2 3,3 3,9 5,8 3,5 1,1 3,1 Hungary 35 23 22,5 18,8 28,2 23,6 18,3 14,3 10 9,9 9,2 5,4 4,9 6,8 Latvia 172,2 951,2 109,2 35,9 25 17,6 8,4 4,7 2,4 2,8 2,4 1,9 3 6,3 Lithuania 216,4 1020,8 410,2 72,2 39,6 24,6 8,9 5,1 0,8 1 1,5 0,4 -1,2 1,1 Poland 70,3 43 35,3 32,2 27,8 19,9 14,9 11,8 7,3 10,2 5,5 1,9 0,7 3,5 Slovakia 61,2 10 23,2 13,4 10 5,8 6,1 6,7 10,6 12 7 3,3 8,5 7,5 Slovenia 115 207,3 32,9 21 13,5 9,9 8,4 7,9 6,1 9 8,6 7,6 5,7 3,7 Bulgaria 419 91,3 72,8 96 62,1 121,6 1058,4 18,7 2,6 10,3 7,4 5,8 2,3 6,1 Romania 170,2 210,4 256,1 136,7 32,3 38,8 154,8 59,1 45,8 45,7 34,5 22,5 15,4 11,9 Source: United Nations Economic Commission for Europe: Statistics for Europe and North America, http://www.unece.org/stats/stats_h.htm, date of access: 15.05.2005Table 4: Export of Goods and Services per capita, growth rate, at prices and PPPs(US) of 2000 Country 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 European Union-15 4,4 3,1 1,5 9 8,2 4,9 9,9 6,6 5 11,3 3,2 1,6 0,6 5,7 Czech Republic -5,6 9,4 15,7 1,6 16,7 5,7 8,5 10,6 5,6 16,6 11,5 2,1 7,5 21,9 Estonia ...... 5,7 7,2 4,4 30,4 13 1,5 28,9 -0,2 0,9 5,7 16,3 Hungary .. 2,3 -9,9 14,1 13,8 12,5 22,8 18,1 12,8 20,3 7,8 4,9 7,8 14,9 Latvia -31,9 16,4 -20,8 -6,9 5,8 21,6 14,3 5,8 -5,5 12,2 7,5 5,2 5 9,3 Lithuania ...... 20,3 19,6 5,4 -16,2 10,6 21,2 19,5 6,9 4,3 Poland -2 10,4 3 12,8 22,6 11,9 12,1 14,3 -2,5 24,5 3,1 4,8 14,7 .. Slovakia 33,8 46,8 -0,5 14,3 4,2 -1,3 17,4 12,7 4,9 13,6 6,3 5,6 22,5 11,4 Slovenia -20,3 -23,3 0,8 12,4 1,2 2,6 11,5 7,6 1,5 12,8 6,3 6,7 3,2 12,6 Bulgaria ...... 12,4 13,4 -4 -4,5 17,2 10 7 8 13,1 Romania -17,8 4,7 11,6 19,5 17,6 2,6 12 -1,3 11 23,9 12,1 17,6 11,1 .. Source: United Nations Economic Commission for Europe: Statistics for Europe and North America, http://www.unece.org/stats/stats_h.htm, date of access: 15.05.200576 Table 5: Import of Goods and Services per capita, growth rate, at prices and PPPs(US) of 2000 Country 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 European Union-15 4,1 4,1 -3,2 8,4 7,7 4,2 9,3 10,1 7,5 10,6 2 1,3 2,3 6,1 Czech Republic -32,8 29,7 23,7 14,7 21,2 12,1 6,9 8,4 5 16,3 13 4,9 7,9 18,4 Estonia ...... 11,1 6,4 7,5 29,3 12,3 -5,2 28,3 2,1 3,7 11 13,8 Hungary .. 0,2 20,2 8,8 -0,7 9,4 23,1 23,8 13,3 19,4 5,1 7,5 11 11,6 Latvia -43,9 8 -39,8 -0,7 1,4 28,5 6,8 19 -5,2 3,1 14,5 4,6 13 15,6 Lithuania ...... 23,3 25 6,2 -12,4 4,7 17,7 17,6 10,2 13,4 Poland 29,6 1,7 13,2 11,3 24,3 28 21,4 18,5 1 15,6 -5,4 2,6 9,3 .. Slovakia -14,7 47,1 -0,7 -4,7 11,6 19,7 14,2 16,5 -6,7 10,5 11 5,5 13,6 12,7 Slovenia -22,4 -22,9 17,6 13,1 11,3 2,3 11,5 10,3 8 7,6 3 4,9 6,8 12,4 Bulgaria ...... -1,9 10,9 12,1 9,3 18,6 14,8 4,9 15,3 14,1 Romania -29,6 7,5 4,4 2,8 16,3 8,7 7,5 11,3 -1,5 27,1 18,4 12 16,3 .. Source: United Nations Economic Commission for Europe: Statistics for Europe and North America, http://www.unece.org/stats/stats_h.htm, date of access: 15.05.2005Table 6: Inflows of Foreign Direct Investment a (FDI) in Eastern Europe (Million dollars) 1992-2000 Country 1992 1993 1994 1995 1996 1997 1998 1999 2000 Czech Republic 1004 654 869 2562 1428 1300 1371 6324 4986 Estonia 82 162 215 202 151 267 581 305 387 Hungary 1471 2339 1416 4741 3291 4166 3344 3311 2777 Latvia 29 45 214 180 382 521 357 347 410 Lithuania 8 30 31 73 152 355 926 486 379 Poland 678 1715 1875 3659 4498 4908 6365 7270 9341 Slovakia 