State-owned Banks in the Transition:
Origins, Evolution and Policy Responses
By, Khaled Sherif, Michael Borish and Paul J. Siegelbaum
TABLE OF CONTENTS
CHAPTER ONE: BACKGROUND .............................................................................................1
General Introduction ..................................................................................................................1
Purpose and Methodology .........................................................................................................4
Acknowledgements ....................................................................................................................5
CHAPTER TWO: ECONOMIC STRUCTURE AND TRENDS IN THE EARLY STAGES
OF TRANSITION ..........................................................................................................................6
Economic Structure of Transition Countries in the Early 1990s ...............................................6
Brief Synopsis of Monetary and Fiscal Trends in Transition Countries: 1989-95 ....................7
CHAPTER THREE: PROFILE OF STATE BANKS EARLY IN THE TRANSITION .....11
General Profile .........................................................................................................................11
Traditional Roles Played By State Banks ................................................................................18
Governance, Management, and Operating Standards of State Banks .....................................19
Summary of Types of Specialized State Banks .......................................................................21
CHAPTER FOUR: BANKING SECTOR TRENDS BY THE MID-1990S ...........................29
The Financial Status of Banks in 1995 and Differing Patterns of Development .....................29
State Banks and Broad Financial Intermediation Measures ....................................................33
Emerging Role of Private Banks..............................................................................................44
Summary: Consistency and Divergence Among Transition Regions Through 1995 ..............47
CHAPTER FIVE: CURRENT STATUS AND CONTINUING PROBLEMS OF STATE
BANKS SINCE 1995....................................................................................................................51
Current Ownership Status and Trends of State Banks .............................................................51
Financial Condition of the State Banks ...................................................................................55
CHAPTER SIX: APPROACHES: WHAT HAS AND HAS NOT BEEN DONE? ...............86
The Role of State Banks and the Effects of Sustaining the State System................................86
Problem Assets, Bank Restructuring Costs, and Approaches in Transition Countries ...........95
The General Impact of Bad Loan Quality and the Pace of Reform .........................................97
Regional Funding and Intermediation Trends .........................................................................99
CHAPTER SEVEN: REMAINING ISSUES: WHAT NEEDS TO BE DONE, AND HOW
TO GET THERE .......................................................................................................................103
General Findings and Conclusions ........................................................................................103
Prospects and Preconditions for State Banks’ Privatization and Resolution .........................105
Recommendations for State Banks’ Privatization and Resolution ........................................109
What Can/Should Donors Do?...............................................................................................117
CHAPTER ONE: BACKGROUND
GENERAL INTRODUCTION
This study examines state ownership in the banking systems of the transition economies, and
how the continuation of this ownership distorts economic reform efforts. While many of the
distortions found in poorly performing economies do not originate in the banking sector, the risk
is always there. Admittedly, in many countries, banks have remained in state hands because
privatization options have not provided acceptable solutions to difficult development problems.
Nonetheless, irrespective of motivation and incentives, the experience teaches us that state banks
are typically either patronage vehicles that ultimately worsen prospects for competitive market
development, or ineffective shells that fail to perform a useful intermediation role once
government imposes effective hard budget constraints and a modern supervisory system.
One useful strategy is to differentiate different types of state banks to ascertain their specific
negative impacts on the economy. Doing so reveals that industrial and agricultural banks have
been the most problematic as their roles were to finance state farms and industries that employed
large numbers of people and served as the backbone of the earlier socialist economic model.
Because banks with industrial or agricultural orientations focused on lending to what eventually
became loss-making enterprises and farms, for increased production (and the preservation of
jobs, (as opposed to the generation of profit), it is these banks that incurred the greatest levels of
insolvency. Two banks that reflect such problems, culminating in their eventual liquidation,
Bancorex in Romania and Bank Ukraina in Ukraine, are discussed in Annexes 6 and 7 as well as
in Box 6.1.
Because of their perceived importance, combined with complications arising from the methods
used to privatize them, these banks often emerged in the post-socialist economies as banks that
were “too big to fail.” The result was usually costly (and often repeated) recapitalizations,
regulatory forbearance, and distortions in the marketplace that prevented a more efficient
banking system from emerging early on. This has been true in many Central European
economies, including countries that are considered among the more successful performers (e.g.,
Poland, Hungary, Czech Republic, Slovenia).Whatever has been positive about these countries’
performance has not been due to recapitalization, forbearance, etc., as shown in several countries
where these restructuring efforts have largely given way to privatization and efforts to mobilize
strategic investment. Rather, their successes lie either in opening up their systems to marketbased competition to more fully integrate with EU economies, being able to attract strategic
investment into their financial systems,1 and leveraging off of their relatively favorable positions
in the socialist era to evolve more quickly to competitive status.
It should be noted, however, and in fairness, that rapid introduction of strategic investment in
domestic banks would not have produced miracles in the early 1990s. It often takes years before
new banks gain the skills needed to prudently assume major balance sheet risk. Moreover, given
the instability of the market at the time, gathering needed information and security for increased
lending and investment were major challenges. In addition, some countries faced bleak prospects
even if they were predisposed to pursuing policy reforms that focused on moving to marketbased systems. The experience of the Kyrgyz Republic is an example of this dilemma. In other
cases, such as Uzbekistan (see Annex 8 and Box 6.2), having substantial resources may serve as
a disincentive to introducing reforms due to the political inconvenience involved. The presence
of such resources and financing can temporarily alleviate bank portfolio problems, making the
immediate political choice of avoiding reform more expedient. However, this defers addressing
the long-term structural problems facing the economy, and usually results in higher costs at a
later date. In either case, policy makers were left with difficult and generally unattractive
options on how to resolve the fate of troubled banks with major links and exposures to
structurally weak sectors of the economy. Many also believe that privatization occurred more
quickly and efficiently in places like Poland and Hungary as a result of their earlier restructuring
efforts. While this may be true, it is also a very expensive proposition for countries with less
attractive markets, and weaker prospects for attracting investment in the first place.
In contrast to agricultural and industrial banks, savings banks were and still are among the most
sensitive to market trends. They are particularly important with regard to deposit safety and longterm public confidence in the ability of the banking system to operate in a sound manner. Often,
this trust has been compromised, with long-term adverse effects on efforts to build stable
banking and financial systems. (For an example of this, see Annex 9 and Box 5.2 for a review of
Ukraine’s Oschadny Bank, the traditional state savings bank.) At the outset of the transition,
after the break-up of the monobank system, savings banks held significant local currency
household deposits, making their funding base attractive. In some countries (mainly CIS and the
Baltic states), this advantage quickly evaporated as hyperinflation destroyed local currencydenominated savings. Elsewhere (mostly in Central Europe), given the less unstable
macroeconomic situation, the condition of savings banks was not as dismal. In some cases, such
as with the Savings Bank in Albania, efforts were made to diversify the bank’s assets and
activities to provide a more balanced and sustainable income stream. However, the inability to
properly manage new risks quickly led to an erosion in financial condition that later had to be
corrected2 at significant cost to the budget.
1
Even Slovenia, which has resisted foreign investment more than the other three economies, has experienced
substantial foreign investment in banks, insurance and other financial services despite continued high levels of state
ownership in the banking system. This has added competition, and permitted the foreign banks and insurance
companies to compete and capture market niche positions in the country where purchasing power parity income
measures are the highest among transition countries. Income measures have been comparatively high for decades
due to the significant trade and export position of Slovenia during the Yugoslav era.
2
In 1997-98, the Government of Albania suspended the right of public banks to lend as part of its effort to
stabilize the banking system after the collapse of pyramid schemes.
2
Savings banks have sometimes been used as sectoral safety nets, required to absorb smaller
troubled banks as part of banking sector consolidation. This was the strategy pursued by the
Czech Republic with Ceska Sporitelna (see Annex 10 and Box 7.1), only to lead to a worsening
of the bank’s financial condition and likely diminution of value when presented to the market for
private acquisition.3 While the objective of creating larger institutions in comparatively small
markets was often rational, more often than not the strategy led to erosion in the financial
position of the savings banks due to the absorption of bad banks, bad portfolios, additional and
unneeded staff, and a culture that was non-traditional (e.g., lending-oriented, risk-seeking).
These banks further suffered from limited risk management capacity, and insufficiently
sophisticated standards and practices. The prominence of Sberbank in the Russian market will
need to be continuously scrutinized for such potential problems, given the continued use by
government of this bank for a number of political functions (see Annex 11 and Box 4.1). As the
Russian government has announced it will divest its holdings in banks that are less than 25
percent government-owned, Sberbank will need to avoid absorbing any banks, assets or shares
that would weaken its financial position.
Meanwhile, there have been some success stories. A number of state banks initially ran into
problems, but were subsequently restructured and put on a commercially sustainable path within
a relatively short period. Unibanka in Latvia went through such a period, facing restructuring
needs as a result of early loan portfolio problems (see Annex 12 and Box 4.2). Once dealt with
resolutely by the authorities, the bank was able to withstand systemic problems faced in the
Latvian banking sector in 1995, attract strategic investment, list on the local exchange, and
ultimately become a part of a larger regional banking institution. Significantly, however,
Unibanka is not a case of an ex-state bank successfully reformed, but rather a wholly new
institution that was built from the viable branches and assets of separate institutions.
Other state banks that have fared comparatively well and been easier to privatize have been the
foreign trade banks. These banks have had foreign currency funding, longstanding links to
international trade and investment, and management capacity that was more attuned to
international trends. Examples have included Bank Handlowy in Poland (now with Citigroup),
and MKB, the Hungarian Foreign Trade Bank (now with Bayerishe Landesbank). Nonetheless,
such positive experiences have not been universal among foreign trade banks. The example of
Bancorex in Romania shows how one particular bank with international links and high profile
connections to large state enterprises turned out to be the nexus for much of the loss-making and
unsustainable economic behavior that characterized Romania through most of the 1990s. As
Azerbaijan restructures a newly consolidated United Universal, it will need to avoid such a fate
from occurring with its most dominant bank, the International Bank of Azerbaijan (see Annex 13
3
Ceska Sporitelna was sold to Erste Bank of Austria in 2000 for $515 million-equivalent for a 52 percent
stake after the government agreed to guarantee half of the bank’s loans for five years. However, this price was
actually higher than originally expected, partly the result of a late attempt by IPB, the Czech unit of Nomura (Japan),
to counter Erste’s bid. As part of the deal, Erste committed itself to a $114 million capital increase at Ceska
Sporitelna or its subsidiaries, and to set aside $571 million for housing and small business programs and $29 million
for venture capital. While higher than expected, many in the market believe Ceska Sporitelna would have attracted a
far higher price earlier in the 1990s before it was used by the government as an anchor for the consolidation of
several smaller banks that ultimately weakened the overall financial condition of the bank.
3
and Box 5.1). Other countries that still have state-owned foreign trade and export-import banks
will likely need to ensure that similar problems do not occur.
More positively, foreign trade banks have generally performed better than the norm. Often,
export-import banks and foreign trade banks are retained by the state for long periods because of
the critical intermediary role they play in international transactions, and for needed trade finance
services during periods when project finance is limited in volume. They frequently have well
trained staff, and donor funding often runs through these banks to stimulate international trade.
However, this should not be viewed as a justification for state ownership. Rather, these strengths
should be viewed positively in increasing the attractiveness of the banks, and improving their
prospects for privatization to well-managed, prime-rated, strategic investors.
It can be noted that problems of state ownership are not restricted to transition countries. Turkey
is currently engaged in a major restructuring and privatization exercise in its banking sector.
Moreover, several OECD countries have a long tradition of state ownership in their banking
systems. While such ownership traditions are changing in continental Europe, state banks in
these and other comparatively wealthy markets have often generated losses and experienced
problems when engaged in directed lending for political purposes (see Annex 14). This
demonstrates how non-viable the approach to directed lending and non-commercial orientations
in banking generally are, notwithstanding the wealth of nations that sometimes practice this
approach. Important is this regard is that it is not just ownership that matters, but overall
incentives and practices. Private banks that engage in politicized lending patterns will also face a
severe threat to their financial position over time. Thus, the key is detaching the ownership,
governance and management from political patronage, and putting banking decisions on a purely
commercial footing with the objective of achieving high returns and ensuring the safety of the
deposit base.
METHODOLOGY
This study evaluates the history and evolution of state banks. Chapter 2 looks at economic
structure and trends early in the transition, and includes a synopsis of monetary and fiscal trends
from 1989-95. Chapter 3 reviews the role of state banks early in the transition, with specific data
and information broken out by specialized type of state bank in each country. Chapter 4 assesses
banking sector trends in the mid-1990s, including the financial status of banks, the emergence of
private banks, and differing patterns of growth by region. Chapter 5 reviews the current status
and continuing problems of state banks since 1995, including intermediation trends, asset
quality, earnings performance, and solvency issues. Chapter 6 summarizes differing approaches
to state bank reform, including an evaluation of results. Chapter 7 highlights remaining issues
that require attention, including ongoing risks to state ownership in the banking system, and
provides recommendations on how to move beyond the current challenges to state banks in
support of development of safe and sound banking systems. This includes recommendations on
privatization approaches, timing and phasing issues, and broader institutional development needs
to ensure a stable foundation is in place for sound financial intermediation practices to take hold.
In addition to the chapters above, the study features a series of annexes that provide further
statistical detail. These include Annexes 1-4 with statistics on most remaining state banks as of
2000. Annex 5 provides a detailed breakdown of arrears in nine selected transition countries.
4
Short summaries of selected state banks from several transition economies and their experiences
are highlighted in Annexes 6-13. A brief summary of selected state banks in OECD countries
and their performance can be found in Annex 14. The study relies on data from a range of
sources. The specific methods and applications surrounding the data can be found in the
Methodological Notes in Annex 15. Specific sources can be found in the bibliography in Annex
16. The following summarizes key sources of data.
 International Financial Statistics from the IMF were used for macroeconomic data and
banking statistics.
 World Bank data and publications were used for macroeconomic and structural data,
as well as for estimates of state banks in the mid-1990s.
 EBRD Transition Reports were used for banking system data regarding nonperforming loans, ownership shares, and numbers of banks per country.
 Bank Scope (Fitch IBCA) was used to obtain fundamental financial information on
state banks and their ownership structure. This applies to 67 banks for which reports
were available. Data used were almost entirely from 2000 results, and included
balance sheet and income statement figures, performance ratios, and ownership status.
ACKNOWLEDGEMENTS
The authors wish to thank Marcelo Selowsky, currently with the IMF and formerly Chief
Economist in the Europe Central Asia Department of the World Bank, for encouraging this study
to proceed and providing resources for this to happen. Luigi Passamonti and Hormoz Aghdaey
served as peer reviewers and their many comments have contributed greatly to the final product.
The many task managers and researchers who assisted with data requests, clarifications, and
opinions also helped immensely with the effort.
George Clarke was responsible for compiling the major portion of macroeconomic data utilized,
and for producing the data on arrears that have been incorporated into the text. The authors wish
to thank Alexander Pankov for coordinating the data gathering effort on the state banks, and to
Alexandra Gross and Anna Sukiasyan for working with Alexander Pankov on the team to
compile needed data and information on state banks. They have also been the primary authors of
the cases produced in the annexes on the individual state banks.
5
CHAPTER TWO:
THE EARLY STAGES OF TRANSITION
ECONOMIC STRUCTURE OF TRANSITION COUNTRIES IN THE EARLY 1990SS
When the transition process began, the former socialist economies were generally oriented
towards industry. As of 1992, 47 percent of total output was from the industrial sector. Services
were about 38 percent, most of it government-related. Agriculture only accounted for about 15
percent of recorded output, although this does not capture subsistence farming. By contrast,
OECD countries in 1992 showed a different distribution, with 66 percent in services, 4 23 percent
in industry, and only 5 percent in agriculture.
Transition country patterns showed little deviation. A few countries had prominent service
sectors, mainly in Central Europe. For example, Slovenia, Hungary and FYR Macedonia all had
service sectors that accounted for more than half of GDP, suggesting that there were enterprises
active in transport, distribution, tourism, and related activities net of direct government
administration. However, in the CIS and Baltic states, services (including government) did not
exceed 39 percent (Russia), and the average was about 35 percent. The Baltic states in particular
showed very low levels of service sector development, particularly Latvia and Lithuania.
Meanwhile, agriculture played a limited role in general economic output, averaging less than 15
percent. Central Europe in particular showed extraordinarily low levels of agricultural output, at
only 8 percent of total GDP. This may understate primary sector output, as many people in the
region rely on subsistence farming as part of their safety net. Moreover, as private farming was
permitted in several of these countries,5 much of the output is presumed to have gone
unrecorded. Only Albania recorded more than half of its GDP in agriculture. Many CIS countries
showed about one third of their economies to be based on agriculture.
The following figure highlights the economic structure of transition countries in 1992.
4
OECD countries at the time showed 19 percent of total GDP was in financial services. While reliable
figures are not available for the 27 transition countries at the time (given the economic turbulence of the period), the
share of financial services to the economy was considered much lower.
5
Bulgaria, Poland, and the previous Yugoslavia (currently five countries) permitted small-scale private
farming during the socialist era.
6
Figure 2.1 Structure of Transition Economies in 1992
(percent)
100%
90%
80%
26.7
36.5
44.3
70%
60%
50%
52.2
47.3
40%
30%
46.9
20%
21.1
16.7
Baltic States
CIS
10%
0%
8.8
CEE
Agriculture
Industry
Services
Notes: FYR Macedonia and Turkmenistan GDP are based on per capita incomes times population.
Sources: World Development Report 1994; EBRD Transition Reports, 2000 and 2001.
With such economic structure, most of the banking that occurred was geared to financing the
industrial sector. Foreign trade banks attempted to sustain traditional trade links that were
integral to the central planning process, but which generally imploded when the Soviet Union
collapsed. Likewise, these banks financed the export of goods for hard currency when trade
opened up. In the latter case, this was already happening in places like Hungary, Romania and
Yugoslavia that had opened up their trade regimes well before the collapse of the Soviet Union.
In some cases, these functions converged in the agricultural sector, agro-processing, or in
commodities (e.g., oil in Azerbaijan and Kazakhstan, natural gas in Turkmenistan, cotton in
Tajikistan and Uzbekistan).
MONETARY AND FISCAL TRENDS IN THE EARLY TRANSITION YEARS: 1989-95
Following the initial shocks experienced in the early 1990s, most Central and Eastern European
countries tightened monetary policy if they had not already, and by extension, regulations
limiting risk-seeking behavior in the banking system. These countries had already shown earlier
signs of monetary discipline and central bank independence, and this resulted in greater stability
by the mid-1990s. For example, on an unweighted basis, inflation rates averaged 15 percent in
1995.6 These were far lower than peak rates experienced just a few years before, in 1989-1992.
Six of 10 countries had single digit inflation figures, and no country exceeded year-end CPI of
6
EBRD figures presented regionally showed a mean of 20.5 percent for Central Europe and the Baltics, 39.4
percent for southeastern Europe, and 350 percent for the CIS countries.
