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BUDAPEST, Dec 17 (Reuters) - Hungary's central bank (NBH) will focus on reviving the banking sector in the next 3-4 years and strong regulation rather than state ownership will be the main avenue for change, Governor Gyorgy Matolcsy said on Thursday.
Matolcsy, architect of several sweeping economic reforms and a key ally of Prime Minister Viktor Orban, told the weekly Heti Valasz that banks need to be more profitable while also lending more to help the economy grow sustainably.
"We see a 10-12 percent return on equity desirable," he said. "We are far from that today."
After taking over the National Bank of Hungary (NBH) in 2013, Matolcsy oversaw a reduction in the main interest rate to a record low 1.35 percent, and launched a massive funding-for- growth programme that was extended this year.
But with growth projected to slow to 2.5 percent by 2016 from about 3 this year, the NBH has ramped up its campaign to convince commercial banks to lend more - something Matolcsy has consistently said they do too little of.
He said Hungary's hallmark banking sector tax, which he introduced during his previous tenure as economy minister, is now ripe to be lowered, adding that differentiation was necessary among lenders.
"We have said before and I personally still think that banks that undertake expanding their lending should get a bigger reduction in the banking tax," Matolcsy said.
Still more tools were necessary to ensure economic development in the central European state, he said, and the bank sector's transformation was the centrepiece of the new tool kit.
"We need to transform the thinking and the workings of the banking system. Banks have kept a lot of money at the central bank instead of lending. We want them to lend to lots of companies instead."
Hungary nationalised two major banks recently, and MKB, Hungary's fifth-largest bank and a perennial loss-maker, is being reorganised under central bank auspices.
The NBH has said it aims to sell all of MKB Bank early next year, and Matolcsy reiterated that the state would not hold on to banks for a long time.
"In the banking system sustained state ownership is not only unnecessary but also harmful. The market can and must be moved in the right direction via strong regulation." (Reporting by Marton Dunai and Sandor Peto; Editing by Mark Heinrich)