100 195 269 308 353 220 684 390 1925 Slovenia 111 113 117 151 174 334 216 107 136 a Inflows into the reporting country Source: Economic Survey of Europe, 2004 No2. p 95, United Nations77 Appendix 3: List of InterviewsHUNGARY1. Júlia Király, Head, International Banker Training Center 02.02.2003 2. Tamás Bácskai, Retired banker of the National Bank of Hungary, 17.02.2003 3. Imre Szilágyi, Researcher, Teleki Foundation 11.02.2003 4. László Halpern, Researcher, Institute of Economics, Hungarian Academy of Sciences, 13.02.2003 5. Péter Pete, Professor of Economics, University of Debrecen, 10.02.2003. 6. Gábor Oláth, Researcher, Kopint Datorg Rt, (former-member of the Monetary Council) 07.02.2003 7. Péter Mihályi, Professor of Economics, CEU, 11.02.2003 8. Éva Várhegyi, Researcher, Pénzügykutató Rt., 19.02. 2003 9. Tamás Kálmán, Head of the Department of Banks, National Bank of Hungary, 19.02.2003 10. László Szakadát, Professor of Economics, Budapest University of Economics and Public Administration, 26.02.2003 11. Ágnes Nádházy, Head of Department Responsible for Banks, APV Rt, 02.04.2003 12. Katalin Mérő, Deputy Head of the Department of Banks, National Bank of Hungary, 20.02.2003 13. Péter Felcsúti, CEO of Raiffeisen Bank, Hungary, 02.04.2003 14. Klára Csoór, Advisor, Hungarian Financial Supervisory Authority, 01.04.2003 15. Márta Klemencsics, Head of Department, Ministry of Finance, 19.03.2003 16. György Mohai, Stock Exchange, Budapest, 20.03.2003 17. Judit Nemény, Researcher, Pénzügykutató Rt., 24.03.2003 18. István Farkas, Former-Minister responsible for Bank Privatization, 24.03.2003 19. György Csáki, Professor of International Economics at ÁVF, (President of the Post), 25.03.2003 20. Csaba Lantos, Deputy CEO, OTP Bank, 31.03.2003 21. Seregdi Laszló, Hungarian Financial Supervisory Authority, 03.04.2003 22. János Löbrin, Former banker of EXIM Bank, 04.04.2003 23. Ferenc Karvalits, Banker, CIB Bank Rt, 08.04.2003 24. Anikó Szántó, Chief editor of financial issues, HVG, (Hungarian business weekly) 08.04.2003 25. Eszter Hargitai, Deputy Head of Department, Ministry of Finance, 09.04.2003 26. Henrik Nagy, Bank supervisor, Hungarian Financial Supervisory Authority, 14.04.2003 27. Ákos Macher, APV Rt, 16.04.2003 28. István Salgó. Secretary of State, Ministry of Finance, 23.04.2003 29. Mihály Kopány, President of the World Bank Office, Hungary, 04.04.2002 30. László Andor, Professor of Economics, Budapest University of Economics and Public Administration, 03.03.2003 31. Katalin Botos, Professor of Economics, Pazmany Peter Catholic University (former- Minister responsible for the Banking sector), 04.03.200378 SLOVENIA1. Ivan Ribnikar, Professor of Economics, University of Ljubljana, Advisor to the Bank of Slovenia, 07.05.2003. 2. Peter Frankl, Chief Editor of Finance, (the Slovenian financial daily), 07.05.2003 3. Marko Košak, Economics faculty, assistant to Ivan Ribnikar, 08.05.2003 4. Zlatko Šabič, Professor of International Relations, University of Ljubljana, 08.05.2003 5. Franjo Štiblar, Chief Economist of Nova Ljubljanska Banka, University Professor of Economics, 12.05.2003 6. Maks Tajnikar, Dean of Economics, (former-Minister of Economics and Minister of Small Enterprises 1992-1996), 13.05.2003 7. Vida Petrovcič, Financial journalist at the Slovenian State Television, 13.05.2003 8. Matija