7
33 percent. Rather, the weakness was more on the fiscal side, where loss-making enterprises
were still receiving financing, either from the banks (usually state-owned), the budget, offbudgetary accounts, or arrears to state companies and energy suppliers. While lower than in
earlier years, fiscal deficits were about 3.3 percent of GDP on an unweighted basis in 1995. It
should be noted that the consolidated deficits were respectable by 1995, but they understated the
softness of budget constraints on the state sector due to the build-up of arrears. Moreover,
lending to the state sector still accounted for stocks and flows of bank lending. 7 Continued state
ownership in the banking sector, particularly in “large” banks8 with large exposures and long
standing ties to state enterprises and farms, made this possible. State banks still accounted for
more than half of all banking system assets in most CEE countries in 1995. The table below
shows that state banks’ asset shares were declining in CEE countries in the early to mid-1990s,
yet were still high. On an unweighted basis, state bank assets were more than half of total
through the mid-1990s. Even in countries where these shares were reported to be less, this was
not the case.9
Table 2.1 Central and Eastern Europe Indicators (1990-95)
(percent)
Inflation Rate
Fiscal Deficit/GDP
1990-94
1995
1990-94
1995
Albania
237.0
6.0
-31.0
-10.3
Bulgaria
338.9
32.9
-10.9
-6.4
Croatia
1,149.0
3.8
-3.9
-0.9
Czech Republic
52.0
7.9
-3.1
-1.8
FYR Macedonia
1,935.0
9.0
-13.8
-1.2
Hungary
32.2
28.3
-8.9
-6.2
Poland
249.3
21.6
-6.7
-2.8
Romania
295.5
27.8
-4.6
-2.6
Slovak Republic
58.3
7.2
-7.0
0.2
Slovenia
247.1
9.0
-0.3
-0.5
Unweighted avg.
459.4
15.4
-9.0
-3.3
State Bank Assets/Total
1992
1995
97.8
94.5
82.2
82.2
58.9
51.9
20.6
17.6
N/A
N/A
81.2
52.0
86.2
71.7
80.4
84.3
70.7
61.2
47.8
41.7
62.6
58.9
Notes: Inflation rates (CPI year end) and fiscal deficit (general government balance) figures are from 1990-94 at
peak; state bank shares are earliest reported if not available for 1992 or 1995; Czech figures exclude two large banks
with major ownership by the National Property Fund.
Source: EBRD
7
Quantifying this with precision is difficult because of the prominence of large industrial enterprises that
were partly privatized, or where the strategic “investor” might have been the National Property Fund of the state,
even where the enterprise was classified as “private..” However, in most CEE and Baltic countries (with Estonia as
an exception), state enterprises often benefited from less than hard budget constraints.
8
“Large” is based on nominal balance sheet values, not discounted for risk and quality. In reality, virtually
all “large” banks would have been much smaller had they written down their assets and capital to reflect
internationally accepted standards for accounting and valuation. These banks eventually faced up to this reality in
the second half of the decade. However, banking systems in the CIS and in several CEE are still dealing with these
issues.
9
In the Czech Republic, the low state shares exclude Ceska Sporitelna and Komercni, two major state banks
that would have radically shifted the ratios.
8
In the Baltic states, inflation rates were higher than in the CEE countries, where inflation rates
generally did not exceed 338 percent. However, year-end CPI rates among the three Baltic states
peaked at about 1,000 percent. Perhaps because the monetary challenge was greater, 1995
inflation rates were higher, at about 29 percent. On the other hand, the Baltic states showed a
high level of discipline, bringing their unweighted average 1995 inflation rates to about a small
fraction of earlier peak levels.10 Meanwhile, monetary discipline was reinforced by fiscal
discipline, as all three countries kept spending within reasonable bounds, even during the
hyperinflationary period. The combination of monetary and fiscal discipline imposed hard
budget constraints on the state enterprise sector, and by 1995, Estonia and Latvia showed limited
state shares of bank assets. In Estonia, this was carried out fairly systematically with the
liquidation of loss-making banks that had been branches of the Gosbank system earlier on. Only
Lithuania took several more years to reduce its state share of bank assets. It should be noted that
“private” ownership alone was not sufficient for sound performance. In Latvia, the state share of
bank assets was low prior to 1995. Yet its largest bank collapsed in 1995 while technically being
a private bank.11 This prompted a more disciplined approach to financial services and banking
supervision from that point on, a position that has been consistently reinforced by the central
bank since 1995.
Table 2.2 Baltic States Indicators (1990-95)
(percent)
Inflation Rate
1990-94
1995
Estonia
953.5
29.0
Latvia
959.0
23.1
Lithuania
1,161.0
35.5
Unweighted avg.
1,024.5
29.2
Fiscal Deficit/GDP
1990-94
1995
-0.7
-1.3
-4.0
-3.9
-5.5
-4.5
-3.4
-3.2
State Bank Assets/Total
1992
1995
28.1
9.7
7.2
9.9
53.6
61.8
29.6
27.1
Notes: Inflation rates (CPI year end) and fiscal deficit (general government balance) figures are from 1990-94 at
peak; state bank shares are earliest reported if not available for 1992 or 1995.
Source: EBRD
Meanwhile, the CIS countries faced enormous challenges in terms of hyperinflation and a nonviable fiscal base. By all measures, the CIS countries failed to achieve macroeconomic stability
to accommodate structural reform requirements. This, in turn, triggered a downward spiral that
exceeded the magnitude of decline experienced in most CEE and Baltic countries. Recent
measures of output relative to pre-transition levels reflect the depth of decline in CIS countries.12
Thus, their ability to recover from central planning has been much more difficult. This was
evidenced first by the extraordinarily high inflation rates suffered by the CIS countries, with
peak rates at nearly 5,000 percent on average. This led to the introduction of new currencies in
CIS countries, including eventually in Russia with the introduction of a new ruble on January 1,
10
This was true in the CEE countries as well, as the 1995 unweighted inflation rate was 3.4 percent of the
unweighted peak average rates from 1990-94.
11
See A. Fleming and S. Talley, “The Latvian Banking Crisis—Lessons Learned,” World Bank, 1996.
12
On average, CIS countries now operate at about 60 percent of pre-transition levels, as compared with the
Baltic states at 70 percent and CEE countries at around 90 percent. See S. Fischer and R. Sahay, “Taking Stock,”
Finance & Development, September 2000.
9
1998. Even by 1995, inflation rates were still significantly higher than in the CEE and Baltic
countries and, in several cases, remained at hyperinflationary levels.. Moldova was the only CIS
country whose inflation rate was less than the average of the three Baltic states that year. Among
CEE countries, only Hungary, Romania and Bulgaria had higher rates that year than Moldova.
Meanwhile, CIS fiscal deficits were about two times the magnitude of the CEE and Baltic states,
at more than 6 percent. Part of this related to the collapse of the industrial sector, as much of the
earlier fiscal revenue flow had been generated off of enterprise sales in the form of turnover
taxes.13 With sales now plummeting and often unrecorded (to avoid tax payments), government
revenues declined. Corruption also played a role in tax payments being made, but not finding
their way to national treasury accounts. All of this reflected a very unstable environment for
normal banking operations.
Against this backdrop, CIS countries often imposed hard budget constraints – in some cases by
circumstance more than by choice – on the state sector. However, CIS countries were also caught
in the difficult situation of seeking to maintain or revive production to preserve jobs and
reactivate the fiscal base. In a tight money regime, this led to budgetary subsidies and transfers,
concessionary rollovers from the banking system, and arrears to enterprises, social funds,
workers and fiscal authorities (see Annex 5 for greater detail). Interestingly, the CIS countries
showed that the state bank share of assets was about half that registered in the CEE countries.
However, this also indicates that “private” banks in the CIS were largely used as vehicles of
financing for their enterprise owners and other related parties, rather than as channels of financial
discipline. These “privatized” practices reflect weaknesses in the banking sector framework and
incentive structure in the CIS countries, and inherent flaws in “ownership transformation.”
Table 2.3 Commonwealth of Independent States Indicators (1990-95)
(percent)
Inflation Rate
Fiscal Deficit/GDP
1990-94
1995
1990-94
1995
Armenia
10,896.0
32.0
-54.7
-11.0
Azerbaijan
1,788.0
84.5
-15.3
-4.9
Belarus
1,996.0
244.0
-2.5
-1.9
Georgia
7,488.0
57.4
-26.2
-4.5
Kazakhstan
2,984.0
60.0
-7.9
-2.7
Kyrgyz
1,363.0
31.9
-17.4
-17.3
Moldova
2,198.0
23.8
-26.2
-5.7
Russia
2,506.0
128.6
-42.6
-5.9
Tajikistan
7,344.0
2,133.0
-30.5
-11.9
Turkmenistan
9,750.0
1,262.0
-1.4
-1.6
Ukraine
10,155.0
181.0
-25.4
-4.9
Uzbekistan
1,281.0
117.0
-18.4
-4.1
Unweighted avg.
4,979.1
362.9
-22.4
-6.4
State Bank Assets/Total
1992
1995
1.9
2.4
88.7
80.5
69.2
62.3
98.4
45.9
19.3
24.3
100.0
69.7
0.0
0.3
N/A
37.0
N/A
5.3
26.1
26.1
N/A
13.5
46.7
38.4
37.5
33.8
Notes: Inflation rates (CPI year end) and fiscal deficit (general government balance) figures are 1990-94 at peak;
state bank shares are earliest reported if not available for 1992 or 1995; earliest figures for Russia, Tajikistan and
Ukraine are for 1996.
Source: EBRD
13
See L. Barbone and D. Marchetti, “Economic Transformation and the Fiscal Crisis: A Critical Look at the
Central European Experience of the 1990s,” World Bank Working Paper 1286, April 1994.
10
CHAPTER THREE: STATE BANKS EARLY IN THE TRANSITION
GENERAL PROFILE14
Overview. The reform of banking systems in post-socialist Central and Eastern Europe and the
former Soviet Union15 has shown some common themes throughout the years in terms of basic
reform efforts, yet with broadly divergent results. Most transition countries introduced two-tier
systems around 1989 as communism (and its monobank system) collapsed. This change placed
monetary policy and its implementation in the hands of the central bank, and established the
basis of a second tier commercial and other banks to engage in normal banking functions. Prior
to 1989, these functions had all been part of one monobank system in most socialist economies.
Thus, the very institutional configuration of financial intermediation represented a challenge to
transition countries. This involved defining new roles and responsibilities in the first and second
tiers of the new system, and conceptualizing how intermediation could proceed at a time when
traditional production, trade and investment were in a state of dislocation and, in some cases,
collapse.
As part of this reconfiguration, the central banks of transition countries were generally entrusted
with the role of banking supervision as a function of their monetary policy role. Thus, as laws
were introduced for both the new central bank and second tier banks, fundamental prudential
norms and initial measures to establish supervisory oversight of the banks were also introduced.
These initially dealt with ownership, capital, lending exposures, reporting requirements, and
other common components of banking legislation and regulation. However, not only did the
prudential requirements prove to be insufficient. Supervisory capacity itself was undermined by
poor and inaccurate accounting and financial information in the banks, weak off-site surveillance
capacity among the supervisory authorities, and lack of experience with on-site examinations.
After an initial period of experimentation with low minimum capital requirements and a push to
liberalize the licensing process for new banks, most transition countries encountered periods of
severe instability. These fundamental banking sector problems were part of larger structural
problems in post-socialist economies, reflecting macroeconomic disorder (e.g., hyperinflation,
exchange rate instability), the breakdown of traditional trade patterns and distribution channels,
and the severe decline in purchasing power of enterprises and individuals. Liquidity shortages
triggered an increase of dramatic proportions in inter-enterprise, tax and other arrears, while debt
service payments to banks declined. Arrears also became more generalized, particularly in the
CIS countries, where power companies, fiscal accounts, wage earners, and pension, health,
unemployment compensation and other social funds effectively became net creditors to the
economy.
14
General profiles of public banks at the beginning of the transition period are based on 1992 information.
15
For purposes of discussion, the 12 countries of the CIS are viewed as one group, and the Baltic countries
are segregated from the former Socialist countries of Central and Eastern Europe.
11
While there were some preliminary efforts to have banks operate on a commercial basis, in most
transition countries, government officials could not resist using at least some of the banks as
vehicles for directed lending. Where banks operated “privately,” this was frequently on behalf of
their connected shareholders, rather than on the basis of normal commercial banking principles
found in a market economy. Meanwhile, state-owned banks continued to serve as the primary
banking vehicle for directed lending and quasi-fiscal financing, usually to loss-making stateowned enterprises and collective farms. In some countries, this ran parallel to the slow
emergence of private banks and private sector development, including in Central Europe (e.g.,
Hungary, Czech Republic) where high levels of direct investment and remittance flows were
serving as a catalyst for modernization and privatization. However, the bulk of intermediation
occurred to/through state channels. As a result, the quality of the loan portfolios of these banks
declined rapidly and, for the most part, irretrievably.
Early Structural Changes in the Banking Sector. Among the centrally planned economies,
virtually all had monobank systems. There were a few exceptions where commercial banks
functioned on a more decentralized basis.16 However, in general, the monobank model was fairly
systematically adopted and followed throughout the socialist world.
As a subset of the monobank system, most of the transition countries were accustomed to having
a small number of specialized state banks (e.g., savings, foreign trade, industrial investment,
agricultural) in addition to the central bank. While this might appear to be similar to the two-tier
system that was later established, they functioned more like departments of one singular banking
system, rather than as independent commercial bank entities operating on their own. In this
sense, there was substantial differentiation from the earlier monobank model as compared with
the post-socialist two tier system introduced around 1989.
Late in the socialist period (mid-1980s), some governments started timid attempts at
decentralization in the banking sector by establishing new “specialized” commercial banks. For
example, in Bulgaria in 1987, the Government moved to establish seven such banks (in addition
to four state banks that existed earlier), each serving a particular industrial sector. The new banks
provided current account facilities, accepted deposits, lent in both local and foreign currencies,
and provided “venture capital” for firms in their particular sector. However, decentralization
only went so far. None of the new banks had branches, and they dealt with their customers
through the local offices of the National Bank. More importantly, these banks were not given
any opportunity to exercise independent judgment, and merely allocated investment funds to
state-owned enterprises in their sectors according to central planners’ instructions. Thus, these
experiments indicated that the traditional system was failing to meet the broad banking needs of
the economy. Given continued state control in most cases, there was little substantive change
resulting from these experiments in terms of how the socialist economies continued to operate.
Moreover, Bulgaria was more the exception than the rule. Even as the earlier system failed to
16
Bulgaria and Hungary introduced two-tier systems in 1987. Prior to that, both countries had a monobank
system. Only Yugoslavia had a large number of banks during the socialist era, most of them “socially-owned” by
enterprises and employees. While Yugoslavia did not have a monobank system, the banks responded to the planning
prerogatives of the central authorities. In this regard, they were not significantly different from their counterparts in
other centrally planned economies.
12
meet anything more than rudimentary banking needs, there was little effort to push for reforms
until after the socialist system collapsed.
Apart from Yugoslavia, which established a two-tier system in 1971, Hungary was the only other
real exception to the rigid socialist model. Net of Yugoslavia, Hungary was the first transition
country to introduce a market-oriented two-tier banking system (in early 1987). In the Hungarian
example, monetary policy was implemented by the National Bank, while credit activities were
undertaken by independent commercial banks operating in a competitive market. Poland
followed Hungary’s lead in January 1989, with Bulgaria, Czechoslovakia and Romania
following Poland in January 1990. As noted above, Bulgaria had already begun to experiment
with new organizational models in 1987.
Notwithstanding these limited exceptions, centrally planned economies generally relied on the
Gosbank system, with departments that specialized in the peculiarities of differing financing
needs of different sectors of the economy. This functional specialization partly explains why, by
1992, the initial transformation to a two-tier banking system was characterized by sector
concentration (e.g., agriculture, industry, export-import, housing, savings) in state banks. In
some cases, (e.g., Croatia, Estonia, FYR Macedonia, Poland, today’s Slovak Republic), some of
the state banks were smaller and commercially diversified in their activities, yet geographically
concentrated,17 just as branches from the Gosbank system remained local in their economic
orientation. Often, they were owned by state enterprises. In other cases, the banks were
specialized by economic sub-sector.18 In general, the large state banks created from the
monobank system represented the core of the new banking system that remained state-owned
and highly concentrated in practically all transition countries.
After the immediate outset of the transition process, the number of banks increased very quickly.
By the early 1990s, shortly after the rapid move to ownership transformation and private entry,
there were roughly 2,350 banks in the 27 ex-socialist countries of Europe and Central Asia. Of
these, only 200 were considered to be “major” or “prominent” state banks.19 Russia alone had
1,306 banks in 1991, 2,456 banks in 1994, and 2,297 banks in 1995. The CIS in total accounted
for 1,841 of the 2,350 banks in transition countries early in the transformation period. By 1995,
the number of banks in CIS countries was 3,171 out of a total of 3,783 banks in all transition
17
For example, in Poland, nine of the smaller Treasury-owned banks were “specialized” geographically while
being more diverse in their banking activities. These banks were separate from the initial four large state-owned
banks spun off from the central bank, and specialized by function (e.g., agriculture, foreign trade, housing, and
foreign currency savings). In Croatia, most of the banks were local in their orientation.
18
For example, in Bulgaria, there were specialized banks for transportation, chemicals and biotechnology,
electronics and defense goods, and building and construction. In Central Asia, several banks were specialized by
commodity function (e.g., cotton in Uzbekistan; natural gas in Turkmenistan).
19
The estimated figure is 200. However, this figure may underestimate the number of smaller banks that
remained publicly owned by the state, municipalities, local government, and separate funds (e.g., National Property
Fund) that were government-influenced and controlled. For example, Russia had more than 400 state banks in the
early 1990s, although most of these were not majority stakes. Sberbank and Vneshtorgbank were the two large state
banks by 1992, while others were relatively small. Likewise, Yugoslavia had the “big six,” but there are more than
an additional 20 smaller banks that are state-owned and/or “socially owned.”
13
countries. Thus, the CIS countries consistently accounted for about 80 percent of the total
number of licensed banks in transition economies through the mid-1990s.
