PARTNERS FOR FINANCIAL STABILITY

Addressing Institutional Gaps in the Financial Sectors of the Baltic States, Central, Eastern and South-

Conference Proceedings

June 8-9, 2000 ,

Co-Sponsored by:

Partners for Financial Stability Institutional Gaps: June 2000 Conference Proceedings 1 PARTNERS FOR FINANCIAL STABILITY

Addressing Institutional Gaps in the Financial Sectors of the Baltic States, Central, Eastern and South-Eastern Europe

CONFERENCE PROCEEDINGS

OVERVIEW

On June 8-9, 2000, the East-West Management An excellent summary of the purpose of the PFS Institute (“EWMI”) hosted a seminar on finan- program, its goals and objectives was provided cial sector development in Central and Eastern by William Frej, former USAID Mission Di- Europe (“CEE”) and Southeastern Europe rector to Poland, and currently USAID Direc- (“SEE”). The seminar introduced the Partners for tor of the Office of Market Transition, Bureau Financial Stability (“PFS”) program, jointly fund- of Europe and Eurasia. ed by EWMI and the U.S. Agency for Interna- tional Development (“USAID”) to promote The theme of this conference is “partnership”. financial sector development in CEE and SEE Partnership is certainly an important concept countries, to 75 participants from 13 CEE/SEE that USAID has been advocating as one of countries. The CEE countries under the PFS pro- our primary operating principles. In this re- gram are defined as the USAID graduated or near gard the program on which we are here to- graduated countries (Czech Republic, Estonia, day is a program that we hope will help all of Hungary, Latvia, Lithuania, Poland, Slovak Re- you better understand USAID’s new Partners public, and Slovenia). The SEE countries under for Financial Stability Program. the PFS program are countries in Southeastern Europe with active USAID programs (Albania, PFS seeks to fill the gaps in the institu- Bosnia Herzegovina, Bulgaria, Croatia, Mace- tional development of financial sectors of donia, Romania, Kosovo and Montenegro). graduated and soon to graduate Central The seminar provided an opportunity for repre- and Eastern European countries sentatives of government, business, and non gov- ernment organizations (“NGOs”) from CEE and PFS was initiated at the end of 1999 by US- SEE countries to share with each other and rep- AID and it is a program that seeks to fill the resentatives of donor organizations their ex- gaps in the institutional development of fi- periences and concerns in the area of financial nancial sectors of graduated and soon to grad- sector reforms. During the two-day seminar, four uate Central and Eastern European countries panels focused on banking, capital markets, in- in order to shorten the time required to meet surance and pension reforms. Each panel was international standards and accession to the composed of experts in the specific discipline (“EU”). These countries in- from CEE countries and Western Europe. The clude the Czech Republic, Estonia, Hungary, observations and comments of the seminar par- Latvia, Slovenia, Poland, Lithuania and the ticipants reflect the discussion between the pan- Slovak Republic. While it is appropriate for elists and participants regarding reforms in the USAID to phase out of these countries, it is four focus areas. also premature to assume that the transition from a command to a market economy is

Partners for Financial Stability Institutional Gaps: June 2000 Conference Proceedings 2 completed. These countries do not yet com- nizations and private pension fund regulato- pletely meet or practice international finan- ry organizations, all of whom are represent- cial standards and this gap could certainly put ed here today. These regional organizations at risk the significant reforms these countries can share lessons learned and exchange in- have already accomplished. formation within the region and affiliate with international organizations. The purpose of PFS is to address continued weakness in these Central and Eastern Euro- The East-West Management Institute is also pean financial systems. Such weaknesses responsible for implementing an inter-region- could make the still fragile financial systems al or East-East technical assistance program vulnerable to crisis, but continuing special- drawing upon financial experts from the US- ized technical assistance could help make key AID graduated or almost graduated countries institutions more resilient and better able to to provide advice in Southeastern European deal with the threats of the transition process. countries. Again, the concept is to share les- sons learned and to provide training and in- PFS consists of two components. The first stitutional support, drawing upon the component is focused on addressing gaps in experience of USAID CEE graduated coun- the financial sectors of specific close out tries. countries with assistance provided primarily by United States government agencies, such According to the panelists, each of the CEE coun- as the US Treasury and the US Securities and tries has made progress in the area of financial Exchange Commission. It also consists of as- sector reform. The conference participants also sistance provided by private sector experts agreed that the progress toward reform, howev- and contractors and as well NGOs such as er, has been uneven across CEE countries in the the Financial Services Volunteer Corps that areas of banking, capital markets, pension, and has been operating in this region from the insurance. very beginning of the transition in 1989. The panel discussions highlighted some of the Whereas this first component takes a bilater- progress in CEE financial sector reforms, and al approach, the second component of PFS, areas where reform is still needed, as well as the which is being implemented by the East-West areas where lessons learned from the CEE finan- Management Institute, is focused specifical- cial sector reform experience can be shared with ly on regional integration and regional link- SEE countries. SEE participants were quick to ages. The East-West Management Institute is share the challenges facing them in these four fi- implementing an inter-regional program of nancial sub-sectors and to outline areas where financial sector assistance. The program con- lessons learned from the CEE experience might cept is to share ideas, lessons learned and be beneficial. The comments of the panelists and policy recommendations and to build and participants are highlighted below. strengthen inter-regional institutions to ad- vance financial sector reforms in Central and Eastern Europe. BANKING

