The Role of Banks in Transition Economies

Abstract

At the beginning of the transition process, the financial sector is faced with a triple challenge:

• There is a significant amount of investment required, which the banking sector is called upon to finance. The industrial and infrastructure investment requirements are — compared to the size of the economy — relatively greater in transition economies than in OECD countries (contributions on this challenge and on how to best tackle it overall are to be found in Section 2.1);

• The banks are starting with a handicap of bad loans and banking relationships with unprofitable state-owned enterprises (the genesis of the bad-debt problem and recommendations on how to overcome it are described in Section 2.2);

• At an institutional and individual level, the financial sector began the transition with a deficit of “human capital”. A wide range of new skills have to developed, particularly those relevant to fulfill a strong corporate governance function (how the banks, the regulatory environment and the supervision authorities can be prepared for these challenges is outlined in Section 2.3).