Convergence Between the EU and Central and Eastern Europe
Edited by David G. Dickinson and Andrew W. Mullineux
Chapter 18: Risk and optimal interest margins: the case of commercial banks in Central Europe
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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