Financial Sector Restructuring in Transition and Emerging Market Economies

This chapter reviews financial sector restructuring and development in Transition and Emerging Market Economies (EMEs) and focuses on enterprise financing. In the formerly centrally planned economies, the first step was to establish a commercial banking system, and this required privatization of both state owned banks and state owned enterprises and resolution of inherited bad debt problems. A corporate governance system for banks, including regulatory and supervisory mechanisms, had to be put in place in order to underpin financial stability and promote an efficient allocation of capital by assuring access to finance by new private small and medium sized enterprises (SMEs) and also households. Next, in common with other EMEs, attention can turn to developing capital, bond and equity, markets, and encouraging and accommodating financial innovation whilst guarding against financial instability and the development of anti-competitive economic rent seeking activities and fraud. The chapter identifies policies that can be used to promote these beneficial financial sector developments.