Transformation of the Estonian Banking System

The transformation of the banking and financial sector in transition economies has become critical for the successful shift from centrally planned to market-driven economic systems. Such reforms led to the creation of financial markets, which are essential for market transactions. The development of the financial sector has been one of the most difficult areas of reform since at the start of transition financial institutions and markets were limited or non-existent (Fries and Taci, 2001). Financial sector reforms are not easy to accomplish in a turbulent environment. This is even more so considering the high speed of economic and social transformation as well as the length, severity and effects of the economic and financial crises experienced in the course of the transition process. Adding to the complexity of the reform process has been the lack of risk management experience in the banking sector and the numerous changes in banking regulations.