ABSTRACT

Under the socialist system in Slovenia, as in all countries that have emerged from former Yugoslavia, banks were owned by socially-owned non-financial business enterprises. They were owners on the principle of unlimited liability. Unlimited liability was in accordance with the role which banks had in the functioning of an economic system that involved socially-owned, non-financial business enterprises; limited liability ownership would have been contrary to the logic of the system and its ideological basis. The question of how banks performed financial intermediation, given the peculiar role they had, is discussed in the first part of this chapter. Because of the large outright and hidden losses among their assets, almost all of them were insolvent at the beginning of transition in the early 1990s. Hence the second step in their transition, after their quick transformation into stock companies, was their rehabilitation. Previous owners that had unlimited liability were not, as they should have been, called on to pay in money or capital. That is the topic of the second section of the chapter. The next step in the transition of banking was the rehabilitation and

immediate post-rehabilitation period, when banks were relatively well protected from foreign competition, not so much for the sake of protection itself but in order to make the central bank’s sterilized foreign exchange transactions effective. They were, of course, controlled and supervised prudently by the central bank as well. But even during that period the banks were exposed to some competition. Their competitors were not domestic financial markets – they would never be a serious threat – but foreign banks. There was also competition amongst the banks. What the banks have actually achieved and whether they are fit enough to survive in a much more or completely competitive environment is the topic of the third part of this chapter. The survival of banks depends not only on their efforts and achievements.

There are serious obstacles beyond their control which may render useless all their efforts to become efficient and competitive banks. In particular, the Slovenian banks have only been able to collect predominantly short-term funds because of the very high propensity of their depositors and other

suppliers of funds to hold liquid assets. The banks are also relatively limited as to how big they can become in a small country. With Slovenia’s population of two million and a Gross Domestic Product of some US$20 billion, large banking institutions cannot emerge without the expansion of business beyond the country’s borders. But big foreign banks are already waiting for that business or they have already taken it over. How important these obstacles or limitations might be is the topic of the fourth section of the paper. Will the ultimate solution in Slovenia be the same as in other transitional

economies, whereby banks become branches or subsidiaries of foreign banks? The chapter closes with some speculation as to whether there are other ways in which banks can succeed as financial intermediaries while also managing the transformation of assets.