Banks In Transition Economies Research Articles

FOREIGN BANKS IN TRANSITION ECONOMIES IN THE CONTEXT OF THE GLOBAL CRISIS: CURRENT TRENDS, RISK PROFILES AND IMPACT SPECIFICITY ON SYSTEMIC STABILITY

Ponte Academic JournalJun 2019, Volume 75, Issue 6 FOREIGN BANKS IN TRANSITION ECONOMIES IN THE CONTEXT OF THE GLOBAL CRISIS: CURRENT TRENDS, RISK PROFILES AND IMPACT SPECIFICITY ON SYSTEMIC STABILITYAuthor(s): Fahri Murshudli ,Roman Kornyliuk, Erkin DilbaziJ. Ponte - Jun 2019 - Volume 75 - Issue 6 doi: 10.21506/j.ponte.2019.6.9 Abstract:Our paper investigates foreign banks impact on financial stability in transition countries during the boom-bust cycles, especially their contribution to the evolution and realization of systemic risk.The purpose of this study is to carry out theoretical pros and cons of foreign banks presence in post-soviet countries based on empirical evidence from their activity and risk profiles under different economic conditions and regulatory regimes. A comprehensive retrospective study of global bank capital entries into transition economies, reasons of foreign capital outflows and the dynamics of banks key financial indicators was carried out, as well as a comparative analysis of foreign versus local bank groups due to systemic financial sustainability.\\\\r\\\\nThe results of this study indicatethat foreign banks appeared more solvent during economic crises in transition countriesin comparison with local private banks, despite great financial losses and required capitalization. The differences in default levels and response to the crisis among foreign and local banks were found. Instead of cross-border contagion channel strengthening, foreign banks presence, higher customer loyalty and capital support from parent institutions reduced deposit outflows and smoothed the potential impact of financial instability during the crises. On the contrary, the need of modern early warning monitoring system of foreign banking still exists because of possible rise of concentration and potential non-financial risks related to geopolitical motives and strengthening of compliance requirements.\\\\r\\\\nMain findings of empirical analysis contribute to a deeper understanding of the ownership influence on the systemic risk formation in theCEE and post-soviet banking sectors during the previous booms and crises. Grounded on the empirical data analysis, important patterns in cross-border funding and systemic risk channels were found. It allows to forecast properlyfuture benefits and risks of foreign bank presence in transition countries for regulatory and business purposes. Download full text:Check if you have access through your login credentials or your institution Username Password

Development of the Banking System in Kyrgyzstan: An Historical Review and Current Challenges

Banking in transition economies differs from developing and developed economies with market system. This study aims to review development of the banking system in Kyrgyzstan since independence. The period under consideration is divided into five stages, each of which has a main distinctive aspect. Despite considerable achievements in last fifteen years the banking system still remains vulnerable to external shocks. Moreover, insufficient institutional infrastructure is one of the fundamental factors retarding further development of the banking system.

The Relationship between Foreign Banking and Credit Access: Panel Analysis Method

Abstract. After 1990, the crises in planned economies has resulted with accept of the free market system and disintegration of this country blocks. The transition economies are defined as process of approaching work to the free market system of markets. Privatization efforts especially in finance markets of transition economies have increased interest to these markets of foreign banks. From the studies concern with enter of foreign banks to the market show that there are both advantages and disadvantages. In this study, the relationship between the allocation of credit and the presence of foreign banks in transition economies examined for the period of 1995-2010. In the study panel data method is used. The aim of the study is examine aspects and effects between the presence of the foreign banks and the loans to the private sector. Also the effect of foreign bank on accessing to credit in transition economies examined in macroeconomic level. Findings obtained from the study empirical applications and theoretical supports from literature supports that when the existence share of foreign banks numerically and in the banking sector is examined, it is observed that foreign banks make the credit accessibility of the firms more difficult. Keywords: Transition economies, Access to credit, Foreign banking JEL Class.: P20, E51, G21

Cross-Border Takeovers and Efficiency of Acquired Banks in Transition Economies: An Observational Study on Ukraine

