Central European banks and stock exchanges:: Capacity-building and institutional development

Abstract

This paper analyses capacity building and institutional development in the banking and capital market sectors of formerly planned economies in Central and Eastern Europe. While the existing literature mostly addresses the specific situation of banks and capital markets in a particular country or for a few countries of the region only, this paper identifies common institutional and structural problems of all 10 Central European applicant countries for EU membership. Given the strong tendencies towards imprudent banking, the small size of the financial markets, asymmetric information, inadequate capitalization and insufficient supervision, privatization of the large former state owned banks may require strong equity involvement of foreign banks and international institutions like the European Bank for Reconstruction and Development (EBRD), which reduce the risk for foreign investors by providing guarantees and securing more reliable banking policies of the respective governments.