Bank Competition and Financial Transition in Central European Countries : the Impact of Foreign Banks During the first part of the 1990s Central European countries encouraged the creation of new private banks in order to increase competition and to improve the quality of financial intermediation. Lacking any conclusive results, they called upon capital from Foreign banks during the second half of the 1990s. Foreign banks, particularly those in Hungary where they are numerous, generated competition and contributed to the increase in the efficiency of the sector. This competition resulted in « price effects », such as the reduction of spreads, and also « qualitative effects » such as the usage, by local banks, of practices and services existing in developed countries. The foreign contribution cannot be understood in a neo-classical perspective of perfect competition. Indeed, adding new competitors similar to local banks is insufficient to improve the quality of financial intermediation. Former banking practices have been drastically changed through the innovations of foreign banks. By introducing new methods, new ways of working, foreign banks have helped to launch a process of dynamic competition resulting in an improvement in the quality of the banking system in Central Europe.