We investigate the impact of cross-border takeovers on target banks’ profitability, efficiency, and market share in Ukraine, an exemplar of a country with poor institutional quality. We rely on a combination of propensity score matching with the difference-in-difference methodology, and our main contribution lies in an additional sensitivity analysis that checks for the presence of temporary unobservable factors. Our results show that foreign investors have acquired Ukrainian banks with average efficiency and profitability, and that these indicators did not change significantly post-takeover. By contrast, foreign banks have targeted mainly large banks, and during the first two years following acquisition the targets’ loan market share and size even increased, whereas funding costs decreased effects that are robust for the presence of temporary unobservable factors. In line with Lanine and Vander Vennet (2007), we thus find that foreign banks are interested in increasing their market share rather than exporting their efficiency.

Central banking in transition economies: Estonia and Belarus

PurposeThe purpose of this paper is to consider the difference in the development of the central bank in two states in transition from communism to capitalism and from being parts of the Soviet Union to being independent states.Design/methodology/approachData and theoretical analysis were gathered from various sources in order to evaluate the approach to central banking taken by these two countries.FindingsSubstantial variations were found in the resulting monetary policies and rates of inflation which demonstrate the differences in the institutions developed and illustrate the importance of independence for the central bank.Originality/valueThe contrasting experience of Belarus and Estonia, both of which gained independence from the Soviet Union in 1991, provide examples of success and failure in this endeavor, thus providing valuable insight to those involved with transitioning economies.

From Reputation amidst Uncertainty to Commitment under Stress: More than a Decade of Foreign-Owned Banking in Transition Economies

The experience of transition economies (TEs) with foreign bank penetration has a time dimension and an organisational dimension that are intertwined. Before 1995, virtually all foreign bank entry in TEs took the form of greenfield subsidiaries set up by a foreign bank in the host country. From 1995 onward, foreign banks participated in government programmes to privatise large state-owned banks and eventually took control of these banks. Oftentimes, a foreign bank entered a TE initially as a greenfield subsidiary and, after acquiring a former state-owned bank, merged the two entities to create a large foreign-owned bank. This takeover and consolidation activity resembles financial mergers and acquisitions in many emerging market economies. What distinguishes the TE experience from foreign bank penetration in many other countries is the hybrid corporate culture of the resulting foreign-owned bank. Having a dominant market position, the foreign-owned bank is a blend of expertise in transaction-based banking from the parent and experience in relationship-based banking from the acquired bank. Thus, I characterise the resulting bank as a hybrid that combines the hard technical information and banking skills of the parent with the soft information about clients and expertise concerning the local business environment of the acquired bank.

How small are the banking sectors in central and Eastern European countries really?

PurposeThe purpose of this paper is to present an analysis of the size of the banking sectors in central and Eastern European (CEE) countries. The banking sectors' ability is focused to provide financial intermediation between savers and investors in the economy.Design/methodology/approachThe existing literature on banking in transition economies argues in unison that banking sectors in CEE countries are too small and do not provide sufficient levels of financial intermediation. In this paper, a common drawback of the existing measures used to indicate the size of CEE banking sectors is detected: they all relate the volume of bank intermediation to gross domestic product (GDP). It is argued that since transition economies have a low stock of financial wealth relative to economic activity, a more objective measure of the size of the banking sector is the ratio of bank assets to a proxy of the stock of financial wealth rather than to GDP.FindingsThere is evidence that the estimation of the size of the banking sectors relative to GDP produce downward biased measures for the ability of CEE banks to intermediate available financial resources. When the size of the banking sector is measured relative to financial wealth, the gap between the developed European Union banking systems and those of the CEE countries is not as severe as argued in studies based on the traditional approach of measuring the size of the banking system with respect to GDP.Practical implicationsUsing the downward biased measure of financial system development to stress the underdevelopment of the financial intermediation in CEE may produce misleading policy recommendations, e.g. recommendations in the direction of rapid financial system expansion by lowering barriers of entry for new banks. The authors' new measure presents an alternative that should be considered by policy makers in the design of measures promoting financial system development.Originality/valueThe paper challenges the existing consensus on severe underdevelopment of the CEE banking sectors. It presents a new approach of accessing financial system development in emerging economies.

