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We thank, without implication, Richard Abrams, George Iden, and David Robinson, participants in the International Seminar on “Financial Sector Issues in the CIS-7,” held in Bishkek, Kyrgyz Republic on May 12-13, 2003; and of the IMF’s Monetary and Financial Systems Department (MFD) staff for comments and suggestions. Help by Kalin Tintchev in the provision of some of the data is also gratefully acknowledged.
SEE countries include Albania, Bosnia and Herzegovina, Bulgaria, the Former Republic of Yugoslavia, the Former Yugoslav Republic of Macedonia, and Romania. CEE countries include Croatia, the Czech Republic, Hungary, Poland, the Slovak Republic, and Slovenia. Given their similarity of financial development with the CEE countries, the Baltic countries—Estonia, Latvia, and Lithuania—are grouped with the CEE countries in the aggregate called CEE+B.
We discuss data averages for groups of transition countries to focus on broad trends. Although some indicators of financial development differ within CIS-7 countries, the conclusions reached on the basis of averages are essentially unchanged when these differences are taken into account.
SMEs appear the most dynamic sectors relative to large firms in many Central and Eastern European countries (see Klapper, Sarria-Allende, and Sulla (2002)).
As of end-2002, average short term interest rates were about 12 percent in the CIS-7 countries and about 5 percent in the CEE+B countries. However, differential in interest rates on short term instruments are only indicative of alternative investment opportunities for depositors, since in no CIS-7 country the public appears to hold a relevant portion, if any, of short term instruments either directly or indirectly thorough banks.
As demonstrated in Ennis and Keister (2003), even the perception of a low probability of banking instability may result in detrimental effects on the economy real growth rate, since an amount of savings lower than it would be desirable is channeled to finance productive investment through bank intermediation.
Recent evidence based on bank-by-bank data for some CIS-7 countries also shows that operating costs of small banks are not significantly higher, and in many instances are lower, than those incurred by large banks.
See Demirgüç-Kunt and Huizinga (1999) and Demirgüç-Kunt, Laeven, and Levine (2003) for a large cross section of countries, Martinez-Peria and Mody (2003) for Latin America, and Okeahalam (2003) for southern Africa.
Drakos (2003) evidence regarding significantly narrower margins for state-owned banks in 11 transition economies (none of which is a CIS-7 country) suggests that state-ownership may be associated with subsidies to rather than rent extraction from borrowers.
The institution quality database is due to Kaufmann, Kraay, and Zoido-Lobaton (2002). They compiled information on: (i) regulatory quality, i.e., the relative absence of government controls on goods markets, government interference in the banking system, excessive bureaucratic controls on starting new businesses, or excessive regulation of private business and international trade; (ii) rule of law, i.e., protection of persons and property against violence or theft, independent and effective judges, contract enforcement; (iii) control of corruption– absence of the use of public power for private gain; (iv) voice and accountability, i.e., the extent to which citizens can choose their government and enjoy political rights, civil liberties, and an independent press; (v) political stability, i.e., a low likelihood that the government will be overthrown by unconstitutional or violent means; and (vi) government effectiveness, i.e., the quality of public service delivery, competence of civil servants, and the absence of politicization of the civil service.
As shown in IMF (2003), progress in institutional quality is also likely to be an important determinant of remonetization.
On the depositors’ side, other factors may be important, such as the insufficient provision of bank services.
See, for example, Bonin and Wachtel (2003), World Bank (2001), and EBRD (1998). Fischer (2001) notes that in past reform strategies in transition economies “too little thought was given to institution-building, for example, of sound legal and regulatory systems and well functioning tax administrations” (p. 4).
A “suitable legal framework” is first in the List of Core Principles for Effective Banking Supervision (Basel, September 1997): “Principle 1. An effective system of banking supervision will have clear responsibilities for each agency involved in the supervision of banking organizations. Each such agency should possess operational independence and adequate resources. A suitable legal framework for banking supervision is also necessary, including provisions relating to the authorization of banking organizations and their ongoing supervision; powers to address compliance with laws as well as safety and soundness concerns; and legal protection for supervisors (our italics). Arrangements for sharing information between supervisors and protecting confidentiality of such information should be in place.”