EPI 1:Banking Sector Development in Central and Eastern Europe
The countries of Central and Eastern Europe abandoned the socialist system and began the transition to capitalism in order to promote rapid growth and the ultimate convergence with the West. Nowhere has the need for institutional reform been as great as in the financial sector. This first Forum Report of the Economic Policy Initiative provides an assessment of banking sector developments in this region and identifies the critical policy choices that will determine whether or not a country is to follow a high growth path leading to convergence with the mainstream of Western Europe. The Report identifies entry of new, foreign banks as a powerful force pushing in the direction of a competitive banking sector while state-orchestrated bank restructuring is a force undermining competition. It argues that the new bad debts will continue to emerge in the course of transition and that the challenge for the coming years will be to leave the solution of this to the routine operation of market-based institutions such as bankruptcy and work-outs involving creditors and private shareholders. The Report discusses in detail bank privatization, banking supervision, bank licensing and other issues that will be important as these countries attempt to negotiate their entry in the European Union.
