Transition Report 1998 Financial Sector in Transition

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Transition Report 1998 Financial Sector in Transition 3542 TR98 Cover 13/11/98 12:10 pm Page 2 Transition report 1998 Financial sector in transition Economic transition AlbaniaArmeniaAzein central and eastern Europe, the Baltic states rbaijanBelarusBosnand the CIS iaandHerzegovinaBProgress in transition ulgariaCroatiaCzec Economic performance Financial sector hRepublicEstoniaF in transition YRMacedoniaGeor giaHungaryKazakh stanKyrgyzstanLatvi aLithuaniaMoldova PolandRomaniaRus sianFederationSlova kRepublicSloveniaT ajikistanTurkmenist anUkraineUzbekist 3542 TR98 Chapter0a 13/11/98 12:17 pm Page i Transition report 1998 Financial sector in transition Transition report 1998 Financial sector in transition Chapter 1 Transition and volatility: a year of stresses and contrasts 1.1 Introduction 2 1.2 Political transition, economic governance and social stresses 3 1.3 The crisis in Russia 3 1.4 Key challenges of the coming years: building institutions and deepening reforms 5 1.5 Growth and volatility 7 1.6 The financial sector in transition 9 1.7 Conclusions and challenges ahead 10 Annex 1.1: The Russian crisis 12 Part I Progress in transition and economic performance Chapter 2 Progress in market-oriented transition 2.1 The year in transition 22 2.2 The dynamics of the next phase of transition 23 2.3 The transition indicators 25 2.4 General trends in transition 28 2.5 The key dimensions of transition 29 Annex 2.1: Legal transition indicators 39 Annex 2.2: Infrastructure transition indicators 44 Annex 2.3: Energy efficiency and greenhouse gas emissions 46 Chapter 3 Macroeconomic performance and prospects 3.1 Output and growth 49 3.2 Inflation 53 3.3 Public finances in transition 54 3.4 External balance 58 3.5 Real exchange rates and competitiveness 62 3.6 Prospects for 1999 – how vulnerable is the region? 65 Annex 3.1: From Asia to Russia – contagion and transition 71 Chapter 4 Cross-border capital flows 4.1 The volume and composition of capital flows 77 4.2 Foreign direct investment 79 4.3 Commercial bank lending, international bond finance and portfolio investments 84 4.4 Maintaining access, containing volatility – some policy options 86 4.5 Conclusion 88 Part II Financial sector in transition Chapter 5 Financial institutions and markets in transition economies 5.1 Financial systems in transition economies 93 5.2 Accounting for distinctive features 96 5.3 The instability of the financial sector 99 5.4 A look forward 101 5.5 Policy implications and conclusion 103 Chapter 6 Legal foundations for sound finance 6.1 Core principles of financial law 106 6.2 Progress in financial transition 110 6.3 Sound finance and transition: challenges for legal reform 114 6.4 Conclusion 116 Chapter 7 Performance of financial institutions: lessons from transition banking 7.1 Scale, financial performance and risk-taking in banking 118 7.2 Bank profitability: country factors, market power and ownership 123 7.3 Serving the customer in transition banking 127 7.4 An assessment of transition banking 128 7.5 Conclusion 129 Chapter 8 Promoting the stable expansion of banking 8.1 Resolving bank failures 132 8.2 Managing entry in banking 136 8.3 Bank privatisation and corporate governance 139 Transition assessments 8.4 Conclusion 144 for each country Since 1994, the EBRD has presented annual assessments of the transition for each country in its Transition Reports. These assessments have highlighted key developments and issues central to the process of transition in a wide range of areas, including: enterprises, markets and trade, financial institutions, fiscal and social safety net reform, and legal transition. This year, the format and contents of these transition assessments have been changed to provide greater compa- rability across countries and a stronger focus on the key transition challenges facing each country. The text discusses the main aspects of reform at the current stage of the transition process. The analysis is more topical and selective than in the past, in order to focus the attention on the most important developments and issues. The text is grouped into six broad dimensions of reform: liberalisation, privatisation, enterprises, infrastructure, financial sector, and fiscal and social sector. The key reform challenges facing the country are summarised at the beginning of the text. The assessment is complemented by a timeline of important historical events in the transition process. In order to provide a quantitative foundation for analysing progress in transition and to promote cross-country compara- bility, each transition assessment includes a data table. The table is grouped into the same six categories as the text. On the left-hand side of the table, “snapshots” provide an overview of selected institutional and legal arrangements as of October 1998. On the right-hand side, the time series data provide indicators of progress in transition within each category. The data presented in these assessments are by no means comprehensive and cannot give a complete account or precise measurement of progress in transition. Some entries, such as the exchange rate regime and the privatisation methods, are useful only for information and carry no normative content. Other variables may have normative content, but their evaluation may vary depending on different practical and theoretical interpretations. The data should be interpreted with caution as their quality varies across countries and categories. The data are based on a wide variety of sources, including national authorities, EBRD staff estimates, and other international organisations. To strengthen the degree of cross-country comparability, much of the data were collected through standardised EBRD surveys of national authorities. The technical notes at the end of this section provide definitions of the variables, along with country- specific qualifications. Selected economic indicators for each country Albania Armenia Azerbaijan Belarus Bosnia and Herzegovina Bulgaria Croatia Czech Republic Estonia FYR Macedonia Georgia Hungary Kazakhstan Kyrgyzstan Latvia Lithuania Moldova Poland Romania Russian Federation Slovak Republic Slovenia Tajikistan Turkmenistan Ukraine Uzbekistan 3542 TR98 Chapter0a 13/11/98 12:17 pm Page ii Contents Foreword . iv Executive summary . vi Acknowledgements . viii Chapter 1: Transition and volatility: a year of stresses and contrasts 1.1 Introduction . 2 1.2 Political transition, economic governance and social stresses . 3 1.3 The crisis in Russia . 3 1.4 Key challenges of the coming years: building institutions and deepening reforms . 5 1.5 Growth and volatility . 7 1.6 The financial sector in transition . 9 1.7 Conclusions and challenges ahead . 10 Annex 1.1: The Russian crisis . 12 Part I: Progress in transition and economic performance Chapter 2: Progress in market-oriented transition 2.1 The year in transition . 22 2.2 The dynamics of the next phase of transition . 23 2.3 The transition indicators . 25 2.4 General trends in transition . 28 2.5 The key dimensions of transition . 29 Annex 2.1: Legal transition indicators . 39 Annex 2.2: Infrastructure transition indicators . 44 Annex 2.3: Energy efficiency and greenhouse gas emissions . 46 Chapter 3: Macroeconomic performance and prospects 3.1 Output and growth . 49 3.2 Inflation . 53 3.3 Public finances in transition . 54 3.4 External balance . 58 3.5 Real exchange rates and competitiveness . 62 3.6 Prospects for 1999 – how vulnerable is the region? . 65 Annex 3.1: From Asia to Russia – contagion and transition . 71 Chapter 4: Cross-border capital flows 4.1 The volume and composition of capital flows . 77 4.2 Foreign direct investment . 79 4.3 Commercial bank.
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