BOX 3.1 SELECTED PROFILE OF CIS STATE BANKS AFTER THE MONOBANK SYSTEM
Armenia:
Armenia inherited all five state-owned banks that operated on its territory before the breakup of the
former Soviet Union (FSU) in 1991. These were (i) the specialized Bank for Industry and Construction
(Ardshinbank), which separated in 1991 from its FSU counterpart Promstroybank; (ii) the specialized
Agrobank, also separated from its FSU counterpart in 1991; (iii) the Export-Import Bank of Armenia
(Armimpex Bank), reorganized on the basis of the former Vnesheconombank, which carried out all
foreign exchange transactions in Armenia; (iv) Econombank, that did not specialize in any particular
industry; and (v) the State Savings Bank (Sberbank Armenian Savings Bank -ASB), which separated
from its FSU counterpart (Sberbank) at end-1991 and which accounted for the bulk of household
deposits in the system at that time. All of these banks, except Sberbank ASB, became incorporated as
joint-stock companies in 1992, although the majority of shares either remained in the hands of the state
or were sold to state-owned enterprises, thus also indirectly controlled by the state. They remained the
largest banks in the country from 1993 through 1996, despite the entry of a large number of
commercial banks. In 1993, the state banks accounted for more than 70 percent of the banking system's
balance sheet figures. However, the banks were weak and unprofitable, with the bulk of their assets
non-performing as a result of large amounts of directed credit extended under government pressure to
state-owned enterprises. A major restructuring of the former state banks was initiated in 1996.
Latvia:
Following the breakup of the Soviet Union, Latvia found itself in much the same position as the other
FSU countries. It inherited branches of the specialized Soviet banks, namely the Savings Bank
(Latvijas Krajbanka), the Agricultural Bank, the Industry and Construction Bank, the Housing and
Social Development Ban, and the Foreign Trade Bank. In addition to the inherited problems of large
non-performing loan portfolios and management who were unused to lending along commercial lines,
the branches were suddenly cut off from their former head offices. Moreover, the banks found that the
authorities in Moscow were unwilling to pass on to the newly independent branches the assets needed
to cover substantial portions of their liabilities. Unlike most of the other newly independent countries
that converted these branches directly into nationally owned specialized banks corresponding to the old
Soviet banks, the Latvian government placed all of the branches of the specialized banks (except the
branches of the Savings Bank) under the direct supervision of the Bank of Latvia (the Central Bank).
These branches dominated the credit business, since the Savings Bank, initially, did not make loans to
either private or public enterprises. As a result, at the end of 1991, the 45 branches controlled 83
percent of all credit to business and also held three-quarters of enterprises’ demand deposits.
Russia:
In 1991, the Russian government broke up the two-tier system, consisting of the Gosbank (the central
bank) and five specialized banks that had existed in the Soviet Union since 1987. This reform led to
the creation of some 800 new banks, taking the capital of the previous state banks. From 1992-95, the
number of banks grew enormously, with nearly 2,500 banks in operation in Russia by 1994. However,
the system was also characterized by significant concentration. The largest 10 banks accounted for 50
percent of total assets in 1995. Most of these banks were spin-offs of former Soviet specialized banks,
or new commercial banks created with very limited capital. The impact of these nearly 2,500
commercial banks on the real economy through lending to enterprises was relatively limited. Many of
the banks were heavily involved in hard currency speculation, and then diversifying their asset
holdings into treasury bills and equity stakes in blue chip enterprises. Such practices were ultimately
unsustainable, and the number of banks in Russia has declined considerably. By 2000, Russia had
1,311 banks, about half of its peak in 1994.
14
BOX 3.1 SELECTED PROFILE OF CIS STATE BANKS AFTER THE MONOBANK SYSTEM (CONTINUED)
Ukraine:
Ukraine’s early transition banking system consisted of the four state-owned specialized banks that were
spun off from the corresponding Soviet banks as Ukraine gained its independence from the Soviet
Union in 1991. The state banks specialized in agriculture (Ukraina), industrial lending
(Prominvestbank), social programs (Ukrsotsbank), and household savings (Oschadny Bank). A fifth
state bank, Ukreximbank, was formed in 1992 to process Ukraine’s foreign trade payments. All
specialized banks but Oschadny and Ukreximbank were corporatized (and thus nominally privatized) in
1992, primarily via “ownership transformation” whereby a number of large state-owned enterprises took
substantial ownership shares in the banks that serviced their sectors. During the ensuing years, the
ownership structure of these corporatized banks became more complicated due to a 1993 order by the
Government that all state enterprise shares in these banks should be transferred to the Ministry of
Finance. This prompted the banks to devise a method of transferring ownership through the distribution
of shares to the employees of client enterprises, and of the banks themselves. Thus, ownership of the
former state banks became diluted among tens of thousands of shareholders, most of them individuals.
In reality, most major policy and personnel decisions were still made by top managers of the state
enterprises that were majority shareholders prior to the share redistribution. In the absence of a major
outside entity owning a controlling stake, this meant that the state continued to exercise considerable
influence in those banks’ affairs.
Together, state banks accounted for a nominal $131 billion in total assets shortly after the
dismantlement of the monobank system (or by the mid-1990s). However, the real “market value”
figure is virtually impossible to estimate due to inaccurate accounting techniques, overvalued
properties and loan portfolios, inadequate provisions and reserves, and general market risk that
ultimately triggered numerous crises and subsequent failures. Nonetheless, based on existing
data and conversion of these data to US dollar exchange rates, the total asset value of these banks
was on the order of about 16 percent of GDP20 by the mid-1990s, most of it in Central Europe.
On an average basis, this translated into state banks having about $654 million in assets,21
although the real average could be much smaller in light of the many small banks over which
state or local governments continued to exercise influence and control. The real average would
also have shrunk had IAS been applied, as these accounting standards would have adjusted
balance sheets (and earnings) for non-performing loans, overvalued fixed assets and secured
loans, asset revaluation from hyperinflation, and related practices that presented a superior
financial position than what existed.
Most transition countries had at least three specialized state banks, and by 1992 the average
among the 27 countries was about seven major state banks per country.22 As noted above, in
some cases, state banks were not specialized in terms of sector. Rather, they focused on more
local geographic markets. However, the vast majority of transition countries had state banks that
20
Asset and GDP measures are used with some caution. However, state banks are estimated to have had
$130,758 million in assets. GDP was roughly aggregated at $804,405 million.
21
$130,758 million in assets across 200 state banks.
22
This ratio applies to major state banks. As noted in the text, many countries had smaller stakes in banks that
could be technically classified as state banks, or at least as government-owned banks, including at municipal and
local levels.
15
were specialized by function, with some crossover in some cases. The following table
summarizes the types of specialized state banks by country around 1992.23
Table 3.1 Profile of State Banks in Transition Economies in 1992
Industrial
Agricultural
Savings
X
X
X
Albania
X
X
X
Armenia
X
X
X
Azerbaijan
X
X
X
Belarus
X
Bosnia
X
X
X
Bulgaria
X
Croatia
X
X
Czech Republic
X
X
Estonia
X
FYR Macedonia
X
X
X
Georgia
X
X
X
Hungary
X
X
X
Kazakhstan
X
X
X
Kyrgyz
X
X
Latvia
X
X
Lithuania
X
X
X
Moldova
X
X
X
Poland
X
X
X
Romania
X
Russia
X
X
Slovak Republic
Slovenia
X
X
X
Tajikistan
X
X
X
Turkmenistan
X
X
X
Ukraine
X
X
X
Uzbekistan
X
X
Yugoslavia
Foreign Trade/EXIM
X
X
X
X
X
X
Other
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Countries with noteworthy state banks were Yugoslavia, Poland, the Czech Republic, Hungary,
and Bulgaria. In particular, Yugoslavia had a substantial number of large banks—eight of the 24
23
It can be noted that several specialized banks played multiple roles (e.g., many industrial banks also
financed foreign operations and construction activities; some savings banks made housing loans; foreign trade banks
financed exporting manufacturers). Likewise, several non-specialized banks provided loans to industry and
agriculture, savings facilities, trade finance, and financing for housing, construction, etc. Thus, just because a
particular cell in the table is empty does not mean that the country’s banks did not provide such types of financing.
Rather, the table simply highlights transition countries’ banks dedicated to particular sectors of the economy, largely
reflecting their earlier focus as part of the monobank system of the central planning era.
16
largest banks24 among transition countries were from Yugoslavia, accounting for $50 billion in
assets in 1991. Poland also had several large banks—seven of 24—although they only accounted
for about $27 billion in assets, half that of the major Yugoslav banks. Hungary had four banks
accounting for $16 billion in assets. The balance was comprised of banks from Czechoslovakia
and Bulgaria. Russia surprisingly did not have banks listed in the top 1,000 on an asset basis,
although 1995 figures for Sberbank suggest that it might have been one of the largest banks at
the time, as might have been Vneshtorgbank. These banks were comparatively large in terms of
asset size, with their rankings relative to other banks around the globe highlighted in the table
below.
Table 3.2 Large State Banks by Global Asset Size Standards Early in the Transition
Bank
Country
Beogradska Banka
Bulgarian Foreign Trade Bank
Sberbank
Ljubljanska Banka
Komercni
OTP
Jugobanka DD Beograd
PKO BP25
Bank Handlowy & Warszawie
PKO SA
Privredna Banka Sarajevo
Vseobecna uverova banka
Privredna Banka Zagreb
Zagrebacka Banka
Bank Gospordarki Zywnosciowej
(Food Industry)
K&H (Commercial & Credit)
Bank
Stopanska Bank
Magyar Kulkereskedelmi (Foreign
Trade) Bank
Vojvodjanska Banka
Bank Przemyslowo Handlowy
(Industry & Comm.)
Budapest Bank
Bank Slaski
Mineral Bank
Wielkopolski Bank Kredytowy
Yugoslavia (Serbia)
Bulgaria
Russia
Yugoslavia (Slovenia)
Czech Republic
Hungary
Yugoslavia (Serbia)
Poland
Poland
Poland
Yugoslavia (Bosnia)
Czechoslovakia
Yugoslavia (Croatia)
Yugoslavia (Croatia)
Poland
Global
Ranking
$15,983 million
287
$14,151 million
312
$13,000 million (1995) N/A
$9,121 million
425
$9,085 million
426
$8,575 million
448
$7,542 million
475
$6,923 million
N/A
$6,756 million
497
$5,722 million
548
$5,307 million
580
$4,839 million
606
$4,295 million
636
$3,852 million
683
$3,150 million
757
Hungary
$2,923 million
786
Yugoslavia (Macedonia)
Hungary
$2,752 million
$2,675 million
804
818
Yugoslavia
Poland
$2,357 million
$1,826 million
860
918
Hungary
Poland
Bulgaria
Poland
$1,793 million
$1,650 million
$1,420 million
$803 million
925
942
968
993
Asset Size
Sources: The Banker, July 1992; Moodys Banking Statistical Supplement, 1998 (for Sberbank)
24
These are defined as transition country banks that were among the 1,000 largest in the world in 1991.
25
PKO BP had assets of sufficient size to be ranked, but was not. It is included in the list due to its asset size.
17
TRADITIONAL ROLES OF STATE BANKS
State banks played a number of roles in society under the socialist command economy. As
discussed above, the key functions were lending to state farms and enterprises, and basic deposit
mobilization and safekeeping. Above all, banks were conduits for the financing of line
ministries’ production plans and targets. Centralized planning routinely set output targets by
industry or sector for the achievement of national and multi-year economic goals. Once these
decisions were made, budgetary resources were allocated and transmitted through the banks to
state enterprises and farms. Important in this regard is that banks were essentially passive
administrative units, rather than credit information processors and active risk-takers operating
according to commercial principles. Thus, when the monobanks were split and new second-tier
state banks were created, they neither had the orientation nor the skills or experience to play an
active role in imposing financial discipline on enterprises. Instead, at least in the early years of
their existence, they remained administrative in their orientation, processing loans and payments
based on line ministry or enterprise instructions. As their enterprise clients became increasingly
subject to market forces and/or were unable to rely on the state for financial help to keep them
operating, this inevitably resulted in severe loan portfolio problems for the state banks. While the
state and ex-state banks were operating largely under traditional assumptions and processes, new
prudential norms were being introduced as governments began to tighten monetary policies and
to introduce hard budget constraints to rein in the destabilizing effects of hyperinflation and
unsustainable fiscal deficits. The combination of these conflicting approaches to prudence in
monetary and banking matters while the real sector was uncompetitive and suffered from
breakdowns in production, trade and investment resulted in massive volumes of unrecoverable
loans.
On the deposit mobilization side, banks were responsible for safekeeping citizens’ savings. In
this regard, many of the traditional savings banks appear to have earned citizens’ trust, as did
some of the agricultural banks. This is because the savings and agricultural banks had significant
branch presence, and were responsible for record-keeping and maintenance of passbook savings,
the processing of pension payments, other compensation awarded to people as part of their
benefits package (mainly savings banks), and subsidy and other programs initiated at times in
support of primary agricultural output and agro-processing plans. However, this trust broadly
evaporated in CIS countries due to hyperinflation and the loss of savings value, combined with
fiscal pressures that prevented governments from implementing successful bank bail-outs. In
non-CIS countries, confidence levels varied based on the degree to which these banks could
accommodate withdrawals, as well as the level of deposit protection provided in the event of a
bank failure or liquidity crisis.
In this regard, the break-up of socialist Yugoslavia presented a special and distinctive set of
circumstances that was somewhat different from other transition countries whose savings were
lost due to hyperinflation. Banking systems in all of the ex-Yugoslav countries faced a crisis in
1992 with the freezing of foreign currency savings deposits which could no longer be honored
after the central government confiscated and spent the hard currency assets funding these
accounts. Slovenia and Croatia issued bonds early in the 1990s to provide some cover for these
account holders. The more fragile economy of FYR Macedonia issued bonds later in the 1990s.
However, depositor confidence has been more difficult to restore in Bosnia-Herzegovina, FYR
Macedonia, and now Yugoslavia due to the numerous crises in the Balkans during the 1990s.
18
The relatively new government of Serbia has committed itself to honoring the frozen deposits
over a period of years. However, it remains to be seen what impact that action will have on
depositor confidence. Evidence in most of the countries suggests that local citizens have little
trust in domestic banks, but they are willing to place their funds in foreign banks. This has been
particularly evident since late 2001 and the conversion of DM and other EU-country currencies
to the new Euro.
During the socialist period and early in the transition, active campaigns to increase retail deposits
were generally non-existent because private savings were limited in most countries. Exceptions
sometimes occurred during periods of national emergency (e.g., wars, floods), but these were
government directed rather than commercially driven.26 Moreover, in countries where private
savings were comparatively high (e.g., Slovenia, today’s Czech and Slovak Republics, Poland,
Hungary),27 resources were often kept outside the banking system28 to avoid administrative and
fiscal harassment from the authorities. Thus, while state banks played their fundamental role as
safekeepers, they were ill equipped to pursue commercial campaigns to attract private savings.
Beyond that, their inability to protect the value and availability of deposits and pensions was
exposed in the CIS region with hyperinflation, non-indexation, and the collapse of the ruble (and
subsequently other local currencies) in the early 1990s. In the non-CIS countries, shocks and
losses also occurred in most countries, although the magnitude of the damage was not as great
(see Tables 2.2-2.4).
GOVERNANCE, MANAGEMENT, AND OPERATING STANDARDS OF STATE
BANKS
Because the state banks were still social and political units at the time they were established,
governance was generally exercised through board representation from the Ministry of Finance.
Often, bank managers had been trained and used to operating in the public enterprise domain, be
it in banking or some other field. In many cases, managers were experienced in their particular
26
The State’s “official obligations” (similar to bonds) were a major instrument to encourage savings in the
Soviet Union. There were all kinds of them, many of them issued to support a specific cause – development of the
air force and navy in the 1930s, for example. The biggest effort of all was mounted during WWII – similar to what
was done in the West. All these obligations turned to worthless paper after 1991. This practice was also common in
other socialist countries, especially in the first post-WWII decade. For example, in the early 1950s, the Government
of Hungary issued a bond called "Loan for the Peace..” People were forced to spend a certain percentage of their
salaries to purchase these securities. There were no maturity dates, nor was interest paid, and the vast majority of
these securities were repurchased at face value at the end of the 1960s.
27
The reasons for the comparatively high savings rate in these countries vary when compared with other exSocialist countries. Slovenia was a major exporter in the former Yugoslavia, and, like Croatia, benefited from
relatively open borders that accommodated the tourist trade, part of which was serviced by the private sector
(lodging, restaurants, cafés). The Czech and Slovak populations traditionally maintained high levels of savings, with
some measure of confidence induced by numbered accounts that appeared to have provided most people with a
sense of privacy. Poland benefited from significant remittances from family and friends living abroad, and from
informal commercial trade. Like Poland, Hungary had relatively high savings due to remittances sent from family
members living abroad.
28
This was less the case with the Czech and Slovak Republics, where inflation rates were kept low, accounts
were often numbered for privacy protection, and savings were traditionally at high levels.
19
sector of focus (e.g., industrial engineers managing industrial banks). Eventually, the
shortcomings of this orientation emerged in the form of poor financial performance. In most
cases, state banks continued to lend as instructed or based on patronage. This meant that their
“commercialization” as joint stock companies was not sufficiently accompanied by a
“commercialization” of their credit management, product development, service levels,
operational efficiency, or risk management practices. Ultimately, this culminated in poor loan
performance, and eventual insolvency. Such problems usually were undetected due to poor
accounting and auditing standards, inexperienced supervisory personnel and inadequate
prudential regulations, decentralized and often incomplete information systems (e.g., branches
unconsolidated with headquarters accounts), and the traditional reliance on the government for
additional funding when liquidity shortages materialized. Once monetary policy and prudential
norms were tightened, this ultimately led to the reduced use of banks as vehicles for lending to
uncompetitive enterprises, or added fiscal cost when bailing out undercapitalized and illiquid
state banks.
Governance standards often deviated from “best practices” as these banks were not run
according to market-based norms. Performance and standards varied from bank to bank. Some
were run according to reasonably professional standards focused on generating/increasing
profitability, boosting capital, managing liquidity, containing risk, and attempting to build
“franchise value.” Others were poorly managed and less concerned with sustainable financial
viability. Boards were often lacking in information and qualifications. Internal audit functions
were underdeveloped and lacking in autonomy. Management information systems were weak.
The ability to scrutinize management behavior in a timely fashion was constrained by all of these
impediments. Annual shareholder meetings were often formal endorsement ceremonies rather
than serious evaluations of performance. The absence of market information and involved
institutional shareholders further weakened prospects for active and effective governance.
Meanwhile, such weaknesses made it possible for many managers to take advantage of
preferential deals that reinforced traditional networks of patronage, but undermined commercial
prospects for the banks.
Operating standards and practices were generally manual, with high levels of personnel and
inefficient processes. This is still evident in the employment figures for many state banks when
compared to private banks. One of the key subsequent challenges for state banks has been
reducing cost structures, increasing productivity and efficiency, and balancing the needs of the
emerging marketplace with stakeholder claims often transmitted through workers’ or employees’
councils. Once privatization initiatives were announced for state banks, many of these banks
included set-aside provisions for employees (e.g., five percent of shares) as an inducement to
cost containment and modernization. However, as most employees were accustomed to earlier
patterns of processing and job security, state banks generally distinguished themselves as highly
inefficient when compared with new banks that emerged with better systems, and better trained
and more motivated staff. Some of the state banks have since moved on to improve their
performance, but this has largely been carried out as part of a needed restructuring plan prior to
eventual privatization.
