Tang, Zoli, and Klytchnikova look at strategies for and low levels of intermediation. The Baltic states appear dealing with banking crises in 12 transition economies-to have struck a good balance, incurring modest fiscal five from Central and Eastern Europe (CEE): Bulgaria, costs while making their systems sounder and more the Czech Republic, Hungary, Macedonia, and Poland; efficient. the three Baltic states: Estonia, Latvia, and Lithuania;The findings suggest the following: and four countries from the Commonwealth of -Operational, financial, and institutional restructuring Independent States (CIS): Georgia, Kazakhstan, the should be undertaken in parallel. Kyrgyz Republic, and Ukraine.* Financial restructuring should involve adequate Three types of strategies were used to deal with the recapitalization to deter moral hazard and repeated crises. The CEE countries generally pursued extensive recapitalization. restructuring and recapitalizing of banks; most CIS * Operational restructuring should entail privatization countries pursued large-scale liquidation; and the Baltic to core investors (particularly to reputable foreign states generally pursued a combination of liquidation and banks). restructuring.* The enterprise problems underlying banking The strategy pursued reflected macroeconomic problems must also be addressed. conditions and the level of development in a country's e Fiscal costs were reduced when governments dealt banking sector. There were more new banks in the only with bad debt inherited from the socialist period; former Soviet Union (FSU-the CIS and Baltic states), when small banks that held few deposits were allowed to but they tended to be small, undercapitalized, and not fail, where the social costs of such failure were low; and deeply engaged in financial intermediation.when only banks that got into trouble because of The CEE countries generally incurred higher fiscal external shocks were rescued while those suffering from costs than the FSU countries but ended up with sounder, poor management were liquidated. more efficient banking systems, with many of the * The government, not the central bank, should recapitalized banks being privatized to strategic foreign undertake bank restructuring. Central bank refinancing is investors. The CIS countries pursued a less fiscally costly not transparent and could lead to hyperinflation. approach but have been left with weak banking systems This paper-a product of the Poverty Reduction and Economic Management Sector Unit, Europe and Central Asia Region-is part of a larger effort in the region to review lessons of experience in transition economies. Copies of the paper are available free from the World Bank,

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