One way to encourage movement by CEE fi- CEE Perspective nancial institution policy and decision mak- ers is to adopt international standards creat- The CEE experience in banking reform was dis- ing and strengthening regional linkages and cussed by George Szapáry on the first day of organizations including securities regulatory the conference, and by the Banking panel on the organizations, regional bank regulator orga- second day of the seminar. Mr. Szapáry, a senior Partners for Financial Stability Institutional Gaps: June 2000 Conference Proceedings 3 advisor at the National Bank of Hungary and a Hungary is not to give government guaran- former International Monetary Fund official, tees on bad or outstanding loans. When you made a convincing argument based on Hunga- privatize, the potential buyers sometimes ry’s experience in bank privatization that one of spend a month or more sending as many as the critical elements in the reform process is thirty people here to look at the banks. Then speed. He also explained that Hungary made an they say we found most of what we could early decision to sell its banks to strategic inves- find, but they are not one hundred percent tors, resulting in bank sales to foreign banks, as sure whether they have found all the bad there was an insufficient number of strong do- loans. So, they ask for a government guaran- mestic investors. In addition, he noted that coun- tee. Three years after their purchase the owner tries still undergoing consolidation, should not comes back and says, listen, I found these bad provide government guarantees to strategic in- vestors, but instead should sell the banks at a small Without strengthening financial disci- discount. This recognizes that there may be bad plines in the corporate sphere, the bank- loans that will turn up after the purchase. He de- ing sector rehabilitation cannot be suc- scribed with great clarity some of the salient les- cessful sons learned about Hungary’s bank privatization: loans and according to our agreement, you Under [bank] consolidation, the longer the guaranteed that you would pay for these bad procedure the higher the expenses. I think this loans that originated before. And the govern- is not a typical Hungarian experience, as we ment had to pay of course, but they got a lot have seen it everywhere else. But there are of political criticism because it was very cost- two reasons for that. One is that as banks con- ly. So having gone through this, I would ad- solidate the management and enterprises, they vise this: do not give a guarantee, rather sell see that the state will bail out the bank, so the bank at a discount. those that can pay will just not pay or will just try to disappear from the scene. The banks Much of the shared experiences about banking also make less of an effort to collect because reform by CEE participants and panelists also you need a lot of collecting, you incur a lot focused on issues of bank consolidation and priva- of expenses, and you need to sue the borrow- tization, strong supervision, and recapitalization ers and so forth. Thus if you drag on the pro- following privatization. Panelists stressed the cess of consolidation the cost will climb. need to build strong information technology (“IT”) systems and to leap frog to the next gener- The consolidation of the banking sector ation of electronic banking to rapidly reduce the should be linked to enterprise restructuring. costs associated with large branch bank networks. If the enterprises are not restructured or not Consumer protection issues were also covered. yet privatized for instance, if they are still Below is an overview of the lessons learned from state-owned, and if you take away from the the experience of several CEE countries, as de- banks their bad loan portfolio, those enter- scribed by Roberto Rocha of the World Bank: prises will continue to generate bad loans to the extent that the banks are still willing to Stabilization and liberalization has been lend to them. So it has to be in tandem with achieved in most of the region although it still the restructuring of the enterprises. Without remains an issue in some countries in South- strengthening financial disciplines in the cor- eastern Europe. The entry of new banks has porate sphere, the banking sector rehabilita- been achieved everywhere in varying de- tion cannot be successful. grees. With regard to restructuring and priva- tization of state banks, I think Poland and Finally, an important lesson we learned in Hungary are the most advanced. Slovakia and Partners for Financial Stability Institutional Gaps: June 2000 Conference Proceedings 4 the Czech Republic are undergoing very deep velopmental and an institutional problem. reforms in this area right now. Slovenia Some countries are meeting this challenge achieved restructuring but is late with priva- better than others, but this is an area, where tization. Many countries in Southeastern Eu- even the most advanced countries have not rope are behind in these two areas and are reached the stage that is expected from OECD still facing this issue. The workout of bad and EU new members. Technical assistance loans is another difficult area we have to face. and bankruptcy legislation and procedures Again Poland and Hungary did it before any- will remain on the agenda for donors for many body else between 1992 and 1995 and have years to come. basically completed this task. The Czech Republic and Slovakia are doing it today and SEE Perspective they are going through a very painful period of working out a huge amount of bad assets; The banking privatization process of the CEE Slovenia did a half-baked cake. Croatia is countries could be highly beneficial if transferred doing it now and most countries in South- to the SEE countries. Banking crises have rocked eastern Europe face this problem, which is Albania, and Bulgaria in recent years and many still to be resolved. other SEE countries are undergoing deep bank- ing reforms. The issues of banking privatization, Banking regulation has been improved improved supervision, training to develop com- throughout the region, primarily with the mercial banking skills, consumer protection and objective of harmonizing legislation with an improved legal framework and enforcement the EU are reform areas that may benefit from the CEE experience in bank reform. Two thoughtful com- Banking regulation has been improved ments from SEE participants were as follows: throughout the region, primarily with the ob- jective of harmonizing legislation with the Ivanka Petkova, Executive Director, Econom- EU; progress has been tediously slow. Leg- ic Policy Institute, Sofia: islation related to banking law, bankruptcy, In 1996-97 Bulgaria experienced one of the foreclosure, and security lending has been most severe banking crises which resulted in very unsatisfactory in most of these countries. the closure of one third of the banks and costs The Czech Republic and Slovakia are going equal to 14 % of GDP being incurred in re- through great efforts to improve their legis- solving problems from the crises. Currently, lation, which is having noticeable results. the Bulgarian banking system is operating under a currency board arrangement. The cur- Unfortunately, bank regulation is an area rency board resulted in an extremely limited where we do not have EU directives to guide lender last resort option for banks in finan- us. There are no EU directives in the areas of cial difficulty, which in turn resulted in bank bankruptcy and foreclosure. Europeans nev- liquidity and risk management issues. Also er could get an agreement on what kind of as a result of the crisis, more prudent regula- model they wanted. So there is more scope tions, stricter supervisory policy, higher re- for individual choice in this area, but this is quirements concerning bank solvency and an area where a lot needs to be done. Not only elimination of self-credits and enforcement bankruptcy, but also foreclosure and particu- of hard budget constraints were adopted. Sev- larly enforcement and security lending in eral possible measures could have positive general. effects on banking sector development. Among them are amendments to the legal Banking supervision is an area that remains framework, where the purpose should be the a challenge all over the region. This is a de- protection of creditor rights and training of Partners for Financial Stability Institutional Gaps: June 2000 Conference Proceedings 5 bank staff to develop basic commercial bank- the more you privatize the larger capital mar- ing skills, and monitoring and risk manage- ket you have. We should also discuss the ment policies and procedures that need to be problem of mass privatization programs. adopted. These are all areas where we may Should mass privatization programs be de- benefit from the experience of Central Euro- veloped and should these programs be linked pean countries. to capital market development?

