A Perspective on Financial Sector Development in Central and Eastern Europe

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Financial sector development in Central and Eastern Europe has proved to be a dramatic process characterized by some well-trumpeted successes, but even more so by many unexpected collapses of seemingly decent institutions and some systemic meltdown as well. The overall record of transition in the area of financial sector development is much less impressive than the achievements in macroeconomic stabilization, economic liberalization, and privatization of formerly state-owned enterprises. There are several reasons for this. Chief among them are the complexities of the financial sector and the intense political as well as emotional sensitivity attached to any major move in this area. Influential stakeholders such as politicians, government officials, business, and media people tend to overestimate the real value of particular institutions and to overemphasize their importance to the national economy. In the absence of strong external and internal governance structures, managers and owners of banks, brokerages, and insurance companies abuse this situation at times to increase their own influence and perceived importance. Therefore, financial sector development in most countries of Central and Eastern Europe in the first decade of transition has been an uphill struggle to restore reliable channels and prudent practices of financial intermediation -- to create a new culture of trust and confidence against all odds given a dire legacy of crime, corruption, cronyism, and collusion.

Researcher/Author: Lajos Bokros, World Bank's Europe and Central Asia Regional Office

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