It should be noted that such flaws in governance, management and incentives have not been
restricted to transition countries. Turkey is currently working its way out of a number of
problems associated with past directed and subsidized lending (influenced by government
20
officials), insider lending (reflecting major problems of bank governance), dangerous assetliability mismatches (currency, maturity, interest rate), and inadequate accounting standards.
These characteristics have adversely affected state banks as well as many private banks, and will
cost the government well over $10 billion in the end.29 Many other countries and banks have also
been affected by such imprudent practices, including those in highly developed economies. Thus,
characteristics that have impaired the performance of transition country state banks are shared by
non-transition country banks as well, including in advanced economies. Usually, the breakdown
has been in the poor financial performance of a bank due to weak credit underwriting standards
(often the result of political pressure and patronage), unsatisfactory governance, and insufficient
supervisory oversight and enforcement.
TYPES OF SPECIALIZED STATE BANKS
Industrial Banks
Most transition countries had at least one major state bank focused on industry, usually with a
bias towards heavy industry. This was largely to sustain production and employment levels, as
well as to generate some fiscal revenues. Loss-making enterprises were often propped up
because they served as a source of tax revenue (from sales proceeds in the form of turnover
taxes) for government. While reliable financial data are not available for the early transition
years, these banks were generally troubled loss-makers from the outset. In most cases, they have
been restructured, recapitalized or liquidated. Only in a few cases have they been successfully
privatized. Because they were set up to finance troubled companies, their mission was often
doomed from the start, serving administrative, political or patronage-based purposes rather than
commercial ones.
The following table shows the industrial banks that existed in the early stages of transition
(around 1992). As noted above, several specialized banks also performed other functions (e.g.,
savings facilities, trade finance). Particularly in the former Yugoslavia, banks were more
diversified in their activities, and the economy was less centrally planned than in other exsocialist countries. Thus, the “industrial” banks below in Bosnia-Herzegovina, Croatia, FYR
Macedonia, Slovenia and Yugoslavia were not as specialized as the industrial banks found in
other countries, although these banks did have an industrial orientation in their ownership
structure and lending activities. In general, the banks below were the major state banks in
countries that had a particular focus on large-scale industrial enterprises, and they include “apex”
development banks that were also established to help allocate or direct lending from abroad to
selected companies and sectors.
29
See “Turkey: Bank Reform Progress” Oxford Analytica, January 2, 2002, and “Turkey: Banking
Challenges” Oxford Analytica, May 15, 2001.
21
Table 3.3 Industrial Banks in Transition Countries in 1992
Central and Eastern Europe and the Baltic States
National Commercial Bank
Albania
Bosnia
Bulgaria
Croatia
Czech Republic
Estonia
FYR Macedonia
Hungary
Latvia
Lithuania
Poland
Romania
Slovak Republic
Slovenia
Yugoslavia
Commonwealth of Independent States
Ardshinbank (Bank for
Armenia
Industry and
Construction)
Promstroibank
Azerbaijan
Belpromstroibank
Belarus
Industriyabank
Georgia
Privredna
> 7 specialized banks
Privredna; HBRD; several smaller
banks that were focused on
shipbuilding finance
Investicni Banka
Bank of Industry and
Construction
Stopanska Banka
Magyar Hitel; Hungarian Credit
Bank
Industry and Construction Bank
Kazakhstan
Kyrgyz
Turan Bank
Promstroibank
Moldova
Russia
Moldindconbank
Promstroibank
Tajikistan
Tajikbankbusiness;
Tajikorientbank
(previously
Promstroibank)
Investbank; Gasbank
Promstroibank
No specialized bank
Turkmenistan
Bank Handlowy; Polish
Ukraine
Investment Bank
Banca Comerciala Romana
Uzbekistan
Priemyselna Banka; Investicni
Banka
No specialized bank, although
Nova Ljubljanska played this role
Jugobanka-Bor; Jugobanka-Beograd;
Beobanka Belgrade; Invest Banka;
Beogradska Banka; Vojvodjanska
Uzpromstroibank
Agricultural Banks
While agriculture played a relatively minor role in the transition economies, a significant number
of people were employed in this sector, often through state farms, collectives and cooperatives.
In addition, several countries permitted households to have very small production sites for
subsistence farming. As in most countries throughout the world, central planners were concerned
with food security issues, stockpiling, warehousing, distribution, problems associated with postharvest losses, etc. Trade networks were also frequently reliant on the shipment of cereals and
grains, and the export of processed foods for inputs and other needed goods in exchange. For
example, small countries like Armenia, Moldova and Georgia were known to ship quantities of
wine and brandy to Russia. Such trade arrangements were not limited to CIS countries, as
Bulgaria, Hungary, Poland and Romania also shipped processed foods to Russia in exchange for
22
needed energy supplies. Agricultural banks generally accommodated the farms, collectives and
cooperatives, and often manufacturers of processed foods, beverages and tobacco. Agricultural
banks also sometimes served as deposit-takers, providing basic safekeeping for rural
communities that might not have had easy access to other banks. Apart from Estonia and several
ex-Yugoslav countries, transition countries usually had at least one dedicated agricultural bank
by 1992. These banks have generally been deep loss-makers, and some have since been
liquidated. Nonetheless, they have often been protected because of the political patronage that
results from close ties to agricultural or farmers’ movements, and due to the extensive branch
coverage these banks often offer.
Table 3.4 Agricultural Banks in Transition Countries in 1992
Central and Eastern Europe and the Baltic States
Rural Commercial Bank
Albania
No specialized bank
Bosnia
Agrarian and Cooperative Bank
Bulgaria
No specialized bank, although some
regional banks focused on agribusiness
Croatia
Agrobank
Czech Republic
No specialized bank
Estonia
No specialized bank
FYR Macedonia
Agrobank
Hungary
Commonwealth of Independent States
Agrobank
Armenia
Agroprombank
Azerbaijan
Belagroprombank
Belarus
Agroprombank
Georgia
Kazakhstan
Kyrgyz
Moldova
Russia
Agricultural Bank
Latvia
Lithuania
Poland
Romania
Slovak Republic
Slovenia
Yugoslavia
Agricultural Bank
Bank Gospodarki Zywnosciowej
Banca Agricola
Slovak Agrobank (Slovenska
Polnohospodarska)
No specialized bank
Vojvodjanska Banka (agro-processing)
Tajikistan
Turkmenistan
Ukraine
Uzbekistan
Kazagroprombank
Agroprombank
Agroindbank
Soviet
Agroprombank (later
changed name to
Rosselkhozbank)
Agroinvestbank
(“Shark Bank”)
Agroprombank
Bank Ukraina
Uzagroprombank
Savings Banks
In most transition countries, the establishment of “new” savings banks accompanied the break-up
of the monobank system. In some countries (e.g., Sberbank Russia, Ceska/Slovenska Sporitelna
in the Czech-Slovak Federal Republic, Sberbank in the Kyrgyz Republic and Tajikistan,
Uzsberbank in Uzbekistan), these were very “narrow” institutions30 that essentially placed all
their savings in cash deposits with the central bank or other state-owned banks, or in government
30
Some of these banks may have had small amounts of loans on their books. However, by and large,
“narrow” is defined to mean savings banks that focused on savings and had limited commercial lending.
23
securities to help finance the budget as tax revenues diminished and fiscal deficits grew. In some
cases, such as in CSFR and Russia, these roles changed and the banks took on more diverse
activities characteristic of commercial banks. However, at the outset, they were fairly narrow in
their focus. In other cases (e.g., PKO BP in Poland, OTP in Hungary, CEC in Romania, DSK in
Bulgaria), the savings banks were used (as before) for housing finance or other fundamental
household needs. In fact, savings banks often had very basic asset-liability matching strategies
under central planning, whereby long-term savings were matched with long-term housing loans
(all in local currency). With strict price controls and the suppression of inflation in most
transition economies, there was no need for sophisticated financial engineering strategies to
manage interest rate, market or foreign exchange risk.. This provided relative calm and
underlying stability at the time. Postal savings banks also existed, and were sometimes part of
the larger savings bank.
Savings banks were often treated with a measure of protection because of their important
financing role for the government.31 This was demonstrated in Central Europe, as they have been
among the last banks privatized in most countries. For example, PKO BP remains state-owned in
Poland. Ceska Sporitelna in the Czech Republic was only privatized in 2000, about the same
time as Slovenska Sporitelna in the Slovak Republic. Moreover, even when countries have opted
for strategic privatization, the actual structure of savings banks’ shareholdings after privatization
has sometimes been more diluted than found at other banks (e.g., OTP in Hungary32), a condition
which impairs effective governance. In the Baltics, the Lithuanian Savings Bank was privatized
as late as 2000, while the Latvian Savings was still in state hands in 2001. In the CIS, savings
banks likewise remain among the last to be privatized. However, in most CIS countries, the
savings banks were particularly hard hit by hyperinflation, and most individual accounts were
devastated. This undermined the integrity of implicit deposit guarantees, and public confidence
in these banks remains low in many cases.33
31
It can be noted that public sector ownership of savings banks is not restricted to ex-socialist countries, and
that it has been prominent in many Euro-zone countries. For example, Austria, Finland, France, Germany and
Sweden all have savings banks that have been at least partly owned by central or local governments for many years.
32
OTP’s shareholder structure when “privatized” was (i) the State owned 25 percent + one share; (ii) two
State Social Security Funds owned 20 percent; (iii) domestic investors owned 27 percent; (iv) 100 foreign investors
owned 20 percent in total (up to 2.5 percent individually); and (v) Creditanstalt and Schroeders each owned 2.9
percent.
33
Sberbank of Russia may be an exception, with substantial deposits and assets (see Box 4.1 and Annex 11).
24
Table 3.5 Savings and Postal Savings Banks in Transition Countries in 1992
Central and Eastern Europe and the Baltic States
Savings Bank
Albania
No specialized bank
Bosnia
Durzjavna Spestovna
Kasa
Bulgaria
No specialized bank
Croatia
Ceska Sporitelna
Czech Republic
Savings Bank
Estonia
No specialized bank
FYR Macedonia
Hungary
Latvia
Lithuania
Poland
Romania
Slovak Republic
Slovenia
Yugoslavia
Orszagos Takarekpenztar
es Kereskedelmi (OTP)
and Postbank
Savings Bank
Savings Bank
PKO BP and PKO SA
CEC
Slovenska Sporitelna,
Postovna Banka
No specialized bank
No specialized bank
Commonwealth of Independent States
Armenia Savings Bank
Armenia
Sberbank
Azerbaijan
Savings Bank
Belarus
Savings Bank
Georgia
Halyk Savings Bank
Kazakhstan
Sberbank
Kyrgyz
Savings Bank
Moldova
(Ekonomii)
Sberbank
Russia
Tajikistan
Turkmenistan
Ukraine
Uzbekistan
Sberbank
Sberbank
Oschadny Bank
Uzsberbank
Foreign Trade Banks
Foreign trade banks were common and increasingly active in the countries of Central Europe,
partly because trade more rapidly shifted from the former Soviet Union to the more lucrative
markets of Western Europe.34 Moreover, the latter showed early direct investment interest in
countries like Hungary, the Czech Republic, and later Poland. Likewise, because Yugoslavia and
Romania had been more non-aligned in their international relations, they had already established
trade links with Western and other markets. Hence, foreign trade banks and export-import
facilities (and in some cases, banks) emerged to encourage these trade and investment links.
In the CIS markets, there was clear interest early on in establishing trade and investment ties
with Russia, as well as in some of the other CIS countries where strategic resources were found
(e.g., oil and gas in Azerbaijan, Kazakhstan and Turkmenistan). However, neither trade nor
investment flourished in the CIS, and only Russia received any material levels of direct
34
Central European trade with the EU was $120 billion in 1993, the first year for which statistics are
available for all countries. Gross trade grew to about $223 billion by 2000.
25
investment from abroad.35 In 1993, gross international trade between the EU and CIS countries
was only about 36 percent of the levels recorded in Central Europe. (As of 2000, CIS levels
were only about 33 percent of those between the EU and Central European economies.) Thus,
while banks existed to accommodate trade and investment links, they did not seem to function
with the product range or volume that Central Europe experienced. Moreover, many of the
largest CIS companies were able to obtain financing from Western banks or markets in the form
of syndicated loans and by issuing depository receipts. Thus, companies such as Gazprom,
Lukoil and other CIS giants were able to go directly to the international capital markets. For
smaller companies lacking comparable clout, they were often unable to penetrate Western
markets due to quality or scheduling issues. This only added to their difficulties in arranging
financing.
Table 3.6 Foreign Trade and Export-Import Banks in Transition Countries in 1992
Central and Eastern Europe and the Baltic States
No specialized bank
Albania
Commonwealth of Independent States
Armimpex (ExportArmenia
Import Bank); possibly
Econombank
International Bank
Azerbaijan
Croatia
No specialized bank, although
Union Bank (formerly
Jugobanka) tried to play this
role
Bulgarska Vnushnoturgovska
Banka
No specialized bank
Czech Republic
Estonia
Obchodni Banka, Zivnostenska
No specialized bank
Kazakhstan
Kyrgyz
FYR Macedonia
Hungary
Latvia
Lithuania
Poland
No specialized bank
Hungarian Foreign Trade Bank
Latvian Foreign Trade Bank
No specialized bank
Bank Handlowy; Bank for
Export Development; Bank
PeKao (Bank Polska Kasa
Opieki)
Moldova
Russia
Tajikistan
Turkmenistan
Ukraine
Bosnia
Bulgaria
Romania
Slovak Republic
Slovenia
Yugoslavia
Belarus
Belvnesheconombank
Georgia
Eximbank (made private
in 1992)
Alem Bank
No specialized foreign
trade bank
Vneshekonombank
Vneshtorgbank
Tajikvnesheconombank
Vnesheconombank
Ukreximbank
Uzbekistan
Bancorex and EXIM Bank
Obchodna Banka; Slovak
Zarucna Banka
No specialized bank
Eximbank
35
National Bank of
Foreign Economic
Affairs
Foreign direct investment in the CIS in 1992 was only $226 million, of which $200 went to Ukraine. By
1995, these figures had only risen to $3.7 billion, of which $1.7 billion went to Russia and nearly $1.0 billion went
to Kazakhstan.
26
Other State Banks
Several transition countries had additional state banks to finance infrastructure and social
programs. Many of these were dedicated to housing and construction. In some cases, banks tried
to stimulate small loans to households for SME development. In Hungary, Konzumbank
represented consumer cooperatives. However, as state budgets tightened over time, support for
these banks often diminished. In most cases, these banks appeared to be relatively ineffective.
For example, there is limited housing finance in most transition country markets, with Poland
being the possible exception. More recently, mortgage lending has increased in countries like
Hungary, Bulgaria, Croatia, and the Czech and Slovak Republics. However, by and large, there
is limited lending for housing construction, and even less in the way of mortgage bonds or
securitization. In other cases, SME lending has often been dependent on donor funding. More
recently, in the most stable markets, commercial banks have increased their lending to SMEs,
households, etc. However, the sustainability of this lending has often emerged only after serious
reforms have been introduced. Under state-supported schemes, such financing did not prove to
be sustainable.
27
Table 3.7 Social, Housing and Related Banks in Transition Countries in 1992
Central and Eastern Europe and the Baltic States
No specialized bank
Albania
Bosnia
Most banks were regional or local
and provided loans for social,
housing and other purposes36
Bulgaria
Stroybank (construction); Mineral
Bank (SME financing)
Croatia
No specialized banks, but local
banks made housing and
construction loans
Czech
Republic
Estonia
FYR
Macedonia
Hungary
Latvia
Lithuania
Poland
Romania
Slovak
Republic
Commonwealth of Independent States
No specialized bank. The early
Armenia
role of ASCB is not entirely
clear. Bank for Industry and
Construction and the
Econombank may have
provided some housing loans.
No specialized bank, although
Azerbaijan
Promstroibank may have
provided construction and
housing loans.
About 13 banks were small,
Belarus
geographically focused, and
provided loans for housing,
construction, etc.
Zhilsotsbank
Georgia
Kazakhstan
Kredsotsbank (housing)
Estonian Social Bank
No specialized bank, although the
Macedonian Bank for Development
Promotion could finance
social/housing, infrastructure and
other activities
Konzumbank
Kyrgyz
Moldova
Zhilkomhozbank (housing)
Moldsotsbank
Russia
Housing and Social Development
Bank
No specialized bank
Tajikistan
No specialized bank, although
Sberbank made loans for
housing
No specialized bank
PKO BP (for housing)
Ukraine
Uzbekistan
Turkmenistan
CEC (for housing loans); Romania
Bank for Development
Slovenska Zaruchna Bank
(guarantees, specialized in support
to SMEs)
36
Turkmenbank, Gasbank,
Senegatbank
Sotsbank
Four sectoral banks also
provided specialized support
(e.g., Phat Bank, or the cotton
bank)
Among Bosnia-Herzegovina’s banks, 17 of 23 accounted for only 21 percent of bank assets. Considering
total assets were only $3.1 billion equivalent in 1997, and that these values were overstated due to weak
classification and provisioning at the time, most banks were very small, albeit “diversified” and “commercial..”
Such a distribution means the average of these 17 banks only had assets of $38 million.
28
Central and Eastern Europe and the Baltic States
No specialized bank
Slovenia
No specialized bank
Yugoslavia
Commonwealth of Independent States
CHAPTER FOUR: STATE BANKS IN THE MID-1990S
THE FINANCIAL STATUS OF STATE BANKS IN 1995: DIVERGING PATTERNS OF
DEVELOPMENT
By the mid-1990s after several years of difficult transition, the number of major state banks was
about 200, roughly the same as figures in 1992 (if the large number of Russian banks in which
the state had small stakes37 is excluded). The major change that did occur was a shift towards
privatization and the presence of newly-created banks. While this had already begun in the early
1990s, by the mid-1990s, there was growing recognition of the need to restructure and privatize
the major state banks for banking sector modernization. This process began in Central Europe
and the Baltics, largely due to the failure of many state banks, the high cost of keeping banks
state-owned, and the superior financing capacity and global information that many foreign banks
brought to the domestic marketplace. These were also key ingredients for many transition
countries as their trade flows shifted away from the CIS and increasingly towards the EU.
Likewise, the advent of increasing trade was linked to increasing foreign direct investment,
which increased the interest of foreign banks in Central European and Baltic markets. All of this
created more intense competition for the state banks, and began to challenge their commanding
balance sheet position in most markets. By contrast, there was limited foreign direct investment
that was “strategic” and “prime-rated” in CIS banking markets by 1995, although some of the
major banks did have operations in some of the CIS countries38.
However, structural reform and ownership changes also prompted different results, as many
private banks were undercapitalized, poorly managed, or utilized for excessive personal gain
rather than long-term commercial viability. This was particularly true in the CIS and Balkan
markets, but also true in parts of Central Europe and still evident in some of the Baltic banks.