Albanian Delegate: A second topic is what is the optimal level of Allow me to briefly comment on banking re- regulation. Little or no regulation is not de- forms in Albania, including the main chal- sirable but over regulation may retard mar- lenges and what should be done in the future. ket development. So what is the optimal level The legal framework for the banking sector of regulation? in Albania has already been completed. The last two laws on money laundering and se- Third, should supervision be consolidated cured financing law were recently passed. (that is banking, securities, pensions and in- Progress has been made in the establishment surance under one body) or would it be bet- of the central bank and commercial banks. ter to have several institutions that supervise Still the Albanian economy is not respond- particular parts of the market? ing to these reforms which include banking supervision, despite the work done by US- The fourth, is the issue of the integration of AID, the Barents Group, Financial Service exchanges. This is directly linked to the ques- Volunteer Corps and so on, it remains one of tion of integration in the European Union, and the biggest challenges for establishing a bet- the question of meeting the requirements of ter functioning banking sector in Albania. The the European Directives. most important continuing reform will be in the area of supervision. Also, training of bank A lively discussion ensued on the topic of mass staff in commercial banking skills is critical. privatization and its role in the development of Of course, public education and consumer capital markets. Most participants agreed that protection continues to be a new challenge. mass privatization had serious shortcomings and The areas of better supervision, training of that a lack of regulation compounded the devel- bank staff and consumer protection I think opment of capital markets particularly in the are the three most important banking reforms Czech Republic. Mr. Jezek, a former Czech that need to be strengthened in Albania. Minister of Privatization, now a Securities Commissioner in Prague made the case that a lack of regulation of the market led to abuses and CAPITAL MARKETS a lack of confidence in the market. Interestingly, however, Marco Simoneti of CEEPAN made an The discussion of capital markets development argument for a two track type of regulatory ap- in CEE countries and the lessons to be learned in proach advocating strong regulation for blue chip SEE countries was led by Miroslaw Kachniews- public listings and for less strict regulation under ki, Secretary of the Polish Securities Commis- the company law for voucher share holdings in sion and Panel Chairman. He suggested four many other companies. Some Polish delegates topics for discussion: jumped in not only to state that the Czech mass privatization experience was completely flawed First, [there] is [the issue of] the relationship but also to take the panel’s Chairman (Mr. between privatization and the development Kachniewski from the Polish SEC) to task for of the capital market. The better capital mar- the over regulation of the Polish market. A few ket you have the easier it is to privatize and of these interesting comments are as follows: Partners for Financial Stability Institutional Gaps: June 2000 Conference Proceedings 6 Tomas Jezek, Presidium, Czech Securities is banking law which began with the Ameri- Commission: can model used in Hungary but which then I was [Czech] Minister of Privatization, and was switched to universal banking. Slovenia was personally responsible for mass privati- is now attempting to harmonize every law zation. Looking back today, I would still with those of the European Union. So, there maintain that voucher privatization was the is an opportunity to get a consistent set of only solution possible at that time. Our mis- laws that will instill investor confidence. So, take was failing to develop tighter [securi- maybe instead of listing every company then, why not have a separate, dual approach? Ba- Our [the Czech Republic] mistake was sic regulation and protection for sharehold- failing to develop tighter [securities] su- ers could be provided through the company pervision and regulation in the period law. The regulations should be very strict after voucher privatization western type rules for the companies that will be publicly traded on the stock exchange. For ties] supervision and regulation in the period mass privatization companies the regulations after voucher privatization. We still had no could be from the corporate law. We would IPOs [initial public offerings]. But I do not separate from those two thousand [mass think that this is the outcome of voucher privatization] companies the hundreds of privatization itself, but the outcome of bad, potentially publicly listed companies. Then non-existent regulation in the period after we could have very strict regulation for the voucher privatization. In the mid-nineties we publicly listed firms and more relaxed regu- saw several financial scandals as a result of lation for all of the others. I think this may be this failure to regulate. Since that time we an approach that our colleagues [from South- have established the Czech Security Commis- eastern Europe] may want to examine as an- sion which was established almost exactly other approach to the question of regulation five years later than was necessary. There are and the relationship between mass privatiza- many other problems we are working on such tion and capital market development. as disclosure, accounting standards, corpo- rate governance, and trade reporting. I would Finally, Mr. Kachniewski made a very good say the lesson we learned was that tight se- point about potential integration of capital mar- curities regulation should have been intro- kets across the region and the need for more stan- duced much earlier and this is what I would dardized regulation as follows: recommend to our colleagues from Southeast- A comment on European regulations. This ad- ern Europe. dresses the question of over-regulation and regulatory arbitrage on-going to various mar- Marco Simoneti, Executive Director, CEEPN, kets to find a place that is less regulated. Eu- Slovenia: ropean legislation gives us [the] possibility In our countries we often have a set of laws that the markets will be harmonized. At a that are not consistent because they were done minimal level it will mean a much greater through different aid schemes. Thus you have, degree of harmonization of laws throughout for example laws based on an U.S. Securi- the region. I do not refer only to those coun- tries that may be members of the European Basic regulation and protection for share- Union in the nearest future, but also to the holders could be provided through the others [in Southeastern Europe] because it’s company law. quite important to say to investors that we have already incorporated the provisions of ties law that conflicts or overlaps confusing- EU directives concerning disclosure. It’s a ly, with the German Company law. Then there kind of standard. Thus, even those markets Partners for Financial Stability Institutional Gaps: June 2000 Conference Proceedings 7 [Southeastern Europe] that may not join the Poland and in Hungary we failed to produce EU in the near future, could benefit from a market. So this question of the optimal lev- adopting EU standards. el of regulation as well as the methods of privatization needs to be carefully considered. In response to some of the discussion about the optimal level of regulation, George Prohasky, An Albanian Delegate also agreed with Mr. Si- Chairman of the Sofia Stock Exchange, Bul- moneti that a two-track approach to regulation garia related the Bulgarian experience, which may be worth exploring as an alternative to strict started with non-existent securities regulation and regulation for all companies. His comments were now has very strict regulation and related costs. as follows: His comments were as follows: I wanted to [make] some comments. I would like to agree with Mr. Simoneti that maybe I was just thinking that probably we [Bulgar- it’s more sensible to adopt this dual approach ia] really might be over regulated because, because in transitional economies you could for example, even for a private placement you create two different markets. One would be need to file a prospectus to the Security Ex- with high standards for IPOs, for privatiza- change Commission in Bulgaria. Also, I tion’s made by IPOs and with the name of would be interested to hear what other coun- other quite big companies to issue shares and tries have adopted the concept of strictly reg- to acquire capital. And this other segment ulated publicly traded company which has would be connected somehow with mass been incorporated in the legislation, because privatization and dispersed ownership. And our latest law from last year especially treats then you need market just for consolidation the publicly traded company as a special type of control and you could adopt a more liberal of company. And actually, if you are a pub- approach to this segment. licly traded company, you register with the SEC and then you come on the different leg- islation, not the normal commercial code but INSURANCE & PENSION you move to the securities law and there the criteria are much stricter for protection of mi- To accommodate the interests of the seminar par- nority shareholder rights…. So I don’t know, ticipants we merged the pension and insurance maybe it’s an interesting concept what Mr. panels into one large panel discussion. The pen- Jerzek said, that the cost of regulation and sion section of the panel was composed of an the level of regulation are something differ- excellent mix of pension reform experts (Rober- ent. to Rocha, World Bank, Juan Yermo, OECD, Dusan Kidric, Slovenia, and Tibor Parniczky, The question is whether all other [countries] Chief Pension Regulator, Hungary). regulations is not that high, but as we have experienced all these pyramids and the fail- Pension reform has proceeded unevenly across ure of the unregulated trading in the first half the CEE countries. Some countries are quite ad- of the nineties, we decided to go to the other vanced in implementing pension reforms that in- extreme in a sense. And unfortunately, our clude the development of fully funded private trading is very low. But I don’t think it is be- pension programs while others are just beginning cause of the lack of regulation. It’s because with basic legislation. Poland and Hungary are of [a] number of other things. Primarily, be- in the advanced group while the Czech and Slo- cause of the way the privatization was done vak Republic are making good progress on the here in Bulgaria. And, because none of the legal framework. Slovenia has Pillar I and II in very big companies were privatized through place and is amending the law to implement Pil- public listings, which has been the case in lar III. The Baltic States are a mix, where some Partners for Financial Stability Institutional Gaps: June 2000 Conference Proceedings 8 laws are in place and implementation has pro- nical assistance, policy dialogue, many stud- ceeded. ies, and also some guidelines. Some of these guidelines include: The need for very strict The discussion about pension reforms focused on licensing procedure to protect consumers some of the basic issues of design. The discus- from failures. The second principle is the de- sion also focused on regulatory issues and a model velopment of compulsory insurance like was suggested on unified regulation or regula- motor vehicle liability insurance. A third prin- tion of banking, securities, pension and insurance ciple is the development of appropriate con- under one institutional roof rather than separate tract law that is so important for the trust of institutional bodies. Hungary currently has a uni- consumers. A fourth principle is to define the fied regulatory body. In addition some interest- taxation of insurance products. The last prin- ing discussion about the role of pension funds in ciple is the need to develop private pension the development of the capital market and the lim- reform in an appropriate regulatory frame- its of good assets for these funds to invest in was work. This is a great booster for life insur- touched upon by several participants. ance markets. This region will always be of great importance for the OECD and we are The discussion on insurance benefited from a mix ready to launch other kinds of further coop- of practitioners (Kalman Mizsei, AIG Insur- eration especially through the East-West ance, David Lewis, Chief Actuary of the Gov- Management Institute. ernment Actuary’s Department in London) and experts (Cecile Vignial, OECD) and a regu- A Delegate from the Ministry of Finance of lator (Laszlo Asztalos, Insurance Regulator, Macedonia posed three questions to Laszlo Asz- Hungary). Much of the discussion centered on talos, former Chief of Insurance Regulation of developing best practices for insurance, consumer Hungary. Her questions were as follows: protection and better regulation. My first question is about the EU directives Cecile Vignial of the OECD outlined some of for insurance. You stated that you started with the key obstacles facing Central and Eastern Eu- the insurance reform in Hungary fourteen rope in the development of insurance markets years ago and that you have started with the while outlining OECD principles for addressing negotiation for association with the EU in the the lack of regulation and liberalization of insur- early nineties. Can you tell us how compli- ance markets in the region. Briefly her comments ant are your regulations with EU directives were as follows: and how advantageous or disadvantageous it is for full accession of Hungary into the EU? I would like to address the obstacles to the development of the insurance market. First, Secondly, what about the incentives you give Central and Eastern Europe lacks an insur- to foreign investors and to foreign insurance ance culture. Another obstacle is mistrust of companies to invest in the insurance indus- financial institutions. Previously insurance try? This is very important for the Republic was seen more as a tax and today its role is of Macedonia currently. often still not well understood. Another ob- stacle is a lack of know-how. I want to focus Thirdly, can you explain a little bit more about on the way OECD tackles the issue of insur- the supervisory function in Hungary, how it ance market development and the issue of is organized in Hungary, especially the on- regulation. site examinations, from the point of view and in terms of the establishment of the body and To assist countries to upgrade their regula- the hiring of staff, training of staff, computer tions, the OECD has developed a lot of tech- and so on? Partners for Financial Stability Institutional Gaps: June 2000 Conference Proceedings 9 Mr. Asztalos answered the questions in detail and terest. This is why we decided to have as large the PFS program subsequently received a request a volume as possible with investments in for assistance from the Macedonian Ministry of stocks or financial instruments other than Finance to learn more about Hungarian insurance government bonds. We also terminated the regulation experience. whole [old] system. There is no switching in the Polish system. You cannot switch from In the area of pension reform several perspec- the old to the new. The old does not exist any tives were discussed about the design of pension more for people born after 1948. So for the systems as well as the regulation of pensions and older people no reform at all; for younger the problems encountered by pension funds seek- people, below fifty it is a very deep reform. ing to invest in good domestic assets. A few of the more interesting comments are highlighted Tibor Parniczky, Chief Pension Advisor, Hun- below: gary: We implemented our pension system two Roberto Rocha, World Bank: years ago and the final stage in the legisla- Full three pillar systems have been passed and tion was that merger of the supervisions of are being implemented in Hungary and Po- capital market banking, insurance and pen- land, which are the two pioneers. Full three sions in Hungary. This will give, higher stand- pillar systems have been passed and are to be ards to pension funds because they will be implemented in Croatia, Latvia and Mace- compared to banks, investment funds and donia. First and third pillar systems without other financial institutions in one building. a second pillar, a mandatory pillar have been We regard it as a challenge or an opportunity passed and are going to be implemented in to improve the capacities of the Hungarian Slovenia; they exist already in the Czech Re- pension funds. The mandatory pension funds, public. And multi-pillar systems are under could not invest abroad in 1998. Now they elaboration or discussion and consideration can invest 10% of their assets abroad. What in a number of other countries in the region we found during the 1998 stock exchange as well, such as Romania and Slovakia. The crisis in Hungary was that it was a good test. legal structure of the systems that we see to- The pension funds of basically conservative day involving the regions is not the same. investors and over 75% of their investment There are variations from country to coun- is in Hungarian government bonds and the try. The supervision agencies are young, they minor part to stocks and investment funds. need to learn their work better, a capacity has What we found in 1998 was that the new to be built up. There is also always the ques- money which went into the pension funds, tion of whether supervision should be alone again, they did not buy stocks but rather it or integrated. There is a movement, I would was invested it again in government bonds not say there is a trend in the world, but there or investment funds. So for that period the are more and more countries [that] are inte- ratio of government bonds and other types of grating their supervisions. Whether this is investment were higher than for stocks. good or bad, I think the jury is still out.