Rojec, Researcher at IMAD, Institute for Macroeconomic Analysis, state financed research unit, 14.05.2003 9. Samo Nučič, Vice-governor of the Bank of Slovenia, responsible for the banking supervision department, 15.05.2003 10. Gordana Ilc Križaj, Head of the Banking Supervision Department, Bank of Slovenia, 15.05.2003 11. Andrej Rant, Negotiator with the EU on financial matters, 15.05.2003 12. Neven Borak, Head of the Securities Market Supervisory Institution, 19.05.2003 13. Emil Lah, Chief Editor of the Bancni Vestnik, the journal of the Slovenian Banking Association, 19.05.2003. 14. France Križanič, Researcher at the Institute for Economic Research at the Faculty of Law, 20.05.2003 15. Mija Repovž, Journalist, columnist, Delo, (Slovenian daily) 21.05.2003 16. Vida Hočevar, Head of Department, Money Laundering Office, Ministry of Finance, 22.05.2003 17. Gorazd Balas, Banker, Bank Austria Creditanstalt, 22.05.2003 18. Hilda Dornik, Advisor to the Government, Ministry of Finance 23.05.2003 19. Jože Mencinger, Researcher at the Institute for Economic Research at the Faculty of Law, Dean of the University of Ljubljana, (former-Minister of the Economy), 26.05.2003 20. Andrej Beloglavec, Advisor, responsible for economic and financial matters, European Commission to Slovenia, 26.05.2003 21. Janez Jansa, Politician, Head of LDS, 27.05.2003 22. Cvetka Selšek, CEO, SKB Banka - Societe General, 27.05.2003 23. Darko Tolar, Banker, (former-State Secretary at the Ministry of Finance, chair of the Committee supervising the privatization of NKBM), 28.05.2003 24. Peter Zajc, Young economist from the Department of Economics, Ljubljana University, 29.05.2003 25. Cilka Frejejcic, Young banker at the Central Bank, 29.05.2003 26. Jože Bradesko, Young banker – Deputy Director in Central Banking Operation, Central Bank, 29.05.2003 27. Marko Jernejčič, Young banker at the Noval Ljubljansaka Banka, 30.05.2003 28. Boštjan Tolar, Young banker at Bank Austria, money market operations, 30.05.200379 Appendix 4: Legal texts and other primary materialsHUNGARYCentral BankNational Bank of Hungary, Annual Reports1991 Law on National Bank of Hungary (Act LX. of 1991 on the National Bank of Hungary) 1994 Amendment of the Law on National Bank of Hungary (Act IV. of 1994 on amendment of Act LX. of 1991 on the National Bank of Hungary and certain rules of the central budget) 1997 Amendment of the Law on National Bank of Hungary 2001 Law on National Bank of Hungary (Act LVIII. of 2001 on National Bank of Hungary) Financial Market1979 Law on Banks (Act II. of 1979 on state finance) 55/1986 Decree of the Ministerial Council (MT) on the establishment of the Bank Supervisory Department in the Ministry of Finance and other rules for the banking sector 106/1989 Decree of the Ministerial Council (MT) on the bank supervisory conditions of banking and the Bank Supervisory Agency 1990 Law on Securities (Act VI. of 1990 on the public issuance and trade of certain securities, and the Stock Exchange) 1991 Law on Investment Funds (Act LXIII. of 1991 on investment funds) 1991 Law on Financial Institutions (Act LXIX of 1991 on financial institutions and financial activities) 1993 Amendment of Law on Financial Institutions (Act CXII. of 1993 on the amendment Act LXIX of 1991 on financial institutions and financial activities) 1994 Law on Money Laundering