Meanwhile, the larger foreign banks catered mainly to a small segment of the corporate market,
and took on only limited balance sheet risk. Thus, in neither case had private banks triggered the
shift in intermediation fundamentals by the mid-1990s that policy makers had hoped for earlier
37
There are no precise figures for the number of state-owned banks in Russia in 1995, given the large number
of banks in which the state or other public authorities had minority stakes. However, the state continued to control
the banking system from 1992-95, dominating savings through Sberbank (70 percent of household deposits) and
providing directed lending to state enterprises through a number of new and regional banks. In the period 1992-95,
the number of banks grew enormously so that there were more than 2,200 banks operating in Russia, although the
largest 10 banks accounted for 50 percent of total assets by 1995. The impact of these 2,200 commercial banks on
the real economy through lending to enterprises was relatively limited because many of the banks were heavily
involved in hard currency speculation, and then diversified their asset holdings into treasury bills and equity stakes
in blue chip enterprises.
38
For instance, ING, ABN-Amro, Deutsche Bank, Société Générale, Citigroup, and HSBC were among the
major banks operating in CIS markets in the mid-1990s.
29
in the decade. However, these fundamentals did show improvement and change in several
markets a few years later, and lending flows did begin to increase based on commercial criteria
by late 1995 in some countries (e.g., Poland, Hungary, the Czech and Slovak Republics).39
By 1995, banking systems had already taken different paths in different transition regions. The
CIS countries continued to have a far larger number of banks, although they were much smaller
on average, in terms of capital and assets. The large majority of these banks operated as “pocket”
banks, subservient to their enterprise shareholders and other related and controlling interests. By
contrast, the Central European and Baltic states were already consolidating their systems,
actively restructuring and (in most cases) recapitalizing their domestic banks as foreign
investment in the sector was materializing, or on the verge of doing so. 40 With the exception of
Slovenia, the ex-Yugoslav states were the primary exceptions to major bank restructuring among
non-CIS countries, largely due to conflagration in the Balkans. However, even poor countries
like Albania were beginning to attract foreign branches and investment, while other countries
whose economies were performing poorly were still able to attract investment into the banking
sector (e.g., Bulgaria, Romania).
On an average (unweighted) basis, the CIS countries each had 264 banks by 1995, of which
seven were state banks that accounted for about one third of total bank assets. Total banking
system assets in CIS countries were about $83 billion in 1995, of which $74 billion were in
Russia alone. State banks in CIS countries had about $30 billion in assets, about 90 percent of it
represented by Russian state banks.
BOX 4.1 RUSSIA’S SBERBANK IN THE MID-1990S
Sberbank became a joint-stock company in 1991 during the government’s reform and restructuring of the banking
sector. This reform led to the creation of some 800 new banks taking the capital of the previous state banks.
Sberbank was the largest among these banks, with its major shareholder becoming the Central Bank of the
Russian Federation. Sberbank’s dominant role in the banking sector persisted throughout a period of growth, and
during the rapid rise in the number of banks in Russia. During that time, Sberbank continued to play the role of a
traditional state savings bank, providing retail banking services throughout the country and lending to stateowned enterprises at the national and regional levels.
In contrast, the banking systems in CEE had fewer banks, but their assets were larger in value.
There were 537 licensed banks in all of CEE and the Balkans, less than 25 percent of Russia’s
banks alone. On average, the CEE and Balkan countries each had 45 banks, of which eight were
state-owned. Total system assets were about $192 billion, or more than double the assets of CIS
banks. State banks in CEE accounted for about 65 percent of banking system assets on average.
39
See M. Borish and M. Noël, “Private Sector Development During Transition: The Visegrad Countries,”
World Bank Discussion Paper 318, 1996.
40
The Czech Republic, Hungary, Poland and Romania had already attracted direct investment from Eurozone and other Western banks into domestic banks or start-ups. Other countries (e.g., Bulgaria, Slovak Republic,
Slovenia) were also beginning to attract limited investment interest in the form of bank branches or small capital
investments in banks.
30
Thus, state banks in CEE and the Baltics had a more prominent role than their counterparts in the
CIS, with assets of about $100 billion, more than three times state bank assets in the CIS.
Part of the difference between the two regions is that asset values were more broadly wiped out
by hyperinflation in CIS, whereas inflation rates were not as devastating in Central Europe as
they were in CIS (and to a lesser extent, the Baltic states). A second reason is that Central
European governments were more willing to recapitalize major state banks as part of broader
pre-privatization restructuring programs that occurred in varying degrees of speed and magnitude
through the 1990s. For example, major recapitalizations occurred at least once in the Czech and
Slovak Republics, Hungary, Poland, Croatia and Slovenia, and to a lesser extent in Romania.41 In
addition, some of the ex-Yugoslav states (i.e., Slovenia and Croatia) floated bonds to compensate
depositors who lost foreign currency savings when the National Bank of Yugoslavia froze these
accounts in 1992. For these reasons, state banks had larger balance sheets in CEE than in CIS,
where asset values were generally erased with hyperinflation. A third explanation is that CIS
countries sometimes set up parallel structures for their commodity-based resources (e.g., Oil
Fund in Azerbaijan) that are considered strategic and essential for foreign exchange earnings. A
fourth explanation is that the CIS countries gravitated increasingly to a system of arrears, barter
and netting as the monetary system imploded, often bypassing the banking system (see Annex 5).
Thus, by the mid-1990s, CIS countries were more likely to have much of their economic and
asset values in non-bank institutions, whereas the CEE and Baltic models focused on eventually
building a stable banking system. To the extent that the latter regions directed lending through
state banks for preferred enterprises and farms, these practices slowly unraveled, as
macroeconomic pressures called for the imposition of hard budget constraints, as new
regulations required stricter bank adherence to solvency and liquidity norms, as new private and
foreign banks demonstrated superior capacity, and as negotiations commenced in some cases for
entry into the European Union.42
On a stock basis, asset-based measures appeared reasonable in the CEE (although lower than in
advanced economies), lower in the Baltics, and microscopic in the CIS countries. All together,
bank assets were about 58 percent of 1995 GDP in CEE, as compared with 126 percent among
OECD countries. However, these stock figures should be treated with caution, as assets in many
cases were overvalued. By the time loans, securities, real estate and other assets were more
properly valued, balance sheets usually shrunk among the largest and most exposed banks. These
were usually state banks that were recapitalized and restructured prior to privatization,
41
See M. Borish, M. Long and M. Noël, “Restructuring Banks and Enterprises: Recent Lessons from
Transition Countries,” World Bank Discussion Paper 279, 1995.
42
While the Czech Republic, Estonia, Hungary, Poland and Slovenia were not officially invited to negotiate
accession until 1998, countries in the region were aware of preliminary steps they needed to take to receive an
invitation. The countries invited were considered those most likely to be able to comply with EU requirements, as
outlined in the 31 chapters that are negotiated. Originally, the Slovak Republic was considered a likely invitee
during the first wave, but its policies were not considered acceptable. After the change in government in 1998 and a
corresponding change in policies, the Slovak Republic was invited along with Latvia, Lithuania, Bulgaria and
Romania. Meanwhile, Estonia was among the first transition countries to be invited. They were not considered a
likely first-tier candidate early in the 1990s when the idea of EU enlargement began to accelerate. However, the EU
rewarded Estonia’s persistent reform efforts with the early invitation.
31
sometimes more than once. The three Baltic states showed bank assets to be about one quarter of
GDP, while the CIS countries had about 18 percent of bank assets to GDP. Given the low GDP
figures in the CIS, the last statistic illustrates the severe decline in asset values resulting from the
collapse of central planning, and how irrelevant most banks had become in CIS economies by the
mid-1990s.
By the mid-1990s, state banks were playing less of a role in terms of lending flows, although
they continued to hold a disproportionate share of total bank assets in Central European
transition economies. State banks’ credit figures were higher than private banks, with many of
these credit figures overvalued claims on Government, rather than loans outstanding to credit
worthy and viable enterprises. State banks also often had significant shares of deposits, although
their capital positions were not always as strong as at the private banks, even before adjusting for
risk and capital adequacy. As countries asserted increasing levels of monetary discipline to
control inflation rates, the role of state banks started to become less important. Lower levels of
broad money to GDP partly reflected the imposition of monetary discipline. Meanwhile, weak
loan classification, audit and accounting standards suggested that bank assets were overstated. In
this case, state banks held most of the assets that would later be reclassified and written down.
The differences between bank assets and broad money indicate that virtually all transition
economies were making progress in bringing down inflation rates as the basis for stabilizing the
overall macroeconomic environment. Among the 12 CEE countries, most had fairly sizable gaps
between the asset values posted with the banks and the level of broad money (M3) circulating
through the economy, the latter being less than the former. While there are several possible
explanations, these gaps broadly reflected the impact on liquidity of tightened monetary policy,
and enterprise and household funds still held or circulating outside the banking system to
conduct transactions without paying taxes. Meanwhile, these trends coincided with structural
shifts in the banking system to encourage recapitalization by retaining earnings generated from
increased interest rate spreads. In the Baltics, these ratios were lower than in CEE, but there were
minimal gaps. In fact, in Estonia and Lithuania, M3 exceeded bank assets, in some ways
suggesting that policy moves to restore public confidence in the banking sector were achieving
results.43 In the CIS, broad money was higher than bank assets, but still low in relative terms.
Particularly in the case of CIS countries, households and enterprises faced severe liquidity
constraints, resulting in a shift to barter and arrears for most transactions, and dollarization of
much of the economy. These tendencies reflected the deep lack of confidence of the public in
both the safekeeping capacity of the banks, and the underlying value of local currencies.
43
These policy moves included introduction of a currency board in Estonia, with the kroon pegged to the
DM, and comparable linkage in Lithuania between the litai and the US dollar.
32
Figure 4.1 Banks' Assets to GDP in Transition Countries in 1995 (millions US dollars)
70%
60%
50%
40%
30%
58%
20%
24%
10%
18%
0%
CEE
Baltic
CIS
Notes: Figures for 1995 or earliest year reported after 1995. No reliable figures reported for Tajikistan,
Turkmenistan, Uzbekistan or Yugoslavia for the period.
Sources: IMF (International Financial Statistics); EBRD Transition Report 2001; authors’ calculations.
STATE BANKS AND BROAD FINANCIAL INTERMEDIATION
Broad Intermediation Trends
In general, financial intermediation through the entire banking system in virtually all transition
economies was low in the mid-1990s, in terms of incremental lending and deposit mobilization.
Net loans had only increased $36 billion-equivalent from 1992 to 1995, little more than $1.3
billion per country on average. Given the 3,783 banks operating in transition countries, this
amounted to about $10 million per bank,44 suggesting that most banks were doing very little, if
any, new lending. Meanwhile, net deposits increased $60 billion-equivalent, or $16 million per
bank on average.45 This suggests that most banks continued to suffer from weak funding bases,
as they mobilized little in the way of additional deposits, lacked access to syndicated debt
markets, and had few opportunities to increase capital from earnings or new issues. This also
points to risks in the inter-bank market, as banks in relatively weak condition were often
borrowers in these markets.
Broken down by region, the CEE banks showed the greatest increase in loan and deposit figures.
In general, loans46 increased nearly $26 billion, of which the Czech Republic showed the greatest
44
$36,276 million/3,783 banks = $9.6 million.
45
$60,203 million/3,783 banks = $15.9 million.
46
Loans are defined as banks’ claims on enterprises and households. This is separate from net domestic credit
figures, which include banks’ claims on Governments.
33
increase. The Czech Republic and Poland accounted for about 80 percent of the region’s net
increase, while Hungary, Bulgaria and the Slovak Republic showed net declines. In the CIS
countries, there was a net increase of about $10 billion in loans, with Russia accounting for more
than $12 billion, second only to the Czech Republic among all transition countries. Several CIS
countries showed net declines, including Kazakhstan, Turkmenistan and Ukraine. Loans
increased nearly $1 billion in the Baltic states.
With regard to deposits, CEE countries accounted for an increase of nearly $42 billion, about
two thirds of total incremental deposits mobilized by transition country banks during this period.
Poland and the Czech Republic accounted for nearly half of the total. FYR Macedonia
experienced a net decline. In the CIS countries, deposits increased nearly $18 billion overall, a
positive development, especially considering the devastating effects of hyperinflation in the
region. However, Russia was wholly responsible for the gains, while all other CIS countries,
apart from Belarus, showed limited increases at best or flat deposit levels. Several CIS countries
showed net declines, including Armenia, Moldova, Turkmenistan and Ukraine. Meanwhile, the
Baltic banks showed a nearly $1 billion increase in deposits, slightly more than net loans. This is
important given the crash of Bank Baltija in Latvia, that country’s largest bank. However,
Latvia’s performance lagged that of Estonia and Lithuania, also reflecting the 1995 banking
crisis Latvia experienced. The figure below highlights basic loan and deposit trends from the
early 1990s to the mid-1990s.
Figure 4.2 Growth of Loans and Deposits -- 1992/3 to 1995 (millions US dollars)
CEE & Baltics
CIS
$140
$121
$120
$103
$100
$80
$77
$79
$60
$47
$35
$40
$29
$25
$20
$1992-3
1995
1992-3
1995
CEE & Baltic'sDeposits
Loans
1992-3
1995
Loans
CIS
1992-3
1995
Deposits
Notes: Loan figures are derived from IFS net domestic credit to enterprises and households, but exclude claims on
Government; figures are for 1992 and 1995, or the earliest year in which figures are available (1993 in many cases,
1994 for Albania and Belarus); deposit figures are from IFS.
Sources: IMF; authors’ calculations
34
Net Domestic Credit
In terms of credit, state banks had approximately $95 billion outstanding47 in credit exposure48 at
the end of 1995. This translates into about $472 million49 in credit exposure for the average state
bank around that time. By comparison, the average private bank only had about $31 million in
credit exposure. The largest banks on average were in the CEE region, mostly in Poland and the
Czech Republic. This was true of both state and private banks, with Baltic and CIS private banks
being particularly small in terms of credit exposure.
As with general asset values, loan values were broadly overstated, and some overall credit values
were overstated, as demonstrated when some CIS Governments eventually defaulted on domestic
debt. In most transition countries in 1995, loan quality was poor, classification standards were
not strict enough or properly applied, and portfolios eventually deteriorated for a number of
reasons. Had sound provisioning standards been in place at the time, the net loan figures on state
banks’ balance sheets would have been smaller. Nonetheless, based on the available data, state
banks had these credit figures.
Given the economic structure of most of the transition economies at the time, industrial banks are
thought to have had the largest aggregate and average exposures. Among the countries covered,
the industrial sector accounted for 21-42 percent of the total economy, and was 33 percent on an
average unweighted basis.50 Thus, state banks in particular had more loans out to state-owned
industrial enterprises than to any other sector or borrower. The second largest group of exposures
appears to have been to the agricultural sector, although it is not clear what percent of state
banks’ credit was allocated in this direction. By the mid-1990s, services were starting to increase
significantly as a share of GDP. However, most of the enterprises responsible for this
development were small private companies without access to bank loans for financing. The
figure below shows credit exposure by state and private banks in 1995.
47
These figures are based on state bank shares of total banking system assets, and applied proportionally to
aggregate credit figures. Aggregate credit figures include claims on Government, and are not restricted to loan
exposures to enterprises and households.
48
This definition is on-balance sheet, and does not account for off-balance sheet items due to data
deficiencies. However, more recent reviews of the financial condition of these banks need to take such items and
contingencies into account for a sound accounting of their status and risk.
49
$94,482 million across 200 state banks.
50
See World Development Report, 1997. Albania had the lowest proportional figure for industrial valueadded, while Ukraine had the highest at 42 percent.
35
Figure 4.3 Sources of Bank Credit Exposure in 1995 (percent)
100%
90%
80%
41.1
70%
72.9
60%
66.2
50%
40%
30%
58.9
20%
27.1
10%
33.8
0%
CEE
Baltics
State
CIS
Private
Notes: Total number of banks are for 1995 except Bosnia; total banks for Yugoslavia are estimated for 1995; state
banks estimated for 1994; asset figures are for 1995, or earliest year reported after 1995; reliable figures not
available for Tajikistan, Uzbekistan or Yugoslavia.
Sources: IMF (International Financial Statistics); EBRD Transition Report 2001; World Bank Policy Note
("Financial Sector Reform in Transition Countries")
As noted above, “stock” measures of credit should not be confused with new loans. While
balance sheet exposures remained high to state industrial enterprises and farms, many of these
loans represented delinquent loans which were rolled over without restructuring and without any
material increase in collateral backing or other risk reduction actions. Moreover, even when
credit was directed to loss-makers, these new funds were often used to pay down arrears to
employees on wage accounts and to government accounts for social benefits. In effect, the new
funds often did little to provide the enterprises with the financing needed to replenish working
capital, fund capital improvements or take other actions designed to foster profitable production..
Thus, much of the “stock” measure of credit for transition countries in 1995 was old and nonperforming despite what the banks’ formal books said.
To the extent that “flow” measures showed an increase in credit (as in most transition countries),
these proceeds were often used to reconcile accounts and pay down arrears, rather than to invest
or retool. In other cases, “controlling” interests diverted funds for uses that undermined the
positions of both the debtors (borrowing enterprises) and creditors (banks). This pointed to the
deep structural problems of many state bank clients, as well as weaknesses in the legal
framework, and corporate governance and management practices that undermined market
development. More specific to the banks, such cases aggravated the solvency and liquidity
problems of state banks, and eventually reduced or eliminated their willingness to assume credit
risk when they did have access to loan funds. In the end, these bank losses, flowing from the
problems of loss-making enterprises, became so severe that governments were unable to fund
36
them yet unable to come up with the needed investment capital to restructure and modernize
without major job losses, debt write-downs, etc.
Assets
By 1995, state banks accounted for $131 billion in total bank assets, as compared with the
private banks’ $149 billion. Thus, by the mid-1990s, private banks accounted for a bare majority
of reported banking system assets in transition countries. This was particularly true in the CIS
and Baltic countries, where private banks accounted for about 73 percent of total banking system
assets. In the CEE countries, the figures were different, as large banks still remained in state
hands. CEE countries still had 55 percent of assets with state banks, while CIS and Baltic
countries had only 27 percent of assets in private banks.
The average state bank in CEE was significant even in 1995, at about $985 million. By contrast,
CIS state banks averaged about $328 million in assets, while state banks in the Baltics were
much smaller at $155 million.51 By contrast, private banks had only a fraction of the assets of
state banks, particularly in the CIS countries. The average private bank in CEE countries had
only $213 million in assets, compared with $41 million in the Baltic states and $17 million in the
CIS countries.52 Thus, overall, CEE banks already had achieved critical mass by the mid-1990s,
whereas only state banks seemed to have sufficient size in CIS and Baltic state markets to
develop significant earnings. However, these prospects were undermined by the poor loan
quality discussed above (and below in Chapters 5-6), as well as by poor service, weak systems,
excess head count, lack of innovation, and a limited array of financial products.