Marek Gora, Poland: CONCLUSION In Poland our decision was to focus on in- come allocation. Having the system focus on In summary, EWMI found that the conference income allocation creates clear incentives for facilitated a sound exchange of ideas between the the people to participate in the system. You CEE experts, donors and OECD experts on the pay the money in, money brings profits and panels and the participants from the CEE and SEE eventually you get the money back plus in- countries. In some cases, participants found com- Partners for Financial Stability Institutional Gaps: June 2000 Conference Proceedings 10 mon ground on issues such as banking privatiza- share the lessons learned of their financial sector tion or the optimal level of regulation for bank- reforms with counterparts in SEE countries who ing, securities, pensions and insurance. In other are beginning to develop and implement some of cases participants voiced disagreement on wheth- these same reforms. er mass privatization worked at all, and whether it did more harm than good to the development EWMI’s PFS team has used this conference as a of capital markets. To some extent the issue is springboard to develop projects, sub-grants and moot except in Bosnia Herzegovina and a few regional associations in order to attempt to ad- places where mass privatization programs may dress some of the needs revealed during the con- still be implemented. ference. EWMI has contacted the speakers and participants from the conference to follow up on Overall, it is clear that European Union acces- the issues discussed, and to ascertain how PFS sion is a powerful motivator for greater regional can work with them to address these issues. In standardization of all four financial sub sectors. addition to the positive responses from many in- In order to speed up the EU accession process, dividuals, there were a number of suggestions that the less developed countries in the group would have evolved into projects, such as the develop- like to avoid some of the EU accession problems ment of a joint project with OECD to create a encountered by their neighbors, and benefit from pension reform network in CEE. EWMI looks the lessons learned by the more developed coun- forward to continuing this ongoing exchange of tries. In the areas where the process of privatiza- information with counterparts in the region to tion is less developed, namely in pension and in- address the institutional gaps in the financial sec- surance reform, there is a desire to adopt a more tors of CEE and SEE countries, and to develop collective approach to these shared social issues. sub-grants, joint projects and other activities. The discussion also indicated that the majority of countries require assistance in implementing best practice methodologies across the four sec- tor areas addressed during the conference.

