Financial Market Reform in Transition Economies

Abstract

FINANCIAL modern tion of the monetary market former reform sector socialist plays is economies, vital in attracting for the because development committed of the capital and pivotal successful and role in that facilitattransithe FINANCIAL tion of the former socialist economies, because of the pivotal role that the modern mon ary secto plays in a tra ting committed capital and in facilitating enterprise. Yet financial reform, represented by deep asset markets and modernised banking institutions, remains far from complete in Russia and the other Elast European countries. Monetary policies are unpredictable and there is inadequate infrastructure to define and support regularised trading in financial instruments. Key factors in a mature financial system, such as availability of credit, efficient banking services, and secure contract law, are frequently absent As a consequence, real investment (especially by foreigners) is being seriously affected by the presence of irregularities in trading between various financial assets, and an unstable and frequently unworkable banking system. For instance, Alexander Khandruyev, Deputy Chairman of the Russian central bank, acknowledged in January 1995 that there were signs of a 'banking crisis' in the wake of the Black Tuesday rouble crisis of October 1994 when the currency slumped by 27 per cent against the US dollar (to 3,926 roubles per dollar) in a single day. Following this, the bank attempted to impose several control measures: a rise in the refinancing rate, a 30 per cent cut in banks' open currency positions, and heavy raising of commercial banks' reserve requirements. In August 1995, the interbank market was frozen for several days, banks were shut and interest rates shot up to 1,000 per cent Policy in these countries therefore needs urgendy to address the operation of banks and financial markets. Many banks in the transition economies are unprofitable and are not yet functioning effectively in the role of allocating credit; they are still largely state owned, and the majority of assets are still controlled by banks created in the communist era. For example, 70 per cent of bank assets in Hungary are concentrated in four state banks; in Poland only diree of nine banks proposed for privatisation in 1991 have been sold off; and Hungary's three laigest banks (Budapest Bank, Magyar Hitel Bank, Kereskedelmi Bank) are still not privatised. In addition, financial services markets, such as those for company shares, insurance, bonds, bills of exchange, derivatives and foreign currency, suffer from inadequate