Scandals expose weakness of financial regulators in Hungary

March 10, 2015

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Pogátsa: Scandals expose weaknesses on the part of financial regulators in Hungary

If this could happen with one company for such a long time on such a scale despite continuous cooperation with financial oversight authorities, then there exists a serious danger that other companies were doing the same.” – Zoltán Pogátsa, economist

Hungarian economist Zoltán Pogátsa appeared on ATV Start Monday morning to discuss the broader implications of the recent collapse of Hungarian financial services companies Buda-Cash Brókerház Zrt. and Hungária Értékpapír Zrt.

The National Bank of Hungary (MNB) suspended Buda-Cash’s right to operate last week after management reported itself to authorities.  Some HUF 30 billion worth of assets are reportedly missing from the brokerage house, along with HUF 70 billion worth of assets belonging to four regional banks constituting the DRB Bank Group.

When asked why none of the governments over the past 15 years had noticed anything wrong at Buda-Cash, Pogátsa said that while problems of this kind were characteristic of the deregulation of the financial sector, they clearly indicated weakness on the part of Hungarian financial regulators.

The economist bemoaned the political finger pointing that has been taking place, saying that “in a healthy democracy political parties come together to see how the regulations and the oversight can be improved.”

Pogátsa stressed the importance of the government “responding quickly with new regulations” of the financial oversight authority being “independent of the government.”

Likening the relationship between the state and the markets to “millk and coffee,” the economist said that in Hungary decades of socialism had resulted in a “strange image of the state as being unsuitable for monitoring markets.”

Pogátsa opined that other market actors were aware of the problem and points out that the same company audited both Buda-Cash Brókerház and Hungária Értékpapír.

He told ATV that the notion that markets were somehow capable of regulating themselves was an “illusion”, and that what was needed was a “good functioning state” and a financial regulator that “identifies these kinds of problems early on” and does not allow them to continue for years on end.

He said that such brokerage companies are required to report their assets on a daily basis and to cooperate with financial oversight authorities, that these instances clearly indicated a weakness on the part of Hungarian financial regulators, and that the currently system needed to be “radically modified.”

According to Pogátsa it was already apparent in 2010 that there were problems with Buda Cash.  He said that according to media reports, financial regulators knew about a “HUF 40 billion problem”, and that from that time forward on they should have audited the company more frequently.

He said he hoped we would learn the reasons for this extraordinary oversight over the next few weeks as “this would be the natural outcome of events”.  When asked whether he believed a number of similar scandals would come to light he answered:

“Theoretically the way the system worked was that brokerage houses provided information to the financial regulators. That two sets of accounting could exist for such a long time, one submitted to financial regulators and one reflecting reality, indicates that there is a danger that financial oversight was not sufficient to exclude the possibility that similar oversights did not occur in the case of over brokerages.  If this could happen with one company for such a long time on such a scale despite continuous cooperation with financial oversight authorities, then there exists a serious danger that other companies were doing the same.”

His words were to prove prophetic.  On Monday evening Quaestor Group’s bond issuer arm declared itself bankrupt having defaulted on the payment of some HUF 5-6 billion worth of bonds, and having reportedly sold some HUF 150 billion (EUR 450 million) worth of fake bonds to investors.

Reference:

http://www.atv.hu/videok/video-20150309-ujabb-brokerceget-fuggesztett-fel-az-mnb