AN INNOVATIVE PACKAGE FOR FINANCIAL SECTOR REFORMS IN EASTERN-EUROPEAN COUNTRIES

This essay sees reform of the financial sector as the key to successful transition to a market economy. The analysis generates the following practical proposals. First, the central bank should be endowed with strong independence, accumulating the deposit-insurance, supervisory, and lender of last resort functions. Second, the central bank should host the payments system and impose gross settlement without credit lines in excess of required reserve balances. It should also impose suitable capital requirements for credit exposure. Third, universal banking should be accepted to improve corporate governance and to make a well-functioning capital market less necessary. Fourth, to reduce moral hazard and provide maximum flexibility, an innovatory multi-tier bank licensing is proposed. Fifth, when government cannot borrow from the central bank, borrowing will contribute to the development of securities markets, whose other two pillars are privatisation and mortgage financing. To alleviate the burden on public finance and maximise liquidity perpetuals, assorted with suitable calls and puts, are proposed.