51
CEE: $99,524 million/101 = $985 million. CIS: $30,147 million/92 = $328 million. Baltic states: $1,086
million/7 = $155 million.
52
CEE: $92,852 million/436 = $213 million. CIS: $52,899 million/3,079 = $17 million. Baltic states: $2,801
million/68 = $41 million.
37
Figure 4.4 Assets of Average State and Private Banks -- 1995 (millions US dollars)
$1,000
985
$900
$800
$700
$600
$500
$400
$300
$200
$100
328
213
41 155
17
$0
CEE
Baltics
Private
CIS
State
Notes: “Total” for averages for banks are averages by type of bank by ownership; total number of banks are for
1995 except Bosnia (1996); state banks are for major state banks in 1994-95; asset figures are for 1995, or earliest
year reported after 1995; no reliable figures reported for Tajikistan, Turkmenistan, Uzbekistan or Yugoslavia for the
period.
Sources: IMF (International Financial Statistics); EBRD Transition Report 2001; World Bank Policy Note
("Financial Sector Reform in Transition Countries")
Deposit Mobilization
In addition to serving as a vehicle for lending (and on-lending), state banks were responsible for
the safekeeping of household and enterprise deposits, and for payments and transfers, including
benefits (e.g., pension payments, food subsidies, health, unemployment, education). Total
deposits in transition country banks were roughly $108 billion in 1992-93. If most of this was
held with state banks (at the time, a reasonable assumption given the prominence of savings
banks and foreign trade banks for international transactions where hard currency deposits were
held), this would have been as high as $570 million on average per state bank. 53 However, with
most deposits held in local currency and the ravaging effects of hyperinflation in virtually every
transition country,54 many of these deposit values and accounts were eliminated. This was
53
$108,296 million/190 =$570 million.
54
Hungary and the Czech and Slovak Republics are the only transition countries whose year-to-year average
CPI from 1990 on never exceeded double-digit rates. Hungary’s average CPI peaked at 34 percent in 1991. In the
Czech and Slovak Republics, the highest average annual CPI rates were 61 percent in Slovakia in 1991, and 21
percent for the Czech Republic in 1993. All other transition economies experienced triple-digit average CPI rates at
least one year after 1989.
38
particularly in the case of the CIS, where no indexation was established for local currency
savings while hyperinflation was frequently measured in four-digit orders of magnitude.55
By the mid-1990s, deposits held with banks were still relatively low, although they had increased
about 56 percent from the 1992-93 period. While the trends were favorable, there was still
recognition that significant money was held outside the banking system. Broad money measures
routinely highlighted major shares of GDP circulating outside the formal system, particularly in
the CIS region, while bank assets to GDP remained relatively low in most transition countries.
Neither state nor private banks provided major incentives for households to place their funds
with banks. Confidence in the stability of the banking system was still minimal. Interest rates
paid on deposits were generally negative in real terms. The absence of credit for most households
and small businesses combined with general liquidity constraints in the economy required people
and firms to keep cash on hand for transactions. The general desire to avoid paying taxes
likewise served as an incentive for private cash or barter transactions, rather than going through
formal payment channels. Meanwhile, in several countries, there were problems with major
banks that emerged in the early and mid-1990s, further complicating efforts to restore
confidence. Thus, in the minds of average depositors, there were many reasons not to place funds
with banks.
By 1995, total deposits held with transition country banks approximated $169 billion. A high
proportion of these deposits (about 71 percent) were held in Central European banks, mostly in
Poland, the Czech Republic, Hungary and the Slovak Republic. Among CIS countries, only
Russia had any material deposit base. However, with 15 times the population of the Czech
Republic, Russia’s deposits were only 1.2 times those held with Czech banks. Likewise, with the
same demographic advantage, Russia’s deposit ratio compared to that of Hungary was only 2.6
times Hungary’s deposits in the aggregate. Thus, CIS banks had generally ceased to serve any
useful savings mobilization role as of 1995, with the possible exception of Russia’s Sberbank,
which accounted for at least one third of Russia’s $42 billion in banking system deposits. 56 As of
1995, per capita deposits were nearly $1,000 in Central Europe, but only $280 in the Baltic states
and only $165 in the CIS countries. The following figure highlights the difference in deposit
mobilization among the regions by taking aggregate and state bank deposit figures and
calculating per capita ratios.
55
Among transition countries, 15 of 27 countries experienced average annual CPI exceeding 1,000 percent at
least once. These countries were (alphabetically) Armenia, Azerbaijan, Belarus, Bulgaria, Estonia, Georgia,
Kazakhstan, Lithuania, FYR Macedonia, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.
56
According to Bank Scope data, Sberbank deposits were 65.6 billion rubles at end 1995, or $14.3 billionequivalent. However, most reports put Sberbank’s deposit share at far higher levels. This could be more recent, with
the flight of many hard currency deposits out of the country after 1995 that were previously held in other banks, as
well as the loss of value of local currency deposits held in other banks after the ruble collapse in 1998 (although this
would have also affected Sberbank’s household deposit base).
39
Figure 4.5 Per Capita Deposit Indicators in 1995
$600
$509
$500
$479
$400
$300
$191
$200
$105
$89
$100
$60
$CEE
Baltic
State Banks
CIS
Private Banks
Notes: Total population for 1995 in millions; deposit figures are for 1995; deposit figures for banks are in millions;
per capita deposits are unitary.
Sources: IMF (International Financial Statistics); EBRD Transition Report 2001; World Bank data
While it is hard to be precise on deposits held by state banks, it is estimated that these banks
accounted for a major share of deposits due to the role played by state-owned savings banks, and
because the other large state banks that held major foreign currency assets were generally not
privatized until after 1995. Even CIS countries that transformed the ownership of their banks by
“privatizing” Gosbank branches still generally had foreign trade banks that were state-owned, as
well as savings banks. Using the state banks’ share of total assets as a proxy for deposits held
with state banks, these banks had an estimated $79 billion in deposits, or about $397 million on
average,57 far lower than the $570 million average two to three years earlier. This shows that
private banks had already begun to capture fairly significant deposit market share by the mid1990s, as shown in the aggregate figures. In the CEE countries, average deposits for state banks
approximated $612 million. In contrast, the average state bank in CIS countries had $185 million
in deposits. In the Baltics, the average deposit base of a state bank was about $98 million in
1995.58
57
$79,477 million/200 state banks = $397 million on average.
58
CEE: $61,772 million/101 = $612 million. CIS: $17,019 million/92 = $185 million. Baltic states: $686
million/7 = $98 million.
40
However, it is revealing that private banks had a majority of aggregate deposits in the region by
the mid-1990s, even if private banks were smaller in terms of average deposits mobilized.59 As
with other balance sheet categories, CEE banks were markedly larger than their counterparts in
the Baltic states, and above all by comparison with the average CIS bank. The figure below
profiles the deposit base of the state banks by country.
Figure 4.6 Deposits in State and Private Banks (percent)
100%
90%
80%
41.1%
70%
72.9%
60%
66.2%
50%
40%
30%
58.9%
20%
27.1%
10%
33.8%
0%
CEE
Baltics
State Banks
CIS
Private Banks
Notes: Total banks are for 1995 except Bosnia (1996); state banks estimated for 1994-95; deposit figures
are for 1995, or earliest year reported after 1995.
Sources: IMF (International Financial Statistics); EBRD Transition Report 2001; World Bank Policy Note
("Financial Sector Reform in Transition Countries"); authors’ calculations
Capital
Data from 1995 indicate that state banks had about $47.5 billion in “net capital” 60 on their
balance sheets, about 46 percent of the total bank capital in transition countries. CEE countries’
state banks had about $14 billion in capital at end 1995, mainly in Poland ($8.1 billion). Russia
was the other major market where state banks had fairly significant levels of capital as a
percentage of total, accounting for $7.1 billion. Croatia and Romania also had aggregate state
59
CEE: $58,129 million/436 = $133 million. CIS: $29,943 million/3,079 = $9.7 million. Baltic states: $1,471
million/68 = $22 million.
60
1995 capital figures are derived from IFS, with EBRD ratios of state bank assets-to-total applied. This is
not exact, and likely overstates state bank capital while understating private bank capital. However, because of poor
accounting standards in 1995, many private bank capital figures were also likely overstated.
41
bank capital in excess of $1 billion61. Overall, these four countries accounted for $17.5 billion in
state bank capital, or about 80 percent of total transition economy state bank capital.
The average state bank had $112 million in capital, with CEE countries having the largest state
banks. In this region, the average state bank had $143 million in capital. CIS countries had $84
million in average capital per state bank, although this was skewed by figures from Sberbank of
Russia. Baltic state banks were very small in general, with remaining state banks averaging only
$4 million in capital.
Private banks accounted for about 54 percent of total system capital among transition countries.
Most private bank capital was in the CIS countries, with $13.3 billion, or 52 percent of total
private bank capital. CEE countries had $12.1 billion in private bank capital, while the three
Baltic states combined only had $193 million in private bank capital in 1995.
In terms of average size, state banks averaged $110 million in capital as compared with only $7
million among private banks. The vast majority of countries showed very low levels of private
bank capital. CIS and Baltic private banks only had $3-4 million in capital on average, whereas
CEE banks had $28 million on average. The largest private banks in terms of capital were found
in the Czech Republic and Poland.62.
All together, 13 of 27 transition countries showed banks with majority state bank capital in 1995.
Thus, it is fair to say that transition countries were generally at a mid-point by 1995 in terms of
the shift in bank capital from state to private. Irrespective of ownership, the table below shows
that most banks in transition countries were small, with only a handful of state banks really
showing relatively large capital positions by 1995. Private banks were small, and many state
banks were likewise small considering that state bank figures were skewed by the capital
positions of a relatively small number of large banks.
61
The Czech Republic may have understated its state bank capital and overstated private bank capital. The
National Property Fund had large stakes in several banks that may have been considered “private” for statistical
purposes.
62
Technically, FYR Macedonia showed $145 million on average per private bank. However, this is viewed as
a statistical error, given the earlier hyperinflation of the former Yugoslavia, the sanctions imposed by Greece, and
the general difficulties the country faced early in the transition in attending to banking sector problems. While FYR
Macedonia launched structural reforms in 1995, it is the authors’ view that the average private bank capital figure
was overstated.
42
Figure 4.7 Allocation of Bank Capital – 1995 (percent)
100%
12%
90%
36%
80%
70%
54%
60%
50%
88%
40%
64%
30%
20%
46%
10%
0%
CEE
Baltic's
Private
CIS
State
Notes: Figures are for 1995 unless not available (1997 for Bosnia-Herzegovina); “capital” = “capital accounts” +/“other items net”; state share of capital is based on state share of assets applied to capital, with private bank shares
serving as a residual.
Sources: IMF (International Financial Statistics); EBRD; authors’ calculations
There was little difference between state and private banks with regard to their basic, nominal
reporting of capital-to-asset ratios (which should be distinguished from capital adequacy
ratios63). The data shows that state banks had 16.8 percent ratios, as compared with 17.2 percent
for private banks. However, because of accounting weaknesses and weak classification standards
in most transition countries in 1995, the published data do not provide enough information to
determine what would have been appropriate capital-to-asset ratios in that risk environment.
Due to improper classification, inappropriate assignment of risk weights, and general
understatement of risks (including off-balance sheet transactions and posted collateral values),
many countries had high capital-to-asset and capital adequacy ratios, only to experience major
financial crises and severe deterioration of solvency once adjustments were made. Thus, capital
ratios were reasonable on the surface in 1995, but proved to be low for most state banks (and
often for private banks) unless they had sound backing from their owners, which then required
fiscal resources, access to international capital markets, and/or some measure of monetary
compensation (e.g., higher net spreads to recapitalize) or regulatory forbearance. More often than
63
Capital-to-asset ratios are direct balance sheet measures without adjustments for risk. Capital adequacy
ratios are risk-weighted, and more accurately measure the depth and quality of a bank’s solvency. While state and
private banks had roughly the same capital-to-asset ratios (at about 17 percent), these ratios would have to be
adjusted for the risks of losses from non-performing assets, or overvalued assets. Had this been done, the capital-toasset ratios for state banks and many private banks would likely have been far less. Where non-performing or
overvalued assets are a problem, adjustments would eventually be netted out and the result would be smaller balance
sheets (e.g., reduced assets and reduced capital).
43
not, the monetary and fiscal measures proved costly to the economy and weakened the
macroeconomic framework. In the case of forbearance, this often led to a distortion in the
competitive environment by at least partly shielding state banks from market discipline.
EMERGING ROLE OF PRIVATE BANKS
The role of private banks was very limited at the outset of the transition, although a number of
countries had already permitted their formation. While the largest banks through the mid-1990s
were state banks, the total number of banks quickly grew once the monobank system was broken
up. Thus, there were more than 2,000 private banks in the ex-socialist countries of Europe and
Central Asia as early as 199164, mostly in Russia and other CIS countries. Non-CIS countries had
448 banks in the early 1990s, with Poland and Bulgaria65 alone accounting for more than one
third of the total banks in CEE. The three Baltic states had 61 banks.
In a few cases, these private banks were established foreign banks. They tended to have limited
balance sheet exposure to the transition countries, but were involved in international payments
and transactions (e.g., trade finance, donor-financed infrastructure projects). For example,
Hungary, Poland and Romania had about $2 billion in official credit exposure as of 1992
(originating in the pre-transition era), and about $2.2 billion in commercial credit exposure.66
Yugoslavia also had official and commercial credit exposure dating back to the Tito era.
However, in general, the private banks early in the transition period were small start-ups, or
branches privatized from the earlier Gosbank system. With low minimum capital and weak
licensing standards, most of these banks were little more than captive finance companies of state
enterprises that insiders and shareholders used for personal gain and patronage.
In the CIS and Baltic states, ownership transformation initially occurred with the rapid spin-off
of branches of the Gosbank into private hands. For example, by 1995, the average CIS country
had 153 banks, although more than 70 percent of these were in Russia.67 Among these, only
seven on average were state banks, the rest being small but technically private. Of the state
banks, Russia only had two that were considered major. Thus, most CIS countries actually had
more state banks on average than Russia, even though Russia’s Sberbank dominated balance
sheet measures among CIS state banks.
Several countries “privatized” their state banks through an “ownership transformation” process.
Such an approach was very common in the CIS and Baltic states, particularly in Russia and
Ukraine. This process generally involved changing the legal status of small banks that had been
spun off from the monobank system to joint stock companies, and then “selling” these banks to
new shareholders. This type of “ownership transformation” was a proxy for bank privatization in
64
In the early 1990s, transition countries already had 2,350 banks, most of them private (figures are from
1990, or the earliest year reported thereafter).
65
Poland had 87 banks as early as 1993, and Bulgaria had 75 banks as early as 1992.
66
Poland became a member of the World Bank in 1946 and the IMF in 1986. Romania became a member of
both institutions in 1972. Hungary became a member of both institutions in 1982.
67
Russia had 1,306 banks in 1991. CIS countries in total had about 1,841 banks.
44
the absence of major capital investment into these banks. In most cases, the “new” shareholders
were traditional state enterprise borrowers, and the “transformed” bank took on the character of a
captive finance company rather than a commercial bank. In some cases, these banks were “new”
to the extent that they sought licenses from the regulatory authorities with “new capital” based
on low minimum capital requirements for entry. Poor lending decisions, bad governance, weak
management, and the collapse of local currencies all pushed these banks into financial trouble
within a relatively short period.
In general, by the mid-1990s, the CIS countries plus Estonia and Latvia had most bank assets in
“private” banks’ hands. However, because most private banks in CIS countries continued to
operate as they had before, as “pocket” banks or captives of the key state enterprises they
financed, there was little change in lending activity and general banking operations as compared
to earlier years. The significance of these banks lies in their ability to return systematically to the
state for automatic financing when needed. This tended to occur on a patronage and political
basis, and contributed to the widespread corruption that has impaired the development process
since the early 1990s.68
In CEE, the number of private banks proliferated as incentives were introduced for new private
banks to emerge. In virtually all countries except Slovenia, licenses could be obtained with very
low minimum capital levels.69. This fostered an easy entry policy that triggered a major increase
in the number of banks in transition countries. However, in this region, a majority of banks’
assets remained in state-owned institutions, even though the number of state banks was far less
than private banks. Ultimately, weak governance, insufficient risk management capacity, and
underdeveloped banking supervision would culminate in several subsequent banking crises or
losses. Nonetheless, the policy early on focused on stimulating competition in the banking sector
by encouraging the formation of private banks while state banks continued to serve as the main
financing channel (to the extent possible) for traditional enterprises and farms. When state banks
ceased to be effective sources of financing, these enterprises either went bankrupt, withered
away, lost all value as a result of asset stripping, or diverted financing to non-bank sources by
running up arrears to numerous non-bank creditors (e.g., power and utility companies, fiscal
accounts, other enterprises, employees). Meanwhile, through the mid-1990s, there was growing
recognition that state banks were deeply insolvent and in serious need of restructuring to avoid
recurrent and costly recapitalizations. Thus, while most major banks in Central Europe remained
68
Corruption is frequently cited as a problem during the transition period, which it has been. However,
discussions with people in transition countries also indicate the corruption was widespread throughout the
communist period. Thus, in many ways, continued patronage was an extension of earlier customs and alliances.
However, when the decision was made to engage in ownership transformation, some of the thinking was based on
the assumption that a change in ownership would change incentives, and thus create commercially viable
enterprises. Experience with bank privatization in CIS countries and mass privatization in many countries indicates
that a change in ownership may well be necessary, but is generally not sufficient for a wholesale change in the
incentive structure required for sustainable growth.
69
To encourage mergers and consolidation of the system, Slovenia increased its minimum capital
requirement for a full banking license from DM 5 million to DM 60 million (about $35 million at the time) in 1993.
By contrast, all other countries generally had minimum capital of Euro 5 million-equivalent or less. Most CIS
countries had well below the equivalent of ECU/Euro 5 million.
45
state-owned in the mid-1990s, many if not most of these were being restructured as part of an
explicit pre-privatization exercise.
The intermediation role of private banks was limited through the mid-1990s in the transition
economies. Part of the reason was that they were generally small to begin with, with limited
resources to lend. Hyperinflation erased most of the value of local currency savings in the CIS,
while war and cross-border disputes (including the issue of frozen foreign currency deposits)
undermined deposit mobilization potential and general banking stability in the former
Yugoslavia. Thus, domestic private banks in all but a few transition countries had very poor
prospects for development early in the transition. Meanwhile, larger banks from abroad were
seeking only the best of the corporate clients. Apart from some syndicated lending, their
activities were generally characterized by off-balance sheet transactions that would generate fee
income without putting significant capital at risk.