Banking in transition economies: does foreign ownership enhance profitability?

This paper studies the relationship between foreign ownership and bank performance. A cross-section of 216 banks in transition economies in Central and Eastern Europe and Central Asia is used. In the analyses a continuous foreign ownership variable is applied. The results are checked by using a foreign ownership dummy variable. A negative relationship is found between foreign ownership and banks’ interest revenues and profitability, although overhead costs are negatively related to foreign bank ownership as well. The results are independent of countries’ GDP per capita and concentration in the banking sector. Evidence is presented for the existence of a home field advantage for domestic banks.

Quasi-Fiscal Operations of Central Banks in Transition Economies

This paper reviews issues associated with quasi-fiscal operations (QFO) of central banks in a sample of countries in Central and Eastern Europe and the former Soviet Union. The concern is the problem of transparency in fiscal and monetary accounts when the central bank undertakes quasi-fiscal operations and the government falls short of providing full coverage of fiscal operations. QFO can also jeopardize monetary policy designed to maintain price stability. A simple framework is developed to estimate the extent of QFO. In some cases, the magnitude of QFO is significant in indicating underestimation of fiscal deficit figures. We claim that the lack of transparency in fiscal accounts of transition countries warrants serious concern.

What drives credit dollarization in transition economies?

This paper provides an in-depth analysis of the use of foreign currencies in the lending activities of banks in transition economies. The impact of bank and firm variables on credit dollarization is studied in an optimal portfolio allocation model and estimated using new aggregate data for 21 transition economies for the period 1990–2003. Empirical results provide evidence that credit dollarization is the combined outcome of domestic deposit dollarization and banks’ desire for currency-matched portfolios beyond regulatory requirements. The effects of international financial factors and natural hedges are less robust across alternative specifications. The paper further discusses the role of regulations in affecting the impact of these factors on credit dollarization and calls for more developed domestic forward foreign exchange markets.

Political Interests and the Emergence of Commercial Banking in Transition Economies*

abstract This paper examines how interactions between government agencies and banking organizations led to the emergence of commercial banking in the Czech Republic and Hungary during the 1990s. We rely on interviews with bank managers at six large banks, government officers, and experts at other organizations to learn how actions based on different political ideologies shaped the banking field. We integrate prior research on institutional change, political interest, and transition economies to describe the emergence of commercial banking. Three important problems characterized commercial banking in the two countries: the disposal of bad loans, the privatization of banks, and the establishment of banking services. We argue that the solutions to these problems based on the changing political interests of organizational actors and regulators represent the phases of institutional development in commercial banking during the 1990s. Implications of our research are discussed regarding the political perspective of organizational fields in transition economies.

Strategies of foreign banks in transition economies

This paper examines the strategies of foreign banks in transition economies. An extreme high share of foreign banks characterizes theses banking markets. I outline different strategies of foreign banks, model their entry decision and provide an empirical analysis by estimating loan supply functions. The main finding is that foreign banks compete with domestic banks in the same market segments. Furthermore, foreign banks tend to follow long-term strategies and thus contribute to credit market stabilization. Contrary to conclusions in the general banking literature, foreign banking behavior is independent of the macroeconomic conditions prevailing in the foreign banks' country of origin.

Strategies of Foreign Banks in Transition Economies

This paper examines the strategies of foreign banks in transition economies. An extreme high share of foreign banks characterizes theses banking markets. I outline different strategies of foreign banks, model their entry decision and provide an empirical analysis by estimating loan supply functions. The main finding is that foreign banks compete with domestic banks in the same market segments. Furthermore, foreign banks tend to follow long-term strategies and thus contribute to credit market stabilization. Contrary to conclusions in the general banking literature, foreign banking behavior is independent of the macroeconomic conditions prevailing in the foreign banks' country of origin.

Online banking in transition economies: the implementation and development of online banking systems in Romania

Internet banking is one of the newest Internet technology applications, which promises multiple benefits both for the financial institutions and for clients. In the last five years a large number of banks have launched Web sites, offering online banking services. While the implementation and the functioning of these digital systems seem to be relatively smooth in the developed economies, the situation may be different in countries with economies in transition. The present paper investigates and analyses the present situation of online banking in Romania, and the appropriate strategies for the successful implementation and development of online banking services in the Romanian context.

