Reforms and Development of the Banking Systems in Transition Economies

The Central and Eastern European (CEE) countries in transit ion faced two-fold task: getting rid of the inheritance of the centralised model and creating sound, market-oriented fmancial sector at the same time. Transition from the old monobank system of a centrally planned economy to the two tier banking system of a market economy was accompanied by market imperfections and cost a lot. Though the roots of the problems were similar in the region, the answers given by the individual governments were quite different. The differences lie in the sequence of the reform steps rather than in the characteristics ofthe steps themselves.The general tasks which each country had to solve by reforming the banking system are described below: establishing the institutions and rules which ensure soundness and competitiveness of the banking systemdealing with the inherited financial weaknesses of the banks and their clienteleprivatising the former state-owned banks in order to hamper the reproduction of the weaknesses deriving from the irresponsible ownership and dependence on political powers.The governments of CEE countries analysed here have to face special pressure coming from the intention to become members of the EU and speeding up the transition process. The association agreements of these countries with EU requires further steps of harmonisation and liberalisation in the regulation of the banking system. Creating free market entrance is particularly urgent in those countries (Czech Republic and Hungary) which have become members of OECD. The quick liberalisation of the financial markets means however further challenge for these countries because of strengthening the international competition on the domestic market.This overview part of this chapter intends to describe the general characteristics of the transition process in the banking systems of CEE countries. The following parts will give more detailed description of individual country experiences, with special consideration of efficiency and regulation of the banking market.