This article is a summary of the author’s recently published book “Banking in
Central and Eastern Europe 1980-2006” and provides an overview of the history of
banking transition from communism to capitalism in 14 Central and Eastern European
countries (the former Soviet Union, Czechoslovakia, East Germany, Yugoslavia,
Belarus, Bulgaria, Croatia, the Czech Republic, Hungary, Kazakhstan, Poland,
Romania, the Russian Federation, Serbia and Montenegro, Slovakia, Ukraine and
Uzbekistan). The essential functions of credit institutions in the former socialist
economic system (monitoring and facilitation of plan fulfillment) are explained.
The comprehensive collapse of the former system triggered a sustained weakening
of the state structure. In most countries, the 1990s were a decade of major
banking upheavals, turmoil and reform. The turn of the millennium featured sector
consolidation, or was a culminating point of restructuring efforts. The first
years of the new millennium have generally featured calmer, stronger and more
open banking sectors than the 1990s. Two “banking reform waves” are distinguished,
salient features of which all countries (need to) run through in order
to mature. The first reform wave includes extensive liberalization measures and
initial limited restructuring and tightening efforts. The macroeconomic situation
temporarily stabilizes. But underlying distorted incentives favor the renewed accumulation
of bad loans and set the stage for new banking crises. Only the second
reform wave ushers in hard budget constraints, in-depth privatization and
“real” owners (which are mostly — but not exclusively — foreign direct investors).
Banking regulation and supervision improve substantially. Western European FDI
has come to dominate banking in all former socialist countries that have either
already become members of the EU or are candidates or have been given an official
“perspective” to (eventually) join the Union. Recently, dynamic catching-up
processes have gathered momentum in many countries. Against the background
of strong economic recovery and expansion, credit booms have unfolded, not
without considerable risks.