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Structural Challenges for Europe

Edited by Gertrude Tumpel-Gugerell and Peter Mooslechner

The main thrust of the book is that the sharing of mutual experiences is important for generating an acceptable policy mix, both at EU and national levels. The contributors highlight key financial issues, including the role of FDI and of foreign banks in the still ‘under-banked’ acceding countries, the re-launch of social security systems and the fiscal challenges of financing the catch-up process. They also examine the ongoing EU debate surrounding the application of the Stability and Growth Pact in Central and Eastern European Countries (CEECs) and go on to explore the contrasting evidence that some CEECs have shown more extensive privatisation efforts than some EU countries.
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Chapter 5: Banking sector development in the Czech Republic

Zdenek Tuma


Zdenek Tuma ˇ ˚ 1. INTRODUCTION At the time of writing, the financial sector of the Czech Republic finds itself in the final stage of reform. Now that the privatization of large banks has been completed, the banking sector is dominated by foreign strategic owners, most of them EU-based banks. These owners are expected to bring much-needed modern banking expertise, improve the efficiency of domestic banks and prepare them for the challenges of EU and EMU accession. After extensive clean-ups of portfolios, the banks’ prudential indicators have improved significantly. The regulation of the banking sector has been largely standardized, and the remaining challenges are broadly similar to those faced by financial regulators in advanced countries, too. The path from the beginning of transition to this promising stage has not been an easy one, though. Reform has come at a substantial cost, both in terms of macroeconomic inefficiencies in the allocation of resources and in terms of public expenditures. The aim of this chapter is to describe these reform processes, focusing in particular on the current situation and future prospects. The chapter is organized as follows. In section 2, I give a short overview of the starting conditions and the early years of transition. Section 3 presents the major developments and reform steps in 1994–2001, including the public and macroeconomic costs. Section 4 describes the current situation of the Czech banking system and its outlook. Section 5 summarizes and concludes with some general observations for the transition economies. 2....

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