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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 7: The banking system in the accession countries

Marianne Kager


Marianne Kager 1. INTRODUCTION The transformation of the centrally planned command economies into Western-style market economies required comprehensive reforms within the financial sectors of the countries in Central and Eastern Europe (CEE). The foremost objective in the early years of reform was the conversion of the single-tier banking system into a two-tier banking system, in which financial institutions can fulfil their central task of ‘supplying, allocating and monitoring financial funds for investment’ (James Tobin). The creation of a functioning banking sector required four general problem areas to be addressed: 1. 2. 3. 4. Solving the issue of non-performing loans Recapitalizing the banking sector Introducing appraisal and accounting standards as well as an adequate system of supervision Privatizing the banking sector An ex-post analysis indicates that the success of restructuring the banking sector in individual countries, as well as the overall economic costs of this restructuring, depended largely on the order in which the above problems were solved. Restructuring costs in the banking sector varied from country to country, and ranged from 6 per cent to 30 per cent of an annual average GDP (see Table 7.1). Despite the difficulties and setbacks which have been encountered by efforts at banking reform in the EU candidate countries since 1990, efforts to reform the banking system and to resolve the banking crises in these countries have generally met with success. 91 92 Financial sector development Table 7.1 Restructuring costs in the banking sector (in per cent of GDP) (1991...

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