By 1995, private banks accounted for $110 billion in credit exposure in transition countries,
about 56 percent of total. On average, this is equivalent to only about $31 million in credit
exposure per bank.70 Breaking this down regionally, private CIS banks were particularly small,
averaging only $13 million in credit exposure per bank, as opposed to the $158 million of their
counterparts in Central Europe.71. By international standards, these were all exceedingly low
average levels, particularly in the CIS and the Baltics. The following table highlights average
Euro-zone credit exposures in 1995 compared with regional averages for private banks in
transition countries. Among Euro-zone countries, Greece, Portugal and Spain are highlighted as
well to show how transition countries compared with the latest entrants to the Euro-zone with the
lowest average incomes.
Table 4.8 Comparative Banking Intermediation Statistics for Private Banks in 1995
(millions US dollars)
Total No. of
(Private) Banks
Greece
Portugal
Spain
Euro-zone Total
CEE
Baltics
CIS
Transition Total
437
68
3,081
3,586
Credit Exposure
Total $
Average $
103,750
116,610
657,660
9,059,820
68,878
158
1,547
23
39,957
13
110,382
31
Deposit Mobilization
Total $
Average $
65,640
97,390
392,780
5,204,820
58,129
133
1,471
22
29,943
10
89,543
25
Notes: Euro-zone includes all 15 countries; averages are per bank in the EU countries and the Euro-zone in total, and
for private banks among transition countries at the time
Sources: International Financial Statistics;
From a deposit mobilization perspective, private banks made some modest progress in attracting
deposits away from the state banks by 1995, although aggregate deposit levels remained very
70
$110,382 million/3,583 private banks = $30.8 million.
71
CIS: $39,957 million/3,079 private banks = $13.0 million. CEE: $68,878/436 private banks = $158.0
million.
46
low. On a per bank basis, private banks in the CEE countries averaged $133 million in deposits
per bank, higher than CIS private bank average of only $10 million and private Baltic bank
average of $22 million.72 These deposit levels were low for a variety of reasons, including
limited cash on hand among households and enterprises, tax avoidance, lack of confidence in the
banks, low real rates paid by banks on deposits, and lack of confidence in deposit guarantees
(implicit or explicit).
By 1995, private banks had about $90 billion in deposits in all transition countries. Given the
total transition countries’ population of 414 million, this translated into per capita deposits held
with private banks of only $216.73 While CEE per capita holdings were $479 in private banks,
they were only $191 in the Baltic states and $105 in CIS countries. However, relative to state
banks, private banks had larger holdings per capita in the Baltics and the CIS. There was
growing convergence in the distribution of deposits in CEE, with CEE private banks accounting
for more than 48 percent of per capita deposits for the region. These trends show that deposits
were gradually migrating to private banks. This is important to note, considering that traditional
savings banks were still state-owned in 1995 in the major CEE countries.74
Thus, by the mid-1990s, private banks were making slow progress in shifting the structure of
deposits away from state banks, but these deposit levels remained low (in CIS and Baltic banks),
and state banks still held large shares in Central Europe.
SUMMARY: CONSISTENCY AND DIVERGENCE THROUGH 1995
After the initial break-up of the monobank system, and particularly given the degree of
macroeconomic chaos and instability that accompanied the early years of the transition, there
was fairly widespread recognition of the need for greater financial discipline by the mid-1990s
(and sometimes sooner). As noted in table 2.2 above, the unweighted inflation rate for nonBaltic, non-CIS countries was 460 percent from 1990-94. In the Baltic countries, the inflation
rates exceeded 1,000 percent, and in the CIS countries the rates approached 5,000 percent.
Hyperinflation alone led to massive shock in most countries, a problem that was compounded by
fiscal decline via lost revenue, and the inability of government institutions to finance services
and investments previously committed. By the mid-1990s, there was widespread recognition of
the need for increased macroeconomic discipline to restore growth and confidence. However,
there was already evidence of regional disparities, with CIS countries experiencing far more
adverse effects, while many CEE countries and the Baltic states showed growing evidence of
fiscal discipline and reduced vulnerability to hyperinflation.
By 1995, hyperinflation and fiscal deficit figures were coming down, partly due to the hardening
of soft lending conditions through the banks. In general, confidence was far more devastated in
72
CIS: $29,943 million/3,079 private banks = $9.7 million. CEE: $58,129 million/437 private banks = $133.0
million. Baltics: $1,471 million/68 private banks = $21.6 million.
73
$89,543 million/414 million = $216.
74
Examples include PKO BP and PKO SA in Poland, OTP in Hungary, Ceska Sporitelna in the Czech
Republic, Slovenska Sporitelna in the Slovak Republic, CEC in Romania, and DSK in Bulgaria.
47
the CIS countries than elsewhere, with the possible exception of the former Yugoslavia, where
years of hyperinflation (dating back to the socialist era), the freezing of foreign currency savings
accounts, and war led to a major loss of faith in civil institutions (including banks in most cases).
These macroeconomic developments triggered (and were reinforced by) a variety of structural
challenges involving financial as well as institutional and incentive issues. From a financial
resource perspective, banking systems were faced with portfolio erosion, declining lending
flows, overvalued fixed assets, the loss of confidence in the safekeeping capacity of banks,
general savings decline, the absence of other borrowing sources, and persistently weak capital.
From an institutional and incentive perspective, banking performance in the absence of
protection and support suffered from (i) poor corporate governance, weak internal systems,
inadequate management, and related party abuse; (ii) an inadequate legal framework for secured
transactions; (iii) weak formal debt collection and liquidation systems; (iv) inadequate
accounting standards; and (v) weak information on most enterprises relative to modern
underwriting requirements. Such instability made it virtually impossible to move quickly to a
financial system that was stable, sound, and commercially viable. This fact was compounded by
the significant cost of systems and human capital development required for such a transition to
be effectively implemented.
In many CEE countries and the Baltics, the tightening of monetary policy was accompanied by a
stricter prudential regulatory framework for banks, with particular emphasis on loan
classification, provisioning standards, and more accurate accounting of profitability or loss
recognition, retained earnings, and capital measures (including more suitable risk weights
applied in capital adequacy measures). In many of the CEE countries and in the Baltics as well as
some of the CIS countries, the tightening of the prudential framework was accompanied by
efforts to strengthen banking supervision capacity. These efforts focused on early warning
signals of financial sector instability, general off-site surveillance from regulatory reporting, and
the coordination and scheduling of comprehensive on-site examinations.
Initial banking supervision measures were taken in many countries prior to 1995. However, they
were not effectively or sufficiently implemented until later. This was often due to the time
needed to develop institutions and personnel for a broad range of functions (e.g., design of
adequate and standardized reporting forms, development of systems to detect early warning
signals, off-site surveillance, on-site inspections, coordination across departments, policy and
strategy), as well as difficulties supervisors often had in being able to execute their mandate. The
latter was particularly the case when state banks violated prudential norms and were out of
compliance, or when “private” banks with close ties to government officials obtained special
favors from these officials. In other cases, these mandates were simply not given enough legal
strength, at least not until a major banking crisis occurred. Above all, banking supervisors often
found weak political support for their mandate. This changed in subsequent years after banking
crises had occurred in most transition countries, and as international institutions moved to
encourage more intensive observance of standardized norms in support of financial sector
stability.75
75
This effort accelerated after the East Asia crisis in 1997. Urgency was reinforced in 1998 with the collapse
of the ruble and the deleterious effects this had on CIS economies.
48
By 1993-94, the performance of CIS and non-CIS countries was already beginning to diverge. In
many non-CIS countries, recognition of solvency and liquidity problems triggered a series of
recapitalizations and restructuring programs geared to restoring stability in the banking system,
and getting banks on track to be profitable on a commercial basis. Poland’s restructuring
program in 1993-94 was followed in the late 1990s with a surge of strategic investment and
privatization. Hungary’s declining fiscal and balance of payments fundamentals by 1994
prompted an acceleration of privatization throughout the economy from 1995-96 on, including a
preference for strategic investment in the banking sector. Estonia moved aggressively to
liquidate weak banks in the early 1990s and to consolidate in the late 1990s, attracting foreign
investment from Scandinavia and Europe as an anchor. Where problems were not identified and
addressed early on (such as in Latvia in 1995, Bulgaria in 1996-97, and Albania in 1997), major
collapses subsequently prompted intensified reform efforts to pre-empt a recurrence of
widespread instability. In all of these cases, governments moved to restructure their banks under
strict guidelines, and with a clear and specific objective to privatize, usually with some form of
strategic investment.
In other countries, where reforms and performance lagged, the approach has been different.
Often, state banks have been kept afloat because of their (often erroneous) perceived importance
to the economy. The tables above show that state shares of banking system assets were still fairly
high in most countries in 1995. However, in addition to the state shares, many countries showed
a significant portion of banks that had earlier been “privatized” by ownership transformation,
rather than through strategic investment. This resulted in a continuation of many of the lending
practices that had gotten the state banks into financial trouble. Invariably, the results have been
high levels of non-performing assets, a drain on the budget and the economy, distortions in the
competitive environment, and an erosion of confidence in civil institutions.
49
BOX 4.2 LATVIA’S SUCCESSFUL RESTRUCTURING AND PRIVATIZATION OF UNIBANKA
The case of Unibanka represents a rare success story. While it initially engaged in activities that undermined the quality of
its loan portfolio and put bank capital at risk, its restructuring exercise proved successful, as reflected in its ability to
withstand systemic weaknesses in the mid-1990s and to attract strategic investment in the second half of the 1990s.
On September 28, 1993, the rump of 21 branches from the newly reorganized Savings Bank was structured into one state
bank – the Universal Bank of Latvia, or Unibanka. Most of the bad loans were concentrated in the branches that constituted
this bank (40 percent of total assets in March 1994). As part of the rehabilitation process, these loans were taken off
Unibanka’s books and replaced with seven-year Government bonds in the amount of LVL 25 million ($50 million
equivalent).
One of the main reasons cited by the Government for creating Unibanka was to provide an insurance policy against
catastrophic failures in the private banking sector. This logic was put to serious test in the first half of 1995, as the
insolvency of the country’s largest bank (Bank Baltija) triggered the systemic crisis in which about 40 percent of the assets
and liabilities of the banking sector were lost, and seven banks, including three of the 10 largest banks, had collapsed.
Although the crisis had a large effect on both large state banks, Savings Bank and Unibanka, the latter was not directly
involved in the crisis, did not need to be closed or bailed out, and was not as badly harmed as the Savings Bank. In fact,
Unibanka benefited (and the Savings Bank suffered) from a flight to quality following the crisis, as depositors reallocated
assets towards banks that appeared better managed, more strongly capitalized, and less risky in the composition of their
portfolios. Surveys of Latvian banking professionals consistently rated Unibanka as the safest bank in Latvia.
Privatization procedures were launched at Unibanka on October 3, 1995. The board of the Latvian Privatization Agency
(LPA) approved the bank's basic privatization regulations, which provided that Unibanka would be privatized in four years.
During 1995, the first stages of Unibanka’s privatization were carried out. Share capital was increased to LVL 11.5 million
(about $23 million), and then a little over 50 percent of the shares were sold for privatization certificates. Twenty-two
percent of shares were sold publicly; 13.5 percent were sold to customers of Unibanka; and 14.5 percent were sold to
employees. The LPA held the remaining shares. In October 1995, the bank's shareholders meeting decided to reorganize the
bank into the joint-stock company, Latvijas Unibanka, and a new charter was approved for the bank. In January 1996,
Unibanka became the first company to be listed on the Riga Stock Exchange official list.
According to the bank's privatization regulations, its share capital was increased during the next privatization round by
attracting additional capital from a strategic investor. In May 1996, Unibanka’s share capital was raised by LVL 6 million
(about $12 million), and the EBRD and Swedfund International AB purchased the newly issued shares. This gave the
EBRD control of about 22.6 percent of total shares and Swedfund control of about 7.5 percent of shares. Over the next three
years, most of the remaining state-owned shares were sold in the international market through a GDR program, and a part of
the shares was sold through special auctions at the Riga Stock Exchange. Overall, the state received LVL 66.1 million
(about $113.4 million) by the time privatization was complete in late 1999, including LVL 21.3 million in cash and LVL
44.8 million in privatization vouchers.
By September 2001, Unibanka's paid-up share capital was LVL 37.1 million ($59.9 million). More than 98 percent of share
capital belongs to the Swedish bank Skandinaviska Enskilda Banken (SEB). A major force in the general trend towards
banking sector consolidation in the Baltics, SEB initially purchased a 23 percent interest in Latvijas Unibanka at a special
auction held in the stock market in late 1998. It then steadily purchased shares from the other bank's shareholders, including
the EBRD’s shares.
50
CHAPTER FIVE: CURRENT STATUS AND CONTINUING PROBLEMS
OF STATE BANKS SINCE 1995
CURRENT OWNERSHIP STATUS AND TRENDS
Recognizing the damage done to the economy with the continued existence of state banks, many
transition countries have moved with greater intensity to effectively privatize their banking
systems. For example, Albania will have a fully privatized banking system by mid- to late 2002,
just a few years after having nearly 100 percent of assets controlled by state banks. The damage
done by the pyramid schemes in 1997 served as a trigger for this acceleration. While nowhere
nearly as damaging to the economy or civil society, the build-up of fiscal and balance of
payments deficits in Hungary by 1994 served as a catalyst for its acceleration of privatization
from 1995-96 on in financial services as well as the real sector. Poland is now down to two
major state banks, and Hungary and the Czech and Slovak Republics have finalized banking
sector privatization of major institutions with strategic investment. 76 Bulgaria and Croatia
recently privatized their largest state banks, and FYR Macedonia and the Baltic states have very
little state investment remaining in their banking systems.
Figure 5.1 Number of State Banks -- 1992-2001
250
200
73
92
150
100
43
128
50
43
118
67
44
0
1992
1995
CEEB
2000
2001
CIS
76
In all four countries, additional smaller banks remain state-owned. However, they are not viewed as
“major” competitors to the private banking system.
51
Among CIS countries, Armenia77 and Georgia have fully eliminated state ownership. The
Kyrgyz Republic only has three banks that are non-private. Moldova will soon be fully private
when it sells its last shares in the Economic Bank (the former savings bank). Kazakhstan has
likewise significantly reduced the share of state bank assets since 1998. The following table
provides a snapshot of the evolution of state banks through the transition process, as well as
plans of individual country governments as of 2001 for their remaining state banks.
Table 5.1 Evolution of State Banks Through the Transition Process: 1992-2001
Current Plans and Status
Albania
Armenia
Azerbaijan
Belarus
Bosnia
Bulgaria
Croatia
Czech Republic
Estonia
FYR Macedonia
Georgia
Hungary
Kazakhstan
Kyrgyz
Latvia
Lithuania
Moldova
Poland
Romania
Russia
Savings Bank to be privatized in 2002.
ASB privatized in 2001.
United Universal still undergoing consolidation; IBA still state-owned.
Several banks remain state-owned without any formal program to move forward with
privatization.
Most state banks being privatized or liquidated in 2002, although progress is slow in some
cases.
Two of last three state banks being offered for sale in 2002.
Only HRB remains state-owned.
The major privatizations took place in 1999-2000 with CSOB and Ceska Sporitelna. Four banks
remain state-owned.
System fully privatized.
Only MDB remains state-owned.
No state banks remain
Two banks remain state-owned.
Government reduced its 80% stake in Halyk (as of December 1999) to a current level of 33.3%
plus one share. The State initially planned to sell its remaining stake in 2001. However, this
tender has since been postponed indefinitely.
Kairat 100% state-owned; Energo Bank partly state-owned; Savings and Settlement Company, a
state financial institution with a limited banking license.
Full privatization planned for Latvian Savings Bank.
Only the Agricultural Bank is state-owned.
System to be fully private after sale of Bank Economii.
Two large banks remain state-owned (PKO BP and BGZ) plus two other banks that are
comparatively large for the region.
Three banks remain state-owned = about 40% of assets; privatization planned for one (BCR),
restructuring and eventual privatization planned for the savings bank (CEC), and reorganization
(and de-licensing) planned for EXIM Bank.
> 460 banks are state-owned, and as many as 679 have shares/stakes from all public institutions
(including the central bank); the state (all-inclusive) held controlling stakes in 62 and blocking
shares in 8078; state plans to divest all holdings of less than 25 percent, leaving Sberbank,
Vneshtorgbank, Vneshekconombank and a small number of new specialized banks (exportimport bank, agricultural bank, development bank).
77
The last state-owned bank, the Armenian Savings Bank, was privatized in 2001. Prior to that, four other
state banks had been rehabilitated by 1998 and subsequently privatized.
78
One report claims that as of October 1, 2001, Russia had more than 1,300 lending institutions, of which 638
were at least partly owned by the state when including shares of the central bank in commercial banks and other
lending institutions. See M. Builov, “Who Owns Russia: Russia’s banking sector. The situation today.,” The Russia
Journal, January 25, 2002.
52
Current Plans and Status
Slovak Republic
Slovenia
Tajikistan
Turkmenistan
Ukraine
Uzbekistan
Yugoslavia
Several small banks remain state-owned, but these are not viewed as highly distortionary. Major
state-owned bank left is Postovna Banka.
Slovenia’s major bank remains state-owned
Sberbank is the only remaining state bank.
Very limited data, but five state-owned banks remain.
Two state banks remain, including Oschadny (savings bank).
One bank fully state-owned (National Bank of Uzbekistan), but 15 are joint-stock banks with
direct or indirect state ownership.
Four state banks being liquidated; however, the Government just opened a state-owned Savings
Bank, with plans to open a few more state banks. In addition to the "Big Six" listed for 2001,
there are a number of smaller banks (around 20) in which the majority of assets are controlled
by the state or socially-owned enterprises and banks. Most of them are deeply insolvent and are
scheduled for liquidation in the near future.
Altogether, there has been a substantial decline in state bank assets in the transition countries. As
of end 1996, state bank assets were estimated to be about $125 billion, although these figures
exclude Bosnia-Herzegovina, Tajikistan, Turkmenistan, Uzbekistan and Yugoslavia. (This would
likely bring the total to about $130 billion or so.) Using the same measures, by 2000, this
estimate had dropped to about $88 billion,79 nearly a one-third decline. The decline has primarily
resulted from privatization of banks, plus balance sheet shrinkage in many remaining state banks
where provisions have been more stringently applied to troubled loan portfolios, overvalued
fixed assets and real estate have been sold or more appropriately valued, deposits have shifted to
other banks, government and central bank financing (via loans or deposit placement) has
diminished, and capital has been adjusted for declining asset values and reversals of income and
accruals.
However, several countries still retain state banks in the hope that their franchise value will
increase with time and eventually generate higher privatization proceeds), or more immediately,
to continue to serve as vehicles for directed credit financing. As of 2000, countries that had state
bank asset shares in excess of 20 percent (without major subsequent ownership changes)
included Azerbaijan, Belarus, Lithuania, Poland, Romania, Russia, Slovenia, Turkmenistan, and
Uzbekistan.80 Still other countries have a smaller share of bank assets in state hands, yet run the
risk of systemic problems due to the strategic nature of the remaining state banks and their use
for political patronage purposes (e.g., Ukraine). The following figures highlight trends in the
state share of bank assets for transition countries since 1996, along with estimated dollar values
for these assets.