A clear message resulting from the conference was that opportunities for regional cooperation in financial sector reform will continue through- out the decade. It is the objective of PFS to turn these opportunities into effective reform in the four sectors. Also, the seminar reinforced the per- ception that experts from CEE countries seek to

FOR FURTHER INFORMATION ON PFS, PLEASE CONTACT:

Richard Guilford East-West Management Institute - Hungary Karoly korut 11 Europa Center Budapest, Hungary 1075 Tel. (36-1) 269-7888 Fax. (36-1) 267-3547

Partners for Financial Stability Institutional Gaps: June 2000 Conference Proceedings 11 CONFERENCE AGENDA

Thursday: June 8, 2000 Panel III - Pension Reform: Welcoming Address What are the preconditions for the development of Richard Guilford, Director private pension funds and international standards in Partners for Financial Stability Program CEE countries? How can the PFS program assist in East-West Management Institute, Inc. these reforms?

The PFS Program: Introductory Remarks Panel Speakers: William Frej, Mission Director Chairman: Prof. Marek Gora, Warsaw U. S. Agency for International Development, Poland Dusan Kidric, Head of the Department for Social Director (Designate), Office of Privatization and Eco- Analysis and Development, Institute of Macroeco- nomic Restructuring, Europe and Eurasia Bureau, nomic Analysis and Development, Ljubljana USAID, Washington, D.C. Tibor Parniczky, Chief Pension Advisor, Hungarian Financial Services Authority, Budapest Financial Sector Reform: Hungary’s Experience Roberto Rocha, World Bank, Lead Economist, Gyorgy Szapary, Advisor to the President, National Bank Budapest of Hungary

Friday: June 9, 2000 Panel IV - Insurance: What are the obstacles preventing the CEE countries Panel I - Capital Markets: from developing their insurance markets? How can the What further reforms are required in the development PFS program assist in these reforms? and regulation of these markets? What is the impact of globalization and European Union accession on the Panel Speakers: CEE/SEE/Baltic markets and the prospects for integra- Chairman: Kalman Mizsei, Budapest tion of these markets? How can the PFS program assist Laszlo Asztalos, Chief Advisor, Tolerancia Consulting in these reforms? Ltd., Budapest David Lewis, Chief Actuary, Government’s Actuary Panel Speakers: Department, London Chairman: Miroslaw Kachniewski, Secretary of the Cecile Vignial, Organization for Economic Co- Securities and Exchange Commission, Warsaw operation and Development, Paris Marko Simoneti, Executive Director, Central Eastern European Privatization Network, Ljubljana Presentation on EU Integration process and Tomas Jezek, Member of the Presidium, Czech Accession Related Actions Securities Commission, Prague David Daly, Delegation of the European Commission, Dr. Frigyes Harshegyi, Former Deputy President Budapest (International) , Budapest

