A traditional banking model in a CEEC (Central and Eastern
European Country) consisted of a central bank and several purpose banks,
one dealing with individuals' savings and other banking needs, and
another focusing on foreign financial activities, etc. The central bank
provided most of the commercial banking needs of enterprises in addition
to other functions. During the late 1980s, the CEECs modified this
earlier structure by taking all the commercial banking activities of the
central bank and transferring them to new commercial banks. In most
countries the new banks were set up along industry lines, although in
Poland a regional approach has been adopted.
On the whole, these
new stale-owned commercial banks controlled the bulk of financial
transactions, although a few 'de novo banks' were allowed in Hungary and
Poland. Simply transferring existing loans from the central bank to the
new state-owned commercial banks had its problems, since it involved
transferring both 'good' and 'bad' assets. Moreover, each bank's
portfolio was restricted to the enterprise and industry assigned to them
and they were not allowed to deal with other enterprises outside their
remit.
As the central banks would always 'bale out' troubled state
enterprises, these commercial banks cannot play the same role as
commercial banks in the West. CEEC commercial banks cannot foreclose on a
debt. If a firm did not wish to pay, the state-owned enterprise would,
historically, receive further finance to cover its difficulties, it was a
very rare occurrence for a bank to bring about the bankruptcy of a
firm. In other words, state-owned enterprises were not allowed to go
bankrupt, primarily because it would have affected the commercial banks,
balance sheets, but more importantly, the rise in unemployment that
would follow might have had high political costs.
What was needed
was for commercial banks to have their balance sheets 'cleaned up',
perhaps by the government purchasing their bad loans with long-term
bonds. Adopting Western accounting procedures might also benefit the new
commercial banks.
This picture of state-controlled commercial
banks has begun to change during the mid to late 1990s as the CEECs
began to appreciate that the move towards market-based economies
required a vibrant commercial banking sector. There are still a number
of issues lo be addressed in this sector, however. For example, in the
Czech Republic the government has promised to privatize the banking
sector beginning in 1998. Currently the banking sector suffers from a
number of weaknesses. A number of the smaller hanks appear to be facing
difficulties as money market competition picks up, highlighting their
tinder-capitalization and the greater amount of higher-risk business in
which they are involved. There have also been issues concerning banking
sector regulation and the control mechanisms that are available. This
has resulted in the government's proposal for an independent securities
commission to regulate capital markets.
The privatization package
for the Czech Republic's four largest banks, which currently control
about 60 percent of the sector's assets, will also allow foreign banks
into a highly developed market where their influence has been marginal
until now. It is anticipated that each of the four banks will be sold to
a single bidder in an attempt to create a regional hub of a foreign
bank's network. One problem with all four banks is that inspection of
their balance sheets may throw up problems which could reduce the size
of any bid. All four banks have at least 20 percent of their loans as
classified, where no interest has been paid for 30 days or more. Banks
could make provisions to reduce these loans by collateral held against
them, but in some cases the loans exceed the collateral. Moreover,
getting an accurate picture of the value of the collateral is difficult
since bankruptcy legislation is ineffective. The ability to write off
these bad debts was not permitted until 1996, but even if this route is
taken then this will eat into the banks' assets, leaving them very close
to the lower limit of 8 percent capital adequacy ratio. In addition,
the 'commercial' banks have been influenced by the action of the
national bank, which in early 1997 caused bond prices to fall, leading
to a fall in the commercial banks' bond portfolios. Thus the banking
sector in the Czech Republic still has a long way to go.
In
Hungary the privatization of the banking sector is almost complete.
However, a state rescue package had to be agreed at the beginning of
1997 for the second-largest state bank, Postabank, owned indirectly by
the main social security bodies and the post office, and this indicates
the fragility of this sector. Outside of the difficulties experienced
with Postabank, the Hungarian banking system has been transformed. The
rapid move towards privatization resulted from the problems experienced
by the state-owned banks, which the government bad to bail out, costing
it around 7 percent of GDP. At that stage it was possible that the
banking system could collapse and government funding, although saving
the banks, did not solve the problems of corporate governance or moral
hazard. Thus the privatization process was started in earnest. Magyar
Kulkereskedelmi Bank (MKB) was sold to Bayerische Landesbank and the
EBDR in 1994, Budapest Bank was bought by GE Capital and Magyar Hitel
Bank was bought by ABN-AMRO. In November 1997 the state completed the
last stage of the sale of the state savings bank (OTP), Hungary's
largest bank. The state, which dominated the banking system three years
ago, now only retains a majority stake in two specialist banks, the
Hungarian Development Bank and Eximbank.
The move towards, and
success of privatization can be seen in the balance sheets of the banks,
which showed an increase in post-tax profits of 45 percent in 1996.
These banks are also seeing higher savings and deposits and a strong
rise in demand for corporate and retail lending. In addition, the growth
in competition in the banking sector has led to a narrowing of the
spreads between lending and deposit rates, and the further knock-on
effect of mergers and small-hank closures. Over 50 percent of Hungarian
bank assets are controlled by foreign-owned banks, and this has led to
Hungarian banks offering services similar to those expected in many
Western European countries. Most of the foreign-owned but mainly
Hungarian-managed banks were recapitalized after their acquisition and
they have spent heavily on staff training and new information technology
systems. From 1998, foreign banks will be free to open branches in
Hungary, thus opening up the domestic banking market to full
competition.
As a whole, the CEECs have come a long way since the
early 1990s in dealing with their banking problems. For some countries
the process of privatization still has a long way to go but others such
as Hungary have moved quickly along the process of transforming their
banking systems in readiness for their entry into the EU.
Arfan Ul Haq is an Asian author. He writes articles about business, economics, banking and finance
Article Source: http://EzineArticles.com/6714954
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