Kyrgyzstan: Central Asia's Island of Democracy? by John s> Anderson (review)

588 SEER, 8o, 3, 2002 Anderson, John. Kyrgyzstan.CentralAsia's Island of Democracy? Harwood Academic Publishers, Amsterdam, I999. xvi + 107 pp. Notes. Tables. Figures.Bibliography.Index. 2 I.00; [ I 2.95. ALTHOUGH severalbooks have been published in the last decade concerning the independent statesof CentralAsia, there are very few that have a country specific focus. John Anderson's book on Kyrgyzstan's transition since the dissolution of the Soviet Union should therefore be regarded as a welcome and timely additionto thisfamilyof academic literature. The book isdividedinto fourchapters.The firstchapterprovidesthe reader with an overview of Kyrgyzstan's history with particular emphasis on the period since Russia'sinterventionin the region.The second chapterexamines Kyrgyzstan'stransition to democracy, the initial enthusiasm for democratic reform and the later tempering of such support that was accompanied by certain set-backs to the democratic process. The chapter illustrates the author's in-depth 'on the ground' knowledge of the ebb and flow of politics within the countryand, as such, is one of the greateststrengthsof the book. In this regard the author is particularlyprescient in identifying a down-turn in the democratization of the country, a trend corroborated by the recent presidential electoral process. Anderson moves from the political to the economic realm in the third chapter. This section details the precipitous decline of the national economy since independence and the deleterious impact upon the welfareof the population. The economic transitionis placed within the context of Kyrgyzstan'sformerintegrationin the Soviet systemand the difficultiesthis raised after independence was achieved. The countrywas confronted simultaneously with three major problems: the de-linking of its economy fromthe formerSovietsystem;the terminationof economic transfers from the centre; and the transitionfrom a command economy to one based on free market principles. One weakness of this section is its reliance on slightlyoutdated economic informationfor national production and poverty. However, thismay be more to do with the time delaybetween the manuscript being completed and the publication of the book, a common problem that must be addressed by the various publishing houses. The final chapter examines the securitychallenges that confront the country in the post-Soviet environment. Anderson identifies two major tasksfor the defense establishment : how to maintain a credible defense force in the context of economic decline and limited resourcesand how to manage its relationswith the major regionalmilitarypowers, namely, Russia, China and Uzbekistan. The book might have benefited from greater engagement with the burgeoningliteratureon democratictransitionsand consolidation, allowing a more comparativeperspectiveto be applied. Similarly,much could be gained by analysing Kyrgyzstan's economic transition in terms of its exit from a traditionalempire in which the political and economic unit were congruent and its entrance into a world system controlled in an altogether different manner by the United States. Doing so might have produced greaterinsight into the global regulatorymechanisms that Kyrgyzstannow has to abide by and the political and economic impact of these constraints. In fairness the author'sobjectiveis not to applya particulartheoryto the case of Kyrgyzstan, REVIEWS 589 but to give the reader an insider'sview of what has happened in the country since independence. To this end the author succeeds. However, an introduction and conclusion developing connections between the economic, political and securityaspectsexamined within the book would have improved such an account. Department ofPolitics J. GLENN University ofSouthampton Holscher, Jens (ed.). FinancialTurbulence and CapitalMarketsin Transition Countries. Macmillan, Basingstoke and London, and St Martin's Press, New York,2000. XX+ 197 pp. Index. ?45.oo. WE now think that we know more about the key determinants of successful transition.Very high on the list is the financial sector. In a marketsystemthe main systemicfunction of the financialsystemis to collect savingsfroma very large number of people, and with them to provide investment funds for somewhat smallernumbersof people and projects.As a necessary adjunctto this processfinancialintermediariesmake assessmentsof the creditworthiness of borrowers,and the viability of projects.They also monitor the progressof theprojectsand the loan repayments.Ifthe financialinstitutionsareincapable of providingthese servicesthen firmsare thrownbackon self-financeor interfirm loans. But even if there are functioning banks in transition economies, then it is important to remember that the financial system is inherently unstable, because it is driven by the profit motive. So regulation is required. But in addition it is necessary to recall...

