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Eastern Europe's experience with banking reform : is there a role for banks in the transition?


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  • Thorne, Alfredo
  • DEC
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    Are there lessons to be learned about how Eastern European countries have dealt with problems in their banking systems? What role have these countries assigned to banks during the transition? How have they used banks in dealing with the enterprise problem? The author addresses these questions by analyzing experience in Bulgaria, Hungary, Poland, Romania, and the former Czech and Slovak Federal Republic. Most of these countries have made substantial progress in restructuring their banking systems, but few have used their banking systems to improve the allocation of credit and hence stimulate the supply response. The author finds the following. The problem is not whether banks hold nonperforming loans but how banks can avoid accumulating more nonperforming loans. The underlying problem is how to close loss-making and nonviable enterprises. The countries that have encouraged the establishment of new private banks, that have introduced regulation and supervision, and that have tried to make banks more competitive have been more successful at improving the allocation of credit and achieving more control over loss-making enterprises. Banks must focus on assessing risk - and for this, capital, private ownership, and adequate regulation are crucial. How quickly banks achieve independence in credit decisions depends on how fast new governance structures can be introduced. In this, the five countries have been less successful. The objectives of bank recapitulation should be to prevent banks from accumulating more nonperforming loans (that is, dealing with the enterprise problem) and to give them the governance structure that would prevent them from incurring new nonperforming loans. This requires introducing a system of risk and reward - by making banks comply with capital adequacy requirements, by privatizing a critical number of banks, and by introducing strong regulation and supervision. Government should see that banks provide efficient payment systems, the basis for trust in banking systems. Introducing adequate regulation and supervision has been difficult as it requires knowing what the banks'role should be. Evidence strongly supports the need to recapitalize and privatize a critical number of banks. Authorities cannot rely on banks to exert control on enterprises early in the transition. In the early stages, control over state-owned enterprises should be exercised by a semipublic institution.

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    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1235.

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    Date of creation: 31 Dec 1993
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    Handle: RePEc:wbk:wbrwps:1235

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    Keywords: Banks&Banking Reform; Financial Intermediation; Financial Crisis Management&Restructuring; Municipal Financial Management; Banking Law;


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    1. Calvo, Guillermo A & Coricelli, Fabrizio, 1992. "Stagflationary Effects of Stabilization Programs in Reforming Socialist Countries: Enterprise-Side and Household-Side Factors," World Bank Economic Review, World Bank Group, World Bank Group, vol. 6(1), pages 71-90, January.
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    Cited by:
    1. Bhattacharyya, Anjana & Bhattacharyya, Arunava & Kumbhakar, Subal C., 1997. "Changes in Economic Regime and Productivity Growth: A Study of Indian Public Sector Banks," Journal of Comparative Economics, Elsevier, vol. 25(2), pages 196-219, October.
    2. De Melo, Martha & Denizer, Cevdet, 1997. "Monetary policy during transition : an overview," Policy Research Working Paper Series 1706, The World Bank.
    3. Hasan, Iftekhar & Marton, Katherin, 2003. "Development and efficiency of the banking sector in a transitional economy: Hungarian experience," Journal of Banking & Finance, Elsevier, Elsevier, vol. 27(12), pages 2249-2271, December.
    4. Buch, Claudia M., 1994. "Dealing with bad debt: Lessons from Eastern Europe," Kiel Working Papers 642, Kiel Institute for the World Economy.
    5. Ábel, István & Polivka, Gábor, 1998. "A bankpiaci verseny Magyarországon a kilencvenes évek elején
      [Bank market competition in Hungary in the early nineties]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(6), pages 534-557.
    6. Scholtens, Bert, 2000. "Financial regulation and financial system architecture in Central Europe," Journal of Banking & Finance, Elsevier, Elsevier, vol. 24(4), pages 525-553, April.
    7. Bilin Neyaptý, 2000. "Central bank Independence and Economic Performance in Eastern Europe," Departmental Working Papers, Bilkent University, Department of Economics 0007, Bilkent University, Department of Economics.
    8. Neven Borak, 2000. "Western Rules for Eastern Banking," Post-Communist Economies, Taylor & Francis Journals, Taylor & Francis Journals, vol. 12(3), pages 293-306.


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