Restructuring and development of the banking sector in advanced transition countries:
lessons for Bulgaria
Project

The aim of the project was to assist the Bulgarian policy makers to work out the policy measures that can address the current deficiencies of the banking sector in Bulgaria . For this purpose the development and restructuring of the banking sector in Hungary , Poland , and Czech Republic was presented. Special focus will be put on the major policy measures, institutional and regulatory changes, i.e. the factors that influence the emergence of a well-developed and sound banking sector. Besides that a summary paper reflecting the developments in the Czech Republic , Poland and Hungary was prepared in order to bring the Bulgarian policy makers the experiences of economies standing at different stages of their banking sector reform and pursuing qualitatively different policies.

The country papers had two major parts. The first part described those developments, policy measures and adjustment efforts that had established the legal, institutional and structural background for the functioning of a healthy banking sector. The second part of the country studies evaluated the factors that have directly influenced the post-privatization development pattern of the banking sector. Finally, the conclusions and lessons from country studies were combined in a final paper to show the similarities and differences as well as the experiences from these developments.

The aim of the country reports was twofold. On one hand they presented the impact of the major policy measures, institutional and regulatory changes on the development and restructuring of the banking sector in the three advanced transition economies. On the other hand, they draw upon the lessons from the positive and negative experiences of these economies to help the Bulgarian policy makers to work out the policy measures that can address the current deficiencies of the banking sector in Bulgaria ..

The aim of the comparative study was also twofold. First it elaborated the differences and similarities of the changes and reforms in the banking sector of the advanced transition economies with the aim of stressing the positive lessons that can be learned by Bulgaria . Second as the advanced transition economies - obviously in different extent and in an uneven fashion - had been ahead of Bulgaria in the reform of their banking sectors, the comparative lessons of these economies could show the most likely difficulties the Bulgarian banking sector would face in the course of post privatization restructuring and increasing openness.

The comparative study therefore focused especially on answering the following three issues:

•  Showing the Bulgarian policy makers and researchers that the banking sector cannot be treated as a separate part of the economy: on the one hand the banking sector depends very much on the general macroeconomic conditions of the country (mostly on growth performance and the macroeconomic imbalances), on the other hand the crisis in the banking sector may cause macroeconomic crisis (as evidenced by Bulgaria's banking crisis of 1996) and have long-term negative spillover impacts (see the slow growth of credits and low lending activity of banks in Bulgaria).

•  Determining the major links between the banking sector and macroeconomic policies in order to explain how to deal with some problems visible in the banking sector (e.g. low share of loans in assets, the slow improvement in inappropriate market structures and lack of competition, which have been an issue in the advanced transition economies for several years, and which currently impair the healthy development and modernization of the Bulgarian banking sector. is a current issue in Bulgaria).

•  Stressing the specific role and characteristics of the banking sector in the economy, which therefore requires special prudential regulations, high transparency and strong, professional and politically free supervision.

The project commenced on November 1, 2000 and ended on June 31, 2001.