The EPI Forum meeting in Warsaw on 27/28 January 1996, the first in the Forum series, centred on a preliminary draft of the first EPI Report, `Banking Sector Development in Central and Eastern Europe', written by Ronald Anderson (Université Catholique de Louvain and CEPR), Erik Berglöf (ECARE, Université Libre de Bruxelles and CEPR) and Kálmán Mizsei (Hungarian Export-Import Bank).
Erik Berglöf presented the main themes of the Report, acknowledging the importance of economic growth for the Central and East European countries (CEECs), and pointing out the intimate relationship between growth and the development of a financial system. He identified three interwoven aims of CEEC banking reform: the enhancement of corporate finance; the creation of liquid asset markets; and the facilitation of the withdrawal of the state. He drew the outlines of a desirable system of financial institutions could be established. He suggested that the distinction between control-oriented and arm's length financial systems could further organize the discourse surrounding the policy agenda, and closed by evaluating developments in the region in terms of this distinction. The discussion revolved around the need for a specification of how banks can influence corporate governance.
Loránd Ambrus-Lakatos (Princeton University and CEPR), then addressed bank privatization, entry and competition, and began by drawing some lessons from the recent privatization processes. Three prevailing methods of privatization have been employed - direct sales, voucher privatization, and the use of initial public offerings - roughly corresponding to the favoured techniques of Hungary, the Czech Republic, and Poland respectively. All three, he claimed, carry inherent limitations, which should be overcome by establishing a privatized banking sector, rather than focussing on privatizing all previously state-owned banks. Then he addressed the salient aspects of competition policy in banking, arguing that universal licences should be granted to banks, while avoiding monopoly positions to emerge. Slawomir Sikora (Powszechny Bank Kredytowy, Warsaw), pointed out the manifold successes of the privatization process, and gave a rich account of the complexities competition and privatization policy must face during transition.
Kálmán Mizsei discussed bad loan management and bank bankruptcy in the region. He described the complexities of navigating between the two requirements of maintaining the credibility of the whole banking sector, and avoiding sustained moral hazard in the relationship between governments and banks. Finally, he urged that the ultimate goal of public policy in banking should be the creation of a competitive banking sector, and proposed an assessment of banking services as commodities.
István Székely (United Nations, New York) then looked at the problem of finding an appropriate place for savings banks in the banking sector. These banks are `too large to fail', and given their privileged access to household savings should be treated with great care by governments. He drew attention to the need for an effective regulatory policy, and the necessary adequate human capital for the regulatory agency. He was sceptical about the dangers of excessive monopolization of important markets by the savings banks, maintaining that innovation in the financial markets could well undermine traditional sources of monopolization. His discussant, José Lloveras (Commission of the European Communities) stressed the significance of savings banks in economies still relying excessively on cash transactions. He provided an engaging argument about savings banks' disposal of an overwhelmingly large part of the pool of financial information about economic actors in these countries.
Ronald Anderson outlined the policy recommendations of the Report. He characterized a stable banking system first, then enumerated the intrinsic dangers threatening this stability. These include the misallocation of human and physical capital, and the fact that trade patterns, industry structures, and institutions supporting the market economy are in a state of flux. He formulated the guarantees that should underwrite any attempt to recapitalize banks and grant them universal licences. He stressed the role of effective enforcement of public policy and depicted the state as a de facto (rather than de jure) stakeholder of bank securities even after privatization. John Bonin (Wesleyan University) warned against allowing political influence to interfere in the operation of banks, and stressed the debilitating effects of inherited bank-client relationships.
In the panel discussion, Jan Bielecki (EBRD and CEPR), Amir Nacqvi (Commission of the European Communities, Ljubljana) and Richard Portes (London Business School and CEPR) focused on how the prospect of accession to the EU affects financial reform in the region. Each emphasized that accession should be exploited by policy-makers to support and ensure the enforcement of desirable policy actions. Jan Mládek (Czech Institute of Applied Economics) argued against pessimistic reading of the situation in the Czech banking sector, and Rumen Dobrinsky (21 Century Foundation, Sofia) recommended decision-makers in individual countries learn from the other countries in the region.