The traditional banking model of the CEECs (Central and Eastern European countries) consists of a central bank and several vocation banks, one to meet the needs of personal savings and other banks and the other to foreign countries. Focuses on financial activities in Eastern Europe. In addition to other characteristics, the needs of corporate commercial banks. At the end of the 1980s, the CEECs changed this initial structure by taking over all commercial banking operations from the central bank and transferring them to new commercial banks. New banks have been created alongside industry in most countries, but Poland has taken a regional approach.
Overall, these new and old commercial banks controlled most financial transactions, but in Hungary and Poland some “new banks” were allowed. The simple transfer of an existing loan from a central bank to a new state commercial bank was problematic because it involved the transfer of “good” and “bad” assets. In addition, each bank’s portfolio was limited to the companies and industries to which it was assigned and was not allowed to do business with other companies outside its authority.
These commercial banks cannot play the same role as Western commercial banks, as central banks always “bail out” troubled state-owned enterprises. CEEC commercial banks cannot seize debt. If a company does not want to pay, state-owned companies will historically receive more money to compensate for this difficulty. It was a very rare event for a bank to cause a business failure. In other words, state-owned enterprises were not allowed to go bankrupt. This was mainly because it affected commercial banks and balance sheets, but more importantly, the subsequent rise in unemployment may have resulted in high political costs.
What was needed was for the commercial banks to “clean up” their balance sheets, perhaps the government to buy out bad loans with long-term debts. The adoption of western accounting procedures may also benefit new commercial banks.
This situation for state commercial banks began to change between the mid to late 1990s, when the CEECs began to recognize the need for a vibrant commercial banking sector to transition to a market economy. However, there are still many issues to be resolved in this area. For example, in the Czech Republic, the government has promised to privatize the banking sector since 1998. Currently, the banking sector has many weaknesses. As competition in the money market intensifies, many small hanks seem to be struggling. This emphasizes their crater capitalization and the large number of high risk companies they are involved in. There were also problems with the regulation of the banking sector and the management mechanisms available. This led to the government’s proposal for an independent securities committee to regulate the capital markets.
The privatization program of the four largest banks in the Czech Republic, which currently manages around 60% of the sector’s assets, also allows foreign banks to enter highly developed markets that previously had little influence. It is expected that each of the four banks will be sold to a single bidder to build a regional hub for the network of foreign banks. One of the problems with the four banks is that the balance sheet inspection can cause problems and reduce the size of the offers. All four banks have classified at least 20% of their loans and have not paid interest for more than 30 days. Banks may be willing to reduce these loans with the collateral they hold, but in some cases the loans outweigh the collateral. In addition, bankruptcy law is ineffective, making it difficult to accurately determine the value of collateral. The possibility of canceling these non-performing loans was only granted in 1996, but even if this route were chosen, it would eat away at the bank’s assets and would be very close to the lower limit of the solvency ratio of 8%. In addition, “commercial” banks were influenced by the actions of national banks, with bond prices falling in early 1997 and the commercial bank’s bond portfolio shrinking. As a result, the Czech Republic’s banking sector still has a long way to go.
In Hungary, the privatization of the banking sector is almost complete. However, in early 1997 it was necessary to agree a national bailout with Postabank, the second state bank owned indirectly by the major social security institutions and the Post. This indicates a vulnerability in this sector. Besides the difficulties encountered at Postabank, the Hungarian banking system has changed. The rapid move towards privatization was due to the problems faced by state-owned banks, which the government failed to bail out and sacrificed around 7% of GDP. At this point, the banking system could have collapsed, and public funding could have saved the bank but not resolved the corporate governance and moral hazard issues. In this way, the privatization process began in earnest. Magyar Kulkereskedelmi Bank (MKB) was sold to Bayerische Landesbank and EBDR in 1994, Budapest Bank was acquired by GE Capital and Magyar Hitel Bank was acquired by ABN-AMRO. In November 1997, the state completed the final phase of the sale of Hungary’s largest bank, the State Savings Bank (OTP). The state that dominated the banking system three years ago now has only a majority stake in two specialized banks, the Hungarian Development Bank and the Eximbank.
The move and success of privatization can be seen on the bank’s balance sheet, which showed a 45% increase in after-tax profits in 1996. These banks also have higher savings and deposits, as well as loans to individuals. businesses and individuals. In addition, increased competition in the banking sector has resulted in narrowing spreads between lending and lending rates, as well as other spillover effects on mergers and closures of small banks. Over 50% of Hungarian banking assets are managed by foreign banks, which provide Hungarian banks with services like those expected in many Western European countries. Most of the foreign banks, mainly run by Hungary, were recapitalized after the acquisition and spent a lot of money on staff training and new IT systems. Since 1998, foreign banks have been free to open branches in Hungary, thus exposing the domestic banking market to full competition.
Overall, the CEECs have come a long way in solving banking problems since the early 1990s. In some countries the process of privatization is still far away, but in others, such as Hungary, the process of privatization. transformation of the banking system for entry into the EU is progressing rapidly.
