ABSTRACT
Efficiency in the financial sector is a broader concept than the cost of intermediation or the liquidity and transparency of markets. It encompasses the sector’s depth and effectiveness in allocating capital – in other words, its capacity to support sustainable growth, including as a conduit and filter for capital flows and as a monetary transmission channel. In all of these respects, there were major advances in the countries of the Baltic region and Central and Eastern Europe during the 1990s. This was evidenced by lower spreads; action to address quasi-fiscal deficits; rapidly growing credit to the private sector; greater financial depth; and some increase in securities market capitalization. And in all of these economies the resilience of the sector and its capacity for risk management were strengthened. This progress reflected a range of policy initiatives:
• while restructuring approaches were far from uniform, a key priority was to impose hard budget constraints on former state enterprises – which in some cases was a decade-long task;
• the liberalization of interest rates promoted deepening and competition, and openness to FDI jump-started governance and financing while the domestic financial sector was maturing;
• stronger banking regulation and supervision was a key element, with regulatory frameworks advancing – at times prompted by crises – in the direction of Basel standards;
• favorable macroeconomic policies, over time, fostered financial efficiency – expanding the pool of savings, and allowing resources to be allocated in an intelligible price environment.
