Banks And Public Capital Markets In Transition Economies

A critical aspect of integration of transition economies (TE) of Eastern Europe into the global financial system is the continuing financial liberalization process and the development of effective domestic capital markets. While these countries have made considerable progress in this area since the early stages of economic transformation, the system is still dominated by foreign financial institutions and the overall level of financial development and market capitalization remains weak by the developed world’s standards. Several recent studies show that just as foreign banks played a role in the credit expansion prior to the financial crisis, many of them reduced their lending considerably and “cut and ran” during the financial crisis. This study examines the levels of development of capital markets and the effect of macroeconomic, bank-level, and regulatory fundamentals on the banking institutions’ decision to participate in public capital markets. The study also examines the predominance of foreign-owned banks in TE and assesses the effect of their presence on the development of financial markets in TE. The study suggests that that the combination of a regulatory void and an increased level of exposure to volatile stock markets is the likely culprit of banks’ reluctance to list their shares on local exchanges. Governments of these countries should continue to improve legal and regulatory structures to encourage banks to participate in public capital markets.