Introductory Framework

Abstract

The financial sector has several particularly important roles to play in the transition to the market of Central and East European countries. These roles are especially difficult to play properly given the long-term tradition of passivity which characterised banks’ functions and behaviour during the period of central planning, and the non-existence of other financial institutions common in market economies, such as stock exchanges. Indeed, the monetary system, which consisted broadly of the mono-bank and its specialised branches, was a tool of the plan. The mono-bank had little autonomy; it guaranteed enterprises the loans needed to carry out planned transactions, in observance with the central plan. Therefore, risk considerations did not affect lending decisions. As a result, there was no tradition of risk evaluation in these banking systems. Furthermore, when the mono-bank lent money to enterprises with losses, which they would be unlikely to pay back, it was performing not just a banking function, but essentially a fiscal function. Therefore, it was — and to some extent still is — difficult to separate fiscal from monetary policy.¹

I am grateful to David Begg, Jenny Corbett, Zdeňek Drábek, Jan Klacek, Jiri Kunert, Millard Long, Nemat Shafik and Andres Solimano for useful suggestions in relation to this chapter.