ABSTRACT
The paper deals with the question whether banks in Central Europe are in a position to exert a positive influence on enterprise performance. Effective, market-driven corporate governance by banks is discussed along the following four questions: are banks sound enough, large enough, strong enough, and skilled enough to have an impact on improving the efficiency of firms? Data on financial sector reform in those 10 formerly communist Central European countries (Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia) that signed association agreements with the European Union forms the basis of analysis.
With regard to skills, it is argued that the widespread banking crisis in the CE-10 is not a consequence of communist heritage any more, but of the weak, slow, and sometimes contradictory policies of the post-communist governments.
While 'bad debt' constitutes the banks' most visible problem, it is argued further that two other problems really endanger the reform process not only of the financial sector, but of the entire reform countries' economies. Firstly, the size of these financial markets is about equivalent to the rounding error of US financial statistics, causing an inherent volatility bomb. For investors, this implies diversification strategies, short-termism and risk-adjusted return on investment goals. For the respective regulators, this recommends coordination strategies for the various capital markets, and setting up financial markets that serve not only a small number of speculators but industry and population at large.
Secondly, using a stakeholder approach, it is argued that strong tendencies prevail for nonprudent banking. Therefore, supervisors, foreign investors and bankers should analyse the 'degrees of freedom' of local bank owners and 255bank managers by dependence analysis. For supervisors and regulators it is also important to consider the links between reliable corporate governance practices, foreign direct investment, and the stability of the countries' currencies.
The conclusion is drawn that due to asymmetric information, small high-risk 'bubble' markets, uncertain bank privatization, capitalization and supervision, it is not easy to see how banks which have difficulties to manage themselves can exert a positive influence on the management of corporations and increase the efficiency of firms. However, even if the more general answer is negative, this does not imply that individual banks or financial institutions may not be in a position to positively influence enterprise performance.
