Revising financial sector policy in transitional socialist economies: will universal banks prove viable?

David H. Scott

No 1034, Policy Research Working Paper Series from The World Bank

Abstract: Focusing on efforts under way in most transitional socialist economies, the author questions whether the banks emerging in the new policy framework will prove viable or be supervisable. He offers a model of financial sector structure designed to foster the development of a sound banking system. In describing the environment in which financial policy is being revised, the author notes that the extraordinary challenges policymakers face might influence the shape of policy. He is concerned that policies to promote a sound banking system might be overlooked or sacrificed. Fundamental policy objectives, says the author, are those important to long-term economic well-being. These include establishing and maintaining the integrity of the payments system and the safety of depositors'savings, and ensuring that money markets function. Transitional objectives, on the other hand, relate primarily to the immediate task of privatizing and restructuring enterprises. Policymakers must balance inherent conflicts between the two kinds of objectives while promoting the achievement of both. Many transitional socialist economies, he observes, adopt a policy framework that envisions universal banking. The author assesses the consequences of the immediate emergence of financial conglomerates, or universal-type banks, and questions whether - in the face of limited managerial and institutional capability, limited capability for supervising financial markets, and extraordinary financial market risks - financial conglomerates simultaneously pursuing conflicting fundamental and transitional objectives will prove viable. The author advocates delaying the emergence of financial conglomerates until skills are developed and market turmoil subsides. In the transitional period, regulatory policy would assign to banks primary responsibility for achieving fundamental objectives, and would encourage nonbank financial institutions to pursue transitional objectives. Policy should promote financial soundness in the banking system, to control the potential costs to government of achieving its fundamental objectives.

Keywords: Banks&Banking Reform; Financial Intermediation; Financial Crisis Management&Restructuring; Banking Law; Economic Theory&Research (search for similar items in EconPapers)
Date: 1992-11-30
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