Developments and Problems of the Banking Systems in Central Europe

Abstract

After 10 years of transition in Central and Eastern European Economies, restructuring and privatization have strengthened the banking system in Hungary and Poland more than that in the Czech Republic. The three banking systems continued to receive sizable foreign capital inflows, but exposures to Russia uncovered the fragilities for the largely state-owned Czech banks and have prompted the authorities to re-launch the bank privatization process. Capital inflows supported strong loan growth in Hungary and Poland, while competition has led to declining profits and a search for higher yields through lending to the small and medium-sized corporate and consumer segments. This three countries have strengthened their regulatory and supervisory frameworks, but significant challenge remain as they face the prospect of full capital account liberalization and contemplate joining the EU.