Panel II - Banking: Review Panel What further measures should be taken to assist banking Chairman: Brian Hannon, Manager of Program sector reform? How can the PFS program assist in these Development, East-West Management Institute reforms? All Panel Chairmen (Messrs. Kachniewski, Gora, Miszei, and Kawalec) and Mr. Guilford Panel Speakers: Chairman: Stefan Kawalec, Chief Advisor to the Board, Bank Handlowy w Warszawie S.A., Warsaw Closing Remarks Jan Jansta, Executive Director, Bank relations, Richard Guilford, Director Deloitte & Touche, Bratislava Partners for Financial Stability Program, Charles Kovacs, Senior Advisor, Arthur Anderson, East-West Management Institute, Inc. Budapest Roberto Rocha, World Bank, Lead Economist, Budapest

Partners for Financial Stability Institutional Gaps: June 2000 Conference Proceedings 12 SPEAKER’S BIOGRAPHIES

Richard Guilford, Director, PFS Program, East-West Foreign Affairs. He holds a masters degree in economics Management Institute, Inc. from Trinity College and a bachelors degree in public ad- Mr. Guilford directs the EWMI PFS program. Prior to join- ministration also from the University of Dublin. ing EWMI, Mr. Guilford managed financial sector and other reform projects for the European Commission in Budapest since the early 1990’s. He is an investment banker with CAPITAL MARKETS PANEL many years of experience developing and managing sov- ereign and private sector business in Latin America, Eu- Chairman: rope and the Middle East for leading international invest- Miroslaw Kachniewski, Secretary of the Securities ment banks. He holds masters degrees in European Union and Exchange Commission, Warsaw Law (Leicester) and Business Administration (INSEAD). Mr. Kachniewski has served as Secretary of the Polish Se- curities Commission since January 1, 1999. In addition, William Frej, Mission Director, United States Agency for since 1995, he has been conducting research on financial International Development (“USAID”), Warsaw, Poland markets at the Warsaw School of Economics International and Director (Designate), Office of Privatization and Eco- Finance Department. Mr. Kachniewski also serves as Chair- nomic Restructuring, Europe and Eurasia Bureau, USAID, man of the Working Group on Enforcement and Exchange Washington, D.C. of Information of the Emerging Markets Committee of the Since 1997, Mr. Frej has served as Poland’s USAID Mis- International Organization of Securities Commissions. Pre- sion Director, managing a $1 billion program, primarily viously, he had been the Deputy Secretary of the Polish focusing on strengthening local governments, and the fur- Securities Commission and a counselor at the Ministry of ther development of competitive, market-oriented finan- Privatization. He holds a Ph.D in economics from the War- cial and private sectors. Prior to that position, Mr. Frej had saw School of Economics. been Director of Regional Housing and Urban Develop- ment Office for Central and Eastern Europe for USAID, Panel Members: and served in the same capacity in USAID offices for In- Marko Simoneti, Executive Director, Central Eastern donesia and the Philippines. In September 2000, Poland European Privatization Network (CEEPN), Ljubljana will graduate from USAID assistance and Mr. Frej will Mr. Simoneti, who holds a Ph.D in economics from Cornell become Director of the Office of Privatization and Eco- University, currently teaches courses on financial institu- nomic Restructuring, Europe and Eurasia Bureau in Wash- tions and corporate finance at the University of Ljubljana, ington, D.C. and acts as Executive Director of CEEPN. CEEPN was founded by Central and Eastern European countries to sup- Gyorgy Szapary, Advisor to the President, National Bank port economic transition in the region by providing chan- of Hungary nels for sharing experience, knowledge, and skills between Mr. Szapary has served as Advisor to the President of the the experts and institutions of various countries. Mr. National Bank of Hungary since 1999. Prior to that time, Simoneti has experience in all areas of economic reform in Mr. Szapary spent six years as Deputy President of that transition economies, with a particular emphasis on bank institution. He has been the International Monetary Fund’s sector restructuring, financial reform, small and medium (“IMF”) Senior Resident Representative in Hungary and enterprises and privatization issues. worked at the IMF in Washington, D.C. for 24 years, where his final position was Assistant Director of the Asian De- Tomas Jezek, Member of the Presidium, Czech partment. Securities Commission, Prague Mr. Jezek is an economist with years of economic reform David Daly, Delegation of the European Commission experience in the region. Having been involved in economic (“EC”), Budapest reform since 1964, Mr. Jezek has a unique perspective on Mr. Daly has been the head of the Political and Economic reform both prior to and throughout the transition period. Unit of the EC Delegation in Budapest since 1996. Prior to From 1990 to 1992, Mr. Jezek served as Minister of his current position, he was a European Union trade nego- Privatization of the Czech and Slovak Federal Republic. tiator to the European Agreements with Central and East- Between 1992-94, he served as Chairman of the Czech Fund ern European Countries. He has also been an auditor at the for National Property and as a Member of Parliament and European Agriculture Guidance and Guarantee Fund in the Chairman of the Budget Committee. Between 1996-98, Mr. Directorate General for Agriculture in Brussels. In addi- Jezek was Chairman of the Prague Stock Exchange. Since tion, he was an Executive Officer in the Irish Department 1998 he has been a Member of the Presidium, Czech Secu- of Agriculture and also served in the Irish Department of rities Commission, as well as serving on numerous boards

