The Development of the Banking Sector in Eastern Europe: The Next Decade

Abstract

The first decade of transition has seen tremendous changes in Eastern European economies. While in the first decade the focus of politicians was primarily on privatizing firms and setting up institutions necessary for a market economy, the focus of the second decade will need to be on developing the financial sector and making the financial institutions work. In this chapter we look more closely at the banking sector in Eastern Europe and we discuss three main questions. Below, we ask what the banking sector should look like; in particular, how competitive we would wish the banking sector to be. Next, we investigate how the initial conditions and the reforms strategies chosen in different countries have shaped the banking sector in Eastern Europe. We then contrast this picture of the banking sector as it is today with the desired market structure discussed below. Finally, we discuss what needs to be done in order to achieve the banking sector as we would like to see it.