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Dimitri Menchikov


Over the last four years, the transition countries have, on the whole, moved substantially toward more market-based exchange rate arrangements, with a view to promoting both greater economic efficiency and more effective macroeconomic stabilization.

Ceyla Pazarbaşioğlu and Jan Willem van der Vossen


Until the late 1980s, the financial sector of the transition countries was characterized by a banking system in which the central bank dominated the financial sector. The savings bank collected savings deposits from households at low interest rates, which were then placed at the Gosbank. According to the credit plan approved by the Planning Authorities, the Gosbank set policy guidelines determining the volume and allocation of credit to different sectors (the credit plan), and the volume and allocation of cash issuance (the cash plan). Funds were then passed to the specialized banks (such as the agricultural and industrial banks), which represented different sectors for on-lending to individual enterprises. Interest rates had no role in the allocation of credit.

V. Sundararajan,, Arne B. Petersen,, and Mr. Gabriel Sensenbrenner


Since 1992, the central banks of the Baltic states and the Commonwealth of Independent States (CIS) have undertaken to various degrees comprehensive reform of their monetary and exchange arrangements in support of their stabilization efforts.5 The objective has been to achieve market-based determination of interest rates and exchange rates, control of banking system liquidity through indirect instruments, and, pari passu, to enhance the use of markets for transmitting monetary policy signals.

International Monetary Fund. European Dept.


Though Europe has made great strides in financial innovation and integration, many advanced European economies still need to level the playing field for the various forms of financial intermediation. Competitive and more diversified financial systems are better at distributing risk and identifying and supporting industries with high growth potential. These systems allow the complementarities of bank- and market-based financing to be fully exploited. At the same time, as the recent financial market turbulence underscores, both private and public prudential frameworks need to keep up with financial innovation if the benefits are to be reaped without incurring excessive risks. To secure the resilience of financial systems in advanced economies, it will be important to improve the management of market and liquidity risk, implement more advanced risk assessment models, and increase transparency of underwriting standards and counterparty risk exposures.