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Banking reform in transition countries

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  • Claessens, Stijn

Abstract

In reforming the financial sector in transition economies, one important debate is whether governments should try to reform existing state-owned banks (the rehabilitation approach) or whether a new private banking system should be allowed to emerge (a new entry approach). Or should there be a mix of the two approaches, in which the state bank activities are restricted while a parallel private banking system develops? The authors'cross-country comparison of banks'institutional development in 25 transitional economies suggests that progress can be faster under the new entry approach, especiallyrelative to initial conditions. Progress under the rehabilitation approach appears to be inhibited by poor incentives. In most countries, even those with a good banking infrastructure and a large segment of good banks, a two track process has evolved, with differences between weak and strong banks. Weak banks have moved little beyond central planning. Regression estimates suggest that slow progress of weak banks is associated with: cover concentration, government preferential treatment, and limited new banks entry. The causality direction is often unclear. Policies and structural conditions can affect bank quality. The role of banks will remain limited in many transition economies due to weak legal infrastructures, much uncertainty and inside information, and problems associated with highly leveraged financial intermediaries - including fraud, political interference, and implicit guarantees. In the short run, self-finance and intermediation among enterprises and through nonbank financial institutions may prevail.

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  • Claessens, Stijn, 1996. "Banking reform in transition countries," Policy Research Working Paper Series 1642, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1642
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    References listed on IDEAS

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    1. Demirguc-Kunt, Ash & Levine, Ross, 1996. "Stock Market Development and Financial Intermediaries: Stylized Facts," World Bank Economic Review, World Bank Group, vol. 10(2), pages 291-321, May.
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    3. Caprio, Gerard Jr. & Summers, Lawrence H., 1993. "Finance and its reform : beyond laissez-faire," Policy Research Working Paper Series 1171, The World Bank.
    4. Allen, Franklin & Gale, Douglas, 1995. "A welfare comparison of intermediaries and financial markets in Germany and the US," European Economic Review, Elsevier, vol. 39(2), pages 179-209, February.
    5. Gerard Caprio, Jr., 1995. "The role of financial intermediaries in transitional economies," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 42(1), pages 257-302, June.
    6. Dimsdale, Nicholas & Prevezer, Martha (ed.), 1994. "Capital Markets and Corporate Governance," OUP Catalogue, Oxford University Press, number 9780198287889.
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    Citations

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    Cited by:

    1. Giovanni Ferri, 2008. "Banking In China: Are New Tigers Supplanting the Mammoths?," Working Papers 052008, Hong Kong Institute for Monetary Research.
    2. David A Grigorian & Vlad Manole, 2006. "Determinants of Commercial Bank Performance in Transition: An Application of Data Envelopment Analysis," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 48(3), pages 497-522, September.
    3. Lino Sau, 2012. "Evolution of China's financial system and its impact on economic development," International Journal of Economic Policy in Emerging Economies, Inderscience Enterprises Ltd, vol. 5(1), pages 1-15.
    4. Park, Albert & Brandt, Loren & Giles, John, 2003. "Competition under credit rationing: theory and evidence from rural China," Journal of Development Economics, Elsevier, vol. 71(2), pages 463-495, August.
    5. Delis, Manthos D & Staikouras, Panagiotis, 2009. "On-site audits, sanctions, and bank risk-taking: An empirical overture towards a novel regulatory and supervisory philosophy," MPRA Paper 16836, University Library of Munich, Germany.
    6. Montes-Negret, Fernando & Papi, Luca, 1997. "The Polish experience with bank and enterprise restructuring," Policy Research Working Paper Series 1705, The World Bank.
    7. Fleming, Alex & Lily Chu & Bakker, Marie-Renee, 1996. "The Baltics - Banking crises observed," Policy Research Working Paper Series 1647, The World Bank.
    8. Ferri, Giovanni, 2009. "Are New Tigers supplanting Old Mammoths in China's banking system? Evidence from a sample of city commercial banks," Journal of Banking & Finance, Elsevier, vol. 33(1), pages 131-140, January.
    9. repec:taf:rjapxx:v:14:y:2009:i:1:p:5-26 is not listed on IDEAS
    10. Patrick Honohan, 1998. "Diagnosing Banking System Failures in Developing Countries," Papers WP093, Economic and Social Research Institute (ESRI).

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