Designing Financial Systems In Transition Economies: Strategies For Reform In Central And Eastern Europe

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This collection examines the design of financial systems for central and eastern European countries engaged in the transition to market-based economies. It highlights the need for better approaches to measuring performance and providing incentives in banking and for financial mechanisms to encourage private-sector growth. Written by leading European and North American scholars, the essays apply modern finance theory and empirical data to the development of new financial sectors.Two broad themes emerge. The first is the critical relationship between reforms in the financial sector and in the real economy. Lending policies, which have a significant impact on business performance, need to discourage bad firm performance without prematurely liquidating potentially profitable enterprises. Conversely, the quality of firms influences the financial sector. If banks cannot find good credit risks, they cannot improve the quality of their portfolios. Until a critical mass of viable firms is built, equity markets will not develop sufficiently. The second theme is that the lack of fully developed markets and institutions may distort the policy outcomes predicted under models based on fully developed economies. Reliance on these models may therefore be inappropriate for transition economies.

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DESIGNING FINANCIAL SYSTEMS IN TRANSITION ECONOMIES This page intentionally left blank DESIGNING FINANCIAL SYSTEMS IN TRANSITION ECONOMIES Strategies for Reform in Central and Eastern Europe edited by Anna Meyendor¤ and Anjan Thakor The William Davidson Institute The MIT Press Cambridge, Massachusetts London, England ( 2002 Massachusetts Institute of Technology All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher. This book was set in Times New Roman on 3B2 by Asco Typesetters, Hong Kong. Printed and bound in the United States of America. Library of Congress Cataloging-in-Publication Data Designing financial systems in transition economies : strategies for reform in Central and Eastern Europe / edited by Anna Meyendor¤ and Anjan Thakor. p. cm. Includes bibliographical references and index. ISBN 0-262-13391-1 (hc. : alk. paper) 1. Finance—Europe, Eastern. 2. Europe, Eastern—Economic policy—1989– 3. Finance—Europe, Central. 4. Europe, Central—Economic policy. I. Meyendor¤, Anna. II. Thakor, Anjan V. HG186.E82 D47 2001 2001032618 332 0 .0947—dc21 Contents Contributors 1 Introduction: Financial Systems in Transition Anna Meyendor¤ and Anjan Thakor 2 Banks’ Bad Debts: Policies, Creditor Passivity, and Soft Budget Constraints Janet Mitchell vii 1 5 3 On the Design of Bank Bailout Policy in Transition Economies Philippe Aghion, Patrick Bolton, and Steven Fries 37 4 Revisiting Hungary’s Bankruptcy Episode John Bonin and Mark E. Scha¤er 59 5 Tax Avoidance and the Allocation of Credit Anna Meyendor¤ 101 6 Franchise Value and the Dynamics of Financial Liberation Thomas Hellmann, Kevin Murdock, and Joseph Stiglitz 111 7 Bank Liquidity Provision and Capitol Regulation in Transition Economies Gary Gorton and Andrew Winton 129 Financial System Reform in Emerging Economies: The Case of Romania Anna Meyendor¤ and Anjan Thakor 147 8 177 9 Should Banks Have the Power to Enter All Financial Businesses? Raghuram G. Rajan 10 E¤ects of Ownership by Investment Funds on the Performance of Czech Firms Andrew Weiss and Georgiy Nikitin 187 Financial Conditions and Inv
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