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Financial and Monetary Integration in the New Europe

Convergence Between the EU and Central and Eastern Europe

Edited by David G. Dickinson and Andrew W. Mullineux

Potential new entrants to the European Union from Central and Eastern European countries face many challenges to achieve financial convergence with the existing EU nations. Using detailed case studies from Bulgaria, the Czech Republic, Latvia, Lithuania and Poland and analysis of cross country data from these regions, Financial and Monetary Integration in the New Europe looks at the key issues for applicant countries as they negotiate the terms of their membership in the European Union. Of major concern to these countries is the financial sector and its implications for economic growth and the conduct of macroeconomic policy. The book examines, in particular, monetary and exchange rate policies, banking regulation and financial market efficiency. The overall impact of building a market driven financial system on economic development is also explored.
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Chapter 18: Risk and optimal interest margins: the case of commercial banks in Central Europe

Convergence Between the EU and Central and Eastern Europe

Daniel Goyeau, Alain Sauviat and Amine Tarazi


Daniel Goyeau, Alain Sauviat and Amine Tarazi INTRODUCTION The banking systems in Central and Eastern Europe have experienced dramatic changes in recent years with the transition process towards a market economy. Reforms aimed at building an institutional environment in which banks could efficiently but also soundly perform their activities. With higher financial fragility in most market economies and the implementation of more stringent prudential rules, the steps towards a decentralized resource allocation system in the banking industry had to fit in with the new international standards for solvency regulation. Bank intermediation nevertheless appears as a major challenge for the economic development of these countries. Because of their narrowness due to the persistence of severe asymmetric information problems among borrowers and lenders, financial markets are still unable to perform their funding function satisfactorily. In this context, at least in the short run, banks have the heavy task of channelling savings and meet the private sector demand for funds. One can then question the ability of the banking system itself to fulfil its functions efficiently in an environment with strong moral hazard incentives and information problems. Also a connected issue that arises, in the light of integration with the European Union is whether European and international standards for prudential regulation should actually be implemented in transition economies if fair competition with Western banks is to be reached. If prudential rules and safety nets in general are prerequisites to prevent systemic risk they can also induce counterproductive effects resulting in credit contraction spreading...

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