From State to Foreign Ownership: The Banking Sector in Eastern and Central Europe

It is nearly two decades since economic transformation of the former socialist economies of Eastern and Central Europe and the Baltic states (ECE) began and today most of these countries have joined the European Union (EU). In this paper we analyze characteristics of the banking sector that emerged through the arduous transition process. In many aspects, this sector is similar to that of other countries of the EU but it also varies in significant ways. The very high share of foreign bank ownership is the hallmark of ECE banking. Despite the relative rapid restructuring of the old socialist enterprise financing system, so far the financial depth of ECE countries has remained significantly below the level of other EU members and also below the average of developing countries at a similar income level. Further government policy measures need to address supply and demand conditions so that access to credit is improved both for the aggregate economy and particularly for the small and medium scale sectors.