Financial Turbulence and Capital Markets in Transition Countries by Jens s> Holscher (review)

REVIEWS 589 but to give the reader an insider'sview of what has happened in the country since independence. To this end the author succeeds. However, an introduction and conclusion developing connections between the economic, political and securityaspectsexamined within the book would have improved such an account. Department ofPolitics J. GLENN University ofSouthampton Holscher, Jens (ed.). FinancialTurbulence and CapitalMarketsin Transition Countries. Macmillan, Basingstoke and London, and St Martin's Press, New York,2000. XX+ 197 pp. Index. ?45.oo. WE now think that we know more about the key determinants of successful transition.Very high on the list is the financial sector. In a marketsystemthe main systemicfunction of the financialsystemis to collect savingsfroma very large number of people, and with them to provide investment funds for somewhat smallernumbersof people and projects.As a necessary adjunctto this processfinancialintermediariesmake assessmentsof the creditworthiness of borrowers,and the viability of projects.They also monitor the progressof theprojectsand the loan repayments.Ifthe financialinstitutionsareincapable of providingthese servicesthen firmsare thrownbackon self-financeor interfirm loans. But even if there are functioning banks in transition economies, then it is important to remember that the financial system is inherently unstable, because it is driven by the profit motive. So regulation is required. But in addition it is necessary to recall that external financial shocks, often propagated through the international currency markets, will periodically threatenthe stabilityof the system.Hence the need for nationallendersof last resort,inter-centralbankborrowingfacilitiesandprudentbutflexiblenational exchange rate, monetaryand fiscalpolicies. Transitioneconomies provide a wide rangeof models of how to shiftfroma monobank system to a two-tiered central and commercial bank system, and then to privatize the second, commercial bank tier. The global financial turbulence, originatingin EastAsia in 1997, provided a test of the robustness of the new systems, and exposed significant weaknesses in their design. Hollscher'sedited book of a I999 conferenceprovidesfourcase studiesof this test:forRussia(Semenkov);Poland(Polanski);the Czech Republic (Turnovec, with a supplementarypaper by Matousek and Traci);and Hungary (Torok). Each case study is accompanied by two short comments by discussants,and their inclusion gives the reader a feeling for the debates that must have attended the originalpresentations. The case studiesarepreceded by two keynote addresses,by Tomann on the role of institutions in transition economies, and by Herten and Holscher on the type of financialmarketsthat might best suit Central-EastEurope. There are also two finalpieces: a conferencewrap-upspeech by Frowen,and a short fourpage note on riskand hedgingby Battermannand Broll. Thus the book succeedsor failson the strengthof the case studies.They are a qualified success. The account by Semenkov is pacey and fluently written, 590 SEER, 8o, 3, 2002 but the concentration on 'who is to blame?'and 'whatto do?'should alertthe reader to the fact that while this must have made an excellent conference presentation,it is not the detailedforensicexamination one might have hoped for. The storyiswell told, but there are no novelties. The Polish case studyis a solid piece of scholarship.It emphasizes that the country was little affected by the international economic turmoil of the late nineties -what effectstherewere coming more throughthe realsectorof the economy thanthroughthefinancialmarkets.Throughout thepreviousdecade Poland had pursued, or been forced by internal opposition to pursue, gradualist transition policies. The relatively stable nature of its economic institutions,and especiallythose in thefinancialsector,played a keypart in its avoidance of problems. Taken together, the papers on the Czech experience provide an interesting account of the failure of the Klaus government to appreciate how a market economy functions. Like a tyro general this government made the fatal mistakeof 'forminga view' about the field, without having seen it. Achieving an efficient functioning market system was a much harder task than they expected. These earlymistakeslost the Republic output, time and credibility, and although the latter can be recovered, the others cannot. It should be a salutarywarning for late starterslike Belarus. Restructuringand regulation are not optional extras. Hungary fared reasonably well, as one might have expected from the country with the most sophisticatedpre-transitionfinancial system. But even then the financial turbulence exposed failings in system design. Private ownershipturnedout to have only a weakimpact on banks'performance,and as Torokemphasizes,it is the qualityof the ownersas well as the qualityof the loan book that is important. Taken together...

