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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 20: Convergence between the financial systems of EU member states and applicant transition economies

Convergence Between the EU and Central and Eastern Europe

Victor Murinde, Juda Agung and Andrew W. Mullineux


Victor Murinde, Juda Agung and Andrew W. Mullineux* INTRODUCTION Most policy makers and academics agree that the restructuring of the financial system is an integral element of the ongoing economic transformation in Eastern and Central Europe (Mullineux 1998; Walter 1998). This is particularly important because, as Doukas et al. (1998) have observed, one distinct feature which all transition economies had in common during the central planning era was that a market-orientated financial system was almost completely absent. Apart from some informal financing activities, the financial sector comprised a Ômonobank systemÕ (state bank, savings banks, specialized banks and so on) which played a limited role compared to a traditional banking system (Buch 1996). Although the savings banks accepted deposits from households and the state banks had accounting and credit disbursement roles, the final decisions on the distribution of credit rested with the central planning agencies, which allocated credit to selected enterprises in order to attain output targets. Bank managers had no incentive to undertake credit risk analysis because the credit lines were underwritten by the state; moreover, the managers were not constrained by capital budgeting criteria (for example, using financial ratios to analyse the efficiency of investment). At the genesis of the transition period, there was no blueprint for developing a banking sector (Bahra et al. 1997). However, most transition economies started by creating a two-tier banking system, comprising on the one hand a central bank to oversee monetary policy and bank supervision, and on the * The research for the chapter...

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