Partners for Financial Stability Institutional Gaps: June 2000 Conference Proceedings 13 and committees. He has also served as an advisor on British Airways/Speedwing in Hungary and Elliott Asso- privatization and capital markets development and regula- ciates, L.P. in New York. Additionally, he serves on the tion in Bosnia, Kazakhstan, Russia, Ukraine. Supervisory Board of Radio Bridge, LLC. Mr. Kovacs has been Director and Head of the Budapest office of the Dr. Frigyes Harshegyi, Former Deputy President Barclays Bank Group and Director of Corporate Finance (International) Hungarian National Bank, Budapest for Price Waterhouse. Prior to these positions, he spent al- As the Deputy President of the National Bank of Hungary most twenty years working internationally for Chase Man- from 1990 to 1997, Dr. Harshegyi was responsible for the hattan Bank where he was last Vice President and Man- country’s foreign debt and foreign exchange reserves man- ager of International Programs. agement. He was appointed as Chairman and Chief Ex- ecutive Officer of CIB Securities, Ltd., Budapest in 1999 Roberto Rocha, World Bank, Lead Economist, Budapest and was previously a Member of the Board of Central Eu- Mr. Rocha has worked at the World Bank for fifteen years, ropean International Bank Ltd., where he was Deputy Chief spending the last seven years as Lead Economist in the Executive Officer and General Manager of Capital Mar- Regional Office in Budapest. While in the Budapest of- kets. Mr. Harshegyi holds a Ph.D in Law from the Univer- fice, Mr. Rocha’s primary responsibilities have been the sity of Szeged. following: banking and capital market reform, enterprise reform, pension reform and macroeconomic assessment. In his work covering Hungary, Czech Republic, Slovak BANKING PANEL Republic and Slovenia, Mr. Rocha has published numer- ous articles and papers on financial sector issues in these Chairman: countries. Stefan Kawalec, Chief Advisor to the Board, Bank Handlowy w Warszawie S.A., Warsaw Mr. Stefan Kawalec has served as Chief Advisor to the PENSION REFORM PANEL Board at Bank Handlowy w Warszawie S.A., since 1994. Prior to joining Bank Handlowy, Mr. Kawalec worked in Chairman: the Polish Ministry of Finance as Director General-Chief Prof. Marek Gora, Warsaw Advisor to Deputy Prime Minister and Minister of Finance Professor Gora has been involved in the pension area for and Undersecretary of State. In addition, Mr. Kawalec over twenty years. After receiving his Ph.D from Warsaw served as the Chairman of the Supervisory Board of Bank School of Economics in the early 1980s, he has continued Pekao, S.A., Deputy Governor in the Board of Governors to conduct research and lecture there. In addition, he was for the European Bank for Reconstruction and Develop- instrumental in the design of the pension reform program, ment and Chairman of Interministerial Task Force on Debt Security through Diversity, which the Polish government for Environment Conversion of Polish External Debt. Mr. began implementing in January, 1999. In addition to his Kawalec has provided consultancy services on banking and work in Poland, Professor Gora has provided pension re- transition issues in numerous countries including Latvia, form advice in Macedonia and the Slovak Republic. He Ukraine and Bosnia. has also worked with the Directorate for Education Labor and Social Affairs at the OECD and is currently a Research Panel Members: Fellow at the William Davidson Institute at the University Jan Jansta, Executive Director, Bank Relations, Deloitte of Michigan. & Touche, Bratislava Prior to becoming the Executive Director of Bank Rela- Panel Members: tions at Deloitte and Touche, Mr. Jansta was the Senior Dusan Kidric, Head of Department for Social Analysis Executive Vice-President and Vice-Chairman of the Board and Development, Institute of Macroeconomic Analysis and of Directors of the VUB, A.S., the largest financial institu- Development, Ljubljana tion in the Slovak Republic. Previously, he worked as Head In addition to his current position as Head of the Depart- of the International Department at both the Ministry of Fi- ment for Social Analysis and Development, Mr. Kidric nance and the Office of the Prime Minister. In addition, serves as an advisor to the government, a member of the Mr. Jansta spent 18 years as the Head of Trade Finance and Social Economic Council of the Republic of Slovenia, and Foreign Exchange Department for the State Bank of as a member of the Expert Board of the Agency for Insur- Czechoslovakia in Bratislava. ance Supervision. His expertise lies in social development and social security, as well as social insurance and public Charles Kovacs, Senior Advisor, Arthur Anderson, financing. With such varied expertise in these areas, Mr. Budapest Kidric has served as an advisor on several projects in Mr. Kovacs currently acts as an Advisor to a number of Slovenia and provided papers for numerous conferences. organizations, including Arthur Andersen & Co, Kft. and

Partners for Financial Stability Institutional Gaps: June 2000 Conference Proceedings 14 Tibor Parniczky, Chief Pension Advisor, Hungarian Fi- ment of Social Security and other government departments nancial Services Authority, Budapest on the benefits and finances of the National Insurance Fund. Mr. Parniczky, who holds a university degree in software In addition, he has provided advice on private pension funds design and mathematics, has worked in the pension field in transition countries, such as Latvia and Lithuania. Prior since 1989. After serving as senior expert for Human Risk to taking his position as Chief Actuary, he served three years Management, Ltd., Mr. Parniczky became an Advisor to as an actuary in life insurance supervision. Previously, Mr. the Ministry of Finance and shortly thereafter, began his Lewis was an examiner for the Institute of Actuaries and tenure as Vice President to the State Private Funds Super- Chairman of the Joint Board of Examiners of the Institute vision of Hungary. Currently, Mr. Parniczky serves as Chief and Faculty of Actuaries. Pension Supervisory Counselor of the newly established integrated Financial Supervisory Authority of Hungary. As Cecile Vignial, Organization for Economic Co-operation one of the architects of the new system, Mr. Parniczky is a and Development, Paris frequent speaker at conferences and training programs con- Ms. Vignial is Administrator in the Insurance and Private cerning pension reform in the region. Pensions Unit of the Directorate for Financial, Fiscal and Enterprise Affairs of the OECD. She is in charge of the Roberto Rocha, World Bank, Lead Economist, Budapest activities of the OECD Insurance Committee with non- [See Banking Panel above] member countries. In her role as Administrator of the In- surance Committee, Ms. Vignial’s primary duty is to man- age the technical assistance and policy dialogue provided INSURANCE PANEL to non-members by the Organization in the insurance and private pension area. Her research focuses are regulatory Chairman: policy issues, and the promotion of related best practices. Kalman Mizsei, Chief Investment Officer for Central and Ms. Vignial has worked for 8 years at the OECD. She gradu- Eastern Europe, AIG Global ated in economics at the Institut d’Etudes Politiques de Paris Investment Corporation, Budapest and has a MSc in Economics from the London School of As Chief Investment Officer for Central and Eastern Eu- Economics. rope for AIG Global Investment Corporation since 1997, Mr. Kalman Mizsei, among his many other responsibili- ties, oversees the management of AIG’s insurance portfo- REVIEW PANEL lios in Central and Eastern Europe and serves as a member of the Supervisory Board of AIG’s Polish pension fund man- Brian Hannon, East-West Management Institute, Inc. agement company. Prior to taking his position at AIG, Mr. New York Mizsei served for two years as Chairman of the Hungarian Mr. Hannon is Manager of Program Development for the Export Import Bank Ltd. and Hungarian Export Credit In- East-West Management Institute, Inc. Prior to joining surance Ltd. In addition, Mr. Mizsei was Vice-President EWMI, Mr. Hannon was a principal in charge of Booz- for Economic Programs for the Institute for East West Stud- Allen & Hamilton’s privatization practice for Central and ies in New York, and served as a Board Member of Budapest Eastern Europe (CEE) and the New Independent States Bank and Advisor to the President of the National Bank of (NIS) of the former Soviet Union. Between 1991-92 he Hungary. was Director for CEE/NIS at the Center for International Private Enterprise of the U.S. Chamber of Commerce. From Panel Members: 1988-91 Mr. Hannon was Special Assistant to the Admin- Laszlo Asztalos, Chief Advisor, Tolerancia Consulting istrator of the U.S. Agency for International Development. Ltd., Budapest He also held trade policy and investment positions respec- As Chief Advisor of the Tolerancia Consulting Ltd. since tively with the U.S. Department of Commerce and the 1990, Mr. Laszlo Asztalos has extensive experience work- Overseas Private Investment Corporation. ing in insurance development. He served as the President of the Hungarian State Supervisory Authority of Insurance from 1992-2000. Mr. Asztalos has also served as Director at the Managing Research Institute and Head of the De- partment of Fiscal Policy, both of the Ministry of Finance.