Skill versus judgement and the architecture of organisations

All activities involve a combination of the exercise of skill and the exercise of judgment. This paper distinguishes these types of talent along three dimensions: the ease with which their exercise can be monitored, the delay before its effects are realised, and codifiability of the tasks involved. It then presents a two-period model of the allocation of multiple tasks within an organization. It shows that the incentives for bundling and separation of tasks within such an organization depend on the relative ease of monitoring of the two tasks, as well as on the extent of correlation between the talents they require. It demonstrates that organizations may rationally place “too much” emphasis on routine tasks, provided these reveal information about talents that may be valuable in non-routine tasks, and in spite of the fact that the incentives to perform the non-routine tasks well will thereby be blunted. The results are applied to the work of aid-giving agencies, to the role of banks in transition economies and to the structure of incentives within the economics profession.

Direct Inflation Targeting in Central Europe

This paper discusses perceived benefits and disadvantages of direct inflation targeting for economies in transition in Central Europe. It examines the experience of net inflation targeting in the Czech Republic and of CPI forecast targeting regimes in Poland, providing specific suggestions for enhancing transparency of monetary policy. Inflation targeting is compared with exchange-rate pegging and is viewed as a superior solution for facilitating the monetary convergence of central European EU candidates to the inflation level prevailing in the eurozone. Other benefits of inflation targeting for central banks in transition economies are described as well. Journal of Economic Literature, Classification Numbers: E31, E52, P33. 5 figures, 2 tables, 22 references.

Comment on Banking in Transition Economies: Does Efficiency Require Instability

Transition economies have been a very interesting laboratory of financial reform. While obviously some differences existed among these economies at the start of transition, there was, in terms of financial sector development, much commonality. Under central planning, banks were the passive recipients of household savings, since bank deposits were often the only asset households could hold. Banks were mere accounting agencies, keeping track of the financial transactions that resulted from planned allocations. Normal banking skills, including risk management, project screening and selection, and a diversified menu of instruments to attract savers, were absent. The other components of a financial system were rudimentary, and in most countries nonbank finance simply did not exist. Initially, one bank performed all lending. Early attempts at market reform in most countries saw this divided into a two-tier system, comprising one central bank and a number of commercial banks, often specialized by sector. But this had very little effect on banks' behavior. Since then, transition economies have pursued quite different financial reform paths, and have adopted and experimented with a range of reform approaches for the financial sector, with, at least at face value, quite different outcomes. There is thus potentially much to be learned from the outcomes for financial reform in these countries and in general. So far, much of the learning has been done without the benefit of an analytical model. This paper is therefore very useful as it can help provide this and thus guide the analysis of outcomes and further policy making. The paper is one of the first attempts to apply some of the recent models of financial intermediation for developed countries to transition economies and as such it provides much insight. My comments on the paper are in three parts: the description of the banking systems and reform in transition economies; the model, its assumptions, and applicability to transition economies; and the lessons for policy and empirical work. The descriptive part of the paper provides useful background for the issues at hand. It provides the macroeconomic, financial, and institutional development context in which financial reform took place. It highlights the unique linkages between enterprise restructuring and financial reform in transition economies, and the large differences in macroeconomic developments among countries since the onset of transition.

Soft Budget Constraints and Banking in Transition Economies

In this paper, we focus on soft budget constraints for enterprises that are financed by banks in transition economies and analyze several theoretical models as variants of a basic sequential model. Despite various transmission channels for soft budget constraints, all models share the same sequential structure in which soft budget constraints arise due to the endogenous lack of credibility for liquidating a project instead of refinancing it. All also have the same property that refinancing is optimal ex post for the decision maker. Hence, mechanisms for hardening the budget constraint require endogenously restoring the credibility of liquidation.J. Comp. Econom.,March 1998, 26(1), pp. 18–40. SITE, Stockholm School of Economics, and CEPR, Box 650, S-11383 Stockholm, Sweden; and ECARE, Université Libre de Bruxelles, and CEPR, 39 av. Roosevelt 1050, Bruxelles, Belgium.