Prevention (Act XXIV. of 1994 on the prevention and prohibition of money laundering) 1994 Law on EXIM Bank (Act XLII. of 1994 on the Hungarian Export-Import Bank Co. and Hungarian Export Insurance Co.) 1996 Amendment of Law on Securities (Act CXI. of 1996 on issuance of securities, investment services, and Stock Exchange) 1996 Amendment of Law on Financial Institutions (Act CXII. of 1996 on credit institutions and financial undertakings) 1996 Law on Hungarian Banking and Capital Market Supervision (Act CXIV. of 1996 Hungarian Banking and Capital Market Supervision) 1997 Amendment of Law on Securities (Act CLI. of 1997 amendment of Act CXI. of 1996 on issuance of securities, investment services, and Stock Exchange) 1997 Amendment of Law on Financial Institutions (Act CLVIII. of 1997 amendment of Act CXII. of 1996 on credit institutions and financial undertakings) 1997 Law on Bank Branches (Act CXXXII. of 1997 on foreign undertakings’ branches and subsidiaries in Hungary) 1999 Law on Merged Financial Market Supervision (Act CXXIV. of 1999 on Hungarian Financial Markets Supervisory Authority)80 2000 Amendment of Law on Financial Institutions (Act CXXIV. of 2000 on amendment of Act CXII. of 1996 on credit institutions and financial undertakings) 2001 Law on the Hungarian Development Bank (Act XX. of 2001 on Hungarian Development Bank) 2001 Law on Fighting Terrorism (Act LXXXIII. of 2001 Act on Combating Terrorism, on Tightening up the Provisions on the Impeding of Money Laundering and on the Ordering of Restrictive Measures) 2001 Law on Capital Market (Act CXX. of 2001 Law on Capital Market) 2002 Law on Prevention of Financing Terrorism (Act LIX. of 2002 on Law on Prevention of Financing Terrorism, UN, New York 1999. December 9 international agreement) 2003 Law on Prevention and Impeding of Money Laundering (Act XV of 2003 on the Prevention and Impeding of Money Laundering)Economy1991 Law on Bankruptcy (Act IL. of 1991 on Bankruptcy) 1991 Law on Accounting (Act XVIII. of 1991 on Accounting) 1997 Law on Mortgage (Act V. of 1997 on Mortgage) Law on the State Budget, 1994 Law on State Property ManagementSLOVENIACentral Bank Bank of Slovenia, Annual Reports 1991 Law on the Bank of Slovenia (Bank of Slovenia Act, Official Gazette of the Republic of Slovenia, No. 1/91) 2001 Law on the Bank of Slovenia (Bank of Slovenia Act, Official Gazette of the Republic of Slovenia, No. 58/02)Financial Market 1989 Bank Law (Yugoslav) 1990 Law on Savings and Loan Undertakings (Official Gazette of the Republic of Slovenia, No. 14/90) 1991 Law on Banks and Saving Banks (Official Gazette of the Republic of Slovenia, No. 1/91, 38/92, 46/93, 45/94, 7/99) – superseded by the 1999 Banking Act except for Article 79. 1992 Law on the Rehabilitation of Banks 1994 Law on Securities Market 1994 Law on Investment Funds 1994 Law on Dematerialization of Securities 1994 Law on the Prevention of Money Laundering (Official Gazette of the Republic of Slovenia, No. 36/94, 63/95, 12/96, 79/01, 59/02) 1999 Bank Law (Official Gazette of the Republic of Slovenia, No. 7/99, 59/01) 81 Economy 1988 Law on Business Enterprises (Yugoslav) 1991 Law on Denationalizaiton 1992 Law on Transformation of Company Ownership 1993 Law on Forms of Enterprise 1999 Law on State Ownership Privatization 82

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