David Lewis, Chief Actuary, Social Security, Government Actuary’s Department, London In his role as Chief Actuary in Social Security at the United Kingdom’s Government Actuary Department, Mr. Lewis provides advice to Ministers and officials at the Depart-

Partners for Financial Stability Institutional Gaps: June 2000 Conference Proceedings 15 ORGANIZER

EAST-WEST MANAGEMENT INSTITUTE East-West Management Institute, Inc. (EWMI) is a not- In 1993, working closely with Junior Achievement Inter- for-profit organization dedicated to promoting economic national, EWMI launched the Fundamentals of Market reform in developing and transition economies. EWMI Economy (FOME) program. This “senior achievement” assists countries in making their transition from planned to program educated adults throughout the region in the ba- free market economies by providing technical assistance sics of a market economy. in such areas as legal and regulatory reform, privatization, enterprise restructuring, capital markets development, and In 1993, EWMI expanded into local training activities by making grants to non-governmental organizations (NGOs). organizing a series of three- to six-month accounting train- ing courses in the Baltic countries, Russia, Ukraine, and Founded in 1988 by financier and philanthropist George . Overseen by Professor Adolf Enthoven of the Soros to assist legal and economic reform in Central and University of Texas at Dallas, these courses successfully Eastern Europe and the Soviet Union, EWMI has become trained over 10,000 accountants in the basics of Western an internationally recognized, multi-million dollar organi- accounting principles. zation. EWMI manages hundreds of highly skilled inter- national and local consultants who design state-of-the-art Current Activities economic reform programs, draft and implement laws, de- In 1995, EWMI was one of a select group of firms to be velop accounting standards, privatize collective farms, and awarded a multi-year, multi-million dollar “Omnibus Con- train government officials and judges. tract” from the United States Agency for International De- Since the fall of the Berlin Wall in 1989, the countries of velopment (USAID) to provide technical assistance to re- Central and Eastern Europe and the Newly Independent form efforts in the CEE/NIS. The first EWMI project un- States of the former Soviet Union (CEE/NIS) have been der this contract was launched in October 1995. Since that striving to achieve sustainable private sector economic time, EWMI has assembled hundreds of international and growth, which is possible only in an environment of mar- local professionals to plan and implement programs, in- ket oriented institutions and policies, and transparent com- cluding: Enterprise Restructuring in Hungary and Moldova, mercial laws and regulations. To establish such an envi- Land Reform and Privatization in Moldova, Accounting ronment, many countries have undertaken ambitious pro- Reform in Moldova, Legal and Regulatory Reform in grams of privatization, legal reform, enterprise restructur- Bosnia Herzegovina, Judicial Training in Albania and Ju- ing, and other economic initiatives. dicial Reform in Bulgaria. EWMI assists these efforts by working with government The following are just a few of EWMI’s achievements un- officials, private sector companies, NGOs and individual der these projects to date: citizens, targeting areas including commercial law reform, • The privatization of over 700 collective farms in financial sector legal and regulatory reform, accounting re- Moldova, resulting in over 2,000,000 individual land form, judicial training, and capacity building programs for titles being issued to new private farmers. privatization, enterprise restructuring and capital markets • The adoption of international accounting and auditing development. standards by the Republic of Moldova and the Federa- tion of Bosnia Herzegovina, and the implementation of EWMI offers expert services to meet the needs of emerg- these new standards by private enterprises. ing markets, and is dedicated to providing innovative solu- • The establishment of Securities and Exchange Com- tions to the challenges of developing economies. EWMI missions and the drafting and adoption of corporate and recognizes that market-oriented reforms and policies are securities legislation by the Federation of Bosnia possible only with strong local leadership and political sup- Herzegovina and Republika Srpska. port, and EWMI’s success in many countries is directly linked to its close collaboration with leading reformers. EWMI compliments its USAID-funded consulting activi- ties with its own programs and grants to local organiza- The Early Years tions. For example, EWMI manages an extensive USAID legal and regulatory reform project in Bosnia that is re- During its first five years, EWMI arranged internships for sponsible for drafting and implementing many commer- professionals from CEE/NIS countries in Western Europe cial and capital markets laws. EWMI supports this effort and the United States. Beginning in 1992, EWMI devel- through grants to the Law Center at the University of oped Junior Achievement (JA) programs and introduced Sarajevo Law School for commercial law training and the them throughout CEE/NIS middle schools and high schools. maintenance of a commercial law database and website.

Partners for Financial Stability Institutional Gaps: June 2000 Conference Proceedings 16