79
These figures are based on EBRD estimates of state bank assets as a share of total bank assets. These
figures differ from tallies from the financial statements of state banks. For example, in 2000, state banks’ financial
statements in transition countries showed assets approximating $108 billion. Using IFS figures as the denominator,
this would mean that state banks had a slightly higher proportion of total banking system assets. However, many of
the additional bank assets are in banks that are currently being liquidated, such as more than $6 billion in “major”
banks in Yugoslavia. Thus, the figure is probably closer to about $100 billion, but could be closer to the $88 billion
approximation once adjusted for write-offs, etc.
80
Albania, Bosnia-Herzegovina, the Slovak Republic and Yugoslavia had high levels (more than 50 percent)
of state ownership in bank assets in 2000, but have since moved on with privatization and liquidation that has
significantly reduced these shares.
53
Figure 5.2 Share of Bank Assets Held by State Banks: 1996-2000
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
1996
1997
1998
CEE
1999
Baltics
2000
CIS
Notes: Most recent percentage used for earlier years when not available (e.g., Bosnia-Herzegovina, Moldova,
Russia, Turkmenistan, Ukraine, Uzbekistan, Yugoslavia); Hungary 2000 is 3Q.
Sources: IMF; EBRD; authors’ calculations
Figure 5.3 Volume of Assets Held by State Banks 1996-2000 (US$Eq millions)
$100
$90
$80
$70
$60
$50
$40
$30
$20
$10
$1996
1997
1998
CEE
Baltics
1999
2000
CIS
Notes: Most recent percentage used for earlier years when not available (e.g., Bosnia-Herzegovina, Moldova,
Russia, Turkmenistan, Ukraine, Uzbekistan, Yugoslavia); Hungary 2000 is 3Q.
Sources: IMF; EBRD; authors’ calculations
54
FINANCIAL CONDITION OF THE STATE BANKS
General Financial Performance Indicators
In 2000, state banks generally accounted for about one third of credit, assets and deposits, but
had far less capital (about 21 percent of total). In terms of solvency, state banks’ capital ratios are
far lower than those of private banks, although this cannot automatically be equated with lower
quality or greater risk. In the CEE countries, many of the state banks are simply holding
Government securities and making fewer loans, both in recognition of the high risks flowing
from the impaired business climate in those countries and to more easily comply with prudential
norms governing liquidity and capital. Meanwhile, after-tax earnings have been relatively low in
the CEE and Baltic states. CIS countries show better returns, although this conclusion is suspect
due to weak accounting standards. However, on a more positive note, there was a substantial
increase in capital in Russian banks, both state and private, in 2000. If the accounting techniques
used are accurate, this would suggest that Russian banks strengthened their solvency in 2000 and
positioned themselves to be more efficient and competitive henceforth. This, in turn, would
presumably benefit CIS indicators in general, as Russia is the dominant economy in the region.
In general, asset growth among transition country banks was primarily focused on Poland and
Russia, with little net increase among the other countries. Asset growth occurred in both the state
and private banks, suggesting this was partly a function of larger macroeconomic trends rather
than strictly a structural development. That these two countries represented such a substantial
part of the overall aggregate trend for the region also reflected the continued clean-up and
consolidation that occurred in the Czech Republic and Hungary, where banks’ asset growth was
negative in the aggregate in 2000.
In terms of general financial profile, state banks in 2000 had about $108 billion in total assets.
(See Annex 1) This approximated 14 percent of total GDP for the countries.81 Most of the state
banks had less than $1 billion in assets, although 20 state banks had more than $1 billion in
assets.82 In five of these cases, the banks have either since been privatized (Komercni and VUB)
or are in the process of being liquidated (Beogradska, Jugobanka, Invest Banka).
81
$108 billion/$768 billion = 14.1 percent.
82
These were (from high to low) Sberbank in Russia, PKO BP in Poland, Komercni in the Czech Republic,
Nova Ljubljanska in Slovenia, Vneshtorgbank in Russia, BGZ in Poland, National Bank for Foreign Economy in
Uzbekistan, VUB in the Slovak Republic, Banca Comerciala in Romania, Vneschekonombank in Russia,
Vneshekonombank in Turkmenistan, Beogradska Bank in Yugoslavia, Jugobanka in Yugoslavia, Nova Kreditna
Maribor in Slovenia, Invest Banka in Yugoslavia, Moscow Municipal Bank in Russia, SKB in Slovenia, Savings
Bank in Albania, Postbank in Hungary, and Ceskomoravka Zarucni in the Czech Republic.
55
As for loans (see Annex 1), state banks showed about $46 billion in loans by end 2000, or 6
percent of recorded GDP.83 About 10 banks accounted for 71 percent of these loans,84 with more
than $1 billion in loans posted on their balance sheets.85 In four of the cases above, the banks
have either since been privatized (Komercni and VUB), or are in the process of being liquidated
(Beogradska and Jugobanka). If these four banks were excluded, loan figures from the major
state banks would have been reduced by about $8 billion.
On the funding side (see Annex 1), deposit figures were about $82 billion, or 11 percent of
GDP.86 With total broad money for transition economies at 33 percent of 2000 GDP, 87 this
suggests that state banks’ deposits account for about 32 percent of total transition country broad
money.88 Using the same figures, this suggests that there is substantial liquidity among the major
remaining state banks relative to their exposures, with loans only 56 percent of deposits.
However, this needs to be evaluated on a case-by-case basis, particularly as some banks are
exposed in the inter-bank market and at risk, or dependent on Government deposits for funding.
This also suggests that many banks are placing their deposits in Government securities rather
than in lending activities. As discussed above and below, this is often prudent and helps banks
comply with regulatory liquidity and capital norms. However, it also reflects the use of state
banks as sources of financing for fiscal and quasi-fiscal activities that often weaken prospects for
economic growth and competitiveness. There was even higher deposit concentration than on the
asset side, as 14 banks accounted for 81 percent of total state bank deposits.89
In terms of capital (see Annex 1), state banks showed only about $10 billion in total, or 9.3
percent of assets. Most state banks are very small, considering that six state banks with more
83
$46 billion//$768 billion = 6.0 percent. These figures include the $6 billion or so in loans reported by the
big banks in Yugoslavia. These figures are excluded from several tables due to the liquidation process in place for
the major banks in Yugoslavia. If the $6 billion from Yugoslavia is excluded, the ratio is only 5.2 percent.
84
$32.6 billion/$46.3 billion = 70.5 percent.
85
These banks were (from high to low) Sberbank in Russia, PKO BP in Poland, Komercni in the Czech
Republic, Nova Ljubljanska in Slovenia, National Bank for Foreign Economy in Uzbekistan, BGZ in Poland, VUB
in the Slovak Republic, Vneshekonombank in Turkmenistan, Beogradska Bank in Yugoslavia, and Jugobanka in
Yugoslavia. Noteworthy in this regard is the number of banks with large assets that do not have major loan
exposures on their books.
86
$82 billion/$768 billion = 10.7 percent.
87
$255 billion/$768 billion = 33.3 percent. Figures for Turkmenistan are from 1999. All other country figures
for broad money and GDP are from 2000.
88
$82 billion/$255 billion = 32.1 percent.
89
$67.0 billion/$82.5 billion = 81.2 percent. The major state banks with more than $1 billion in deposits at
end 2000 were (from high to low) Sberbank in Russia, PKO BP in Poland, Komercni in the Czech Republic, Nova
Ljubljanska in Slovenia, BGZ in Poland, VUB in the Slovak Republic, Vneshtorgbank in Russia,
Vneschekonombank in Russia, National Bank for Foreign Economy in Uzbekistan, Banca Comerciala in Romania,
Moscow Municipal Bank in Russia, Nova Kreditna Maribor in Slovenia, Savings Bank in Albania, and SKB in
Slovenia.
56
than $500 million-equivalent in stated capital accounted for 54 percent of total capital.90 This
would leave a remaining $4.6 billion in capital spread across 71 banks reporting figures
(including some that have since been privatized or are being liquidated). Without accounting for
adjustments for classified assets or other charges, the average state bank at the time had about
$65 million in capital after excluding these six major state banks.
In terms of earnings (see Annex 1), state banks reported about $329 million in after-tax earnings
in 2000. However, apart from Sberbank (Russia), PKO BP (Poland), Vneshtorgbank (Russia)
and BCR (Romania), earnings were meager. Only eight state banks in total reported after-tax
earnings exceeding $20 million. Thirteen banks reported losses, and 33 reported earnings at or
barely above the breakeven point.91 Annex 2 provides a range of financial ratios for state banks
that includes return measures, net interest margins, some loan volume and quality indicators, as
well as some funding figures.
Overall, state banks still possess sizable market share in many countries. (See Annex 3 for shares
of GDP, and Annex 4 for market shares.) For example, most banking system assets in Albania,
Azerbaijan, Belarus and Slovenia, and about half in Romania, were state-owned at end 2000.
Belarus was particularly high, with its six major state banks accounting for more than 90 percent
of total assets. Loan share is a little different, with Belarus being the only country where state
banks account for a majority of loans. This indicates that private banks are emerging as the major
lenders, and that state banks’ earning assets (to the extent they are actually generating income)
are more often in Government securities, fixed assets, or other items. On the deposit side,
Albania, Azerbaijan, Belarus, Lithuania,92 Russia and Slovenia had majority state bank shares,
with Bosnia-Herzegovina and Romania having about half of total deposits in state banks’ hands.
Meanwhile, in terms of capital, only Belarus and Romania were majority state-owned, while
Slovenia was about half state and half private. It may well be that state banks also accounted for
the majority of assets, loans, deposits and capital in Tajikistan, Turkmenistan, Uzbekistan and
Yugoslavia.
Loans and Net Domestic Credit
State banks are less prominent in active lending to the real sector than are private banks. Data
from 2000 indicate that state banks had about $82.5 billion in “net domestic credit” on their
balance sheets, which essentially accounts for bank loans and investment in Government
securities. Of this total, about $40 billion was estimated to be loans to households and
90
$5.4 billion/$10.0 billion = 54.0 percent. The state banks with more than $500 million in capital were (from
high to low) Vneshtorgbank of Russia, Sberbank of Russia, National Bank for Foreign Economy in Uzbekistan,
Komercni in the Czech Republic, PKO BP in Poland, and BCR in Romania.
91
Barely above breakeven includes earnings from $0-$2 million.
92
Lithuania is included only by combining Savings Bank figures with those of the still state-owned
Agricultural Bank. The Savings Bank of Lithuania has been privatized since end 2000.
57
enterprises, and $42.5 billion93 was in the form of claims on Government (mostly securities
investments). All together, this amounted to about 36 percent of total net domestic credit among
transition countries.94 State banks are more actively engaged in Government financing for two
major reasons. First, the banks themselves may be in weak condition, with their balance sheets
reflecting Government securities that are earning assets to help them recapitalize. Second, state
banks that are major deposit mobilizers (e.g., savings banks) often serve as a source of financing
for Governments that are using the banks for budgetary and extra-budgetary financing.
About two-thirds of the net domestic credit total for state banks in 2000 was in the CEE
countries,95 as this is where most of the largest state banks remain (apart from Russia). Russia
and Poland alone accounted for half of the total, largely due to Sberbank and PKO BP. These
two countries, combined with the Czech Republic, Slovenia and the Slovak Republic, accounted
for 78 percent of the total. Uzbekistan also has a large volume of state bank credit.96
However, further analysis shows that less than half of the “net domestic credit” of CEE state
banks is actually in the form of loans. In fact, these state banks had only 44 percent of their total
credit in the form of loans, as compared with private banks in the region that show 87 percent of
net domestic credit in the form of loans. This is lagging trends in the Baltic states, where the
three countries had a higher proportion of overall loans to net domestic credit, and where private
banks’ loans accounted for 84 percent of their total net domestic credit. In the CIS countries,
only 54 percent of state banks’ net domestic credit was in the form of loans, while private banks
showed about 78 percent. All together, 71 percent of net domestic assets were in the form of
loans, mainly from private banks in all three regions.
From a risk management perspective, this suggests that CEE state banks are more vulnerable to
Government (i.e., domestic debt) risk than to enterprise or household risk, while the reverse is
true for the Baltic states and the CIS. Meanwhile, private banks in all three regions are more
vulnerable to the enterprise and household sectors than are state banks, particularly in CEE and
the Baltics. In the CIS, private banks hold about 22 percent of net domestic credit in the form of
Government securities. Considering past government defaults in some CIS countries, this
suggests that private banks need to be on their guard as well concerning their exposure to
Government securities, and that this is not just a risk for state banks. The figure below shows the
relative share of loans to net domestic credit at end 2000 by ownership and region.
93
This figure differs slightly from some of the above-mentioned loan figures, due to differences in sources
(e.g., IMF, Bank Scope) and methodologies. However, the differences are not considered material for purposes of
the analysis.
94
$82,537/$228,717 = 36.1 percent.
95
$51,521/$82,537 = 62.4 percent.
96
Banks that played a major role in 2000 net domestic credit figures from these countries include Komercni
(Czech Republic), Nova Ljubljanska (Slovenia), VUB (Slovak Republic), and the National Bank for Foreign
Economic Activity (Uzbekistan).
58
Figure 5.4 Comparative Distribution of Loans as a Percentage of Net Domestic Credit: 2000
(million US dollars)
100
90
80
70
60
50
40
30
20
10
0
CEE
State Banks
Baltics
Private Banks
CIS
All Banks
Notes: Private loan figures were derived from total loans to state enterprises and the private sector (from IFS) less
loans on state banks’ balance sheets.
Sources: IMF; Fitch IBCA; authors’ calculations
On average (on an unweighted basis), Central European countries had about $4.7 billion in state
bank credit, while CIS countries averaged $2.8 billion. Meanwhile, the loan share of net
domestic credit by region was $2.1 billion on average in Central Europe and $1.5 billion in CIS
countries, consistent with the figures above that show that less than half of state banks’ earning
assets are in the form of loans. The Baltic states’ figures were negligible, and have become even
less since 2001 after the privatization of Lithuania’s Savings Bank.
CIS countries show a higher share of state bank financing of net domestic credit on average, at
about 44 percent. The CEE countries have about one third of total net domestic credit on state
banks’ balance sheets. Again, the Baltic state banks were relatively insignificant at this juncture,
accounting for about 12 percent of total net domestic credit at end 2000. The following table
highlights these figures, along with the share of loans.
59
Table 5.2 State Banks' Loans and Total Net Domestic Credit Exposure at end 2000
(million US dollars)
Total Bank Credit
($)
Albania
Armenia
Azerbaijan
Belarus
Bosnia
Bulgaria
Croatia
Czech Republic
Estonia
FYR Macedonia
Georgia
Hungary
Kazakhstan
Kyrgyz
Latvia
Lithuania
Moldova
Poland
Romania
Russia
Slovak Republic
Slovenia
Tajikistan
Turkmenistan
Ukraine
Uzbekistan
Yugoslavia
TOTAL
CEE total
Baltic total
CIS total
State Bank % of
Credit
1,312
229
544
1,405
2,064
2,512
9,741
30,578
1,407
755
229
18,230
2,750
60
1,683
1,983
211
64,795
3,865
52,100
12,497
8,877
N/A
1,887
3,963
5,040
N/A
228,717
155,226
5,073
68,418
91.4
1.3
93.6
101.2
7.8
32.2
14.1
36.0
0.0
1.1
0.0
9.1
24.0
10.0
18.3
14.8
12.8
32.1
92.3
41.1
35.3
74.3
N/A
104.0
13.1
77.5
N/A
36.1
33.2
11.8
44.5
State Bank Credit
($)
1,199
3
>509
1,422
161
809
1,375
11,002
0
8
0
1,657
661
6
308
293
27
20,813
3,566
21,400
4,408
6,600
N/A
1,962
519
3,906
N/A
82,614
51,598
601
30,415
o/w Loans ($)
10
3
185
1,075
89
429
647
3,752
0
8
0
599
385
2
149
201
13
10,179
1,015
10,234
2,723
3,499
3
1,803
322
2,525
N/A
39,850
22,950
350
16,550
Notes: Figures are for 2000 unless not available (1999 then used as alternative); “net domestic credit” includes
claims on central/local governments; “loans” are only loans to enterprises and households, and exclude securities
investments; state share of credit based on state bank statements, with private bank shares serving as residual; data
for Yugoslavia not used due to liquidation procedures being applied to big banks.
See table 5.3 for list of banks included in data analysis.
Sources: IMF (International Financial Statistics); Bank Scope (Fitch IBCA); authors’ calculations
60
Table 5.3 State Banks Included in the Analysis at end 2000
Savings Bank
Albania
Armenia
Armenia Savings Bank
IBA, United Universal
Azerbaijan
Belarus
Bosnia
Bulgaria
Croatia
Czech Republic
Estonia
FYR Macedonia
Georgia
Hungary
Kazakhstan
Kyrgyz
Latvia
Lithuania
Moldova
Poland
Romania
Russia
Slovak Republic
Slovenia
Tajikistan
Turkmenistan
Ukraine
Uzbekistan
Yugoslavia
Belpromstroibank, Belagroprombank, Belbusinessbank, Belgazprombank, Belarusbank,
Belvnesheconombank
Investment Bank, Central Profit Bank, Gospodarska, Privredna
DSK, Biochim, Central Cooperative
Dubrovacka, Croatia, Croatian Bank for Reconstruction and Development, Hrvatska
Postanska
Komercni, Ceskomoravska Zarucni, Ceska Exportni
No state banks
Macedonian Development Bank (estimated)
No state banks
Magyar Fejlesztesi, Postbank
Export-Import Bank, Halyk
Kairat, Energo Bank
Latvian Mortgage and Land Bank, Latvian Savings Bank
Agricultural Bank
Banca de Economii
PKO BP, BGZ, National Economy Bank, Bank Ochrony Srodowiska
Banca Agricola, BCR, CEC, EXIMBank
Sberbank, Medium & Long Term Credit Bank, Vnesheconombank, Russian Bank for
Development
VUB, Investicna a Rozvojova, First Building Savings, Slovenska Zarucna a rojvojova,
Banka Slovakia, Exportno-Importna
Nova Llubljanska, Nova Kreditna Maribor, Postna Banka, Slovene Export Corporation,
Slovenska Investicijska
Insufficient data available
Bank for Foreign Economic Affairs
Ukreximbank, Oschadny
State Housing Savings Bank, Asaka, Uzpromstroybank, National Bank for Foreign
Economic Activity
Note: Banks highlighted in bold have been privatized or liquidated since end 2000
The following table shows the comparison of state banks to private banks in terms of net
domestic credit exposure. The figures indicate a significant range of exposures, with 12 of 25
countries for which data are available having state banks with less than 20 percent exposure.
However, among the remaining 13, seven had exposures in excess of 50 percent. Even more
importantly, many of the largest economies among transition countries had 20-50 percent state
bank exposure as a percent of total net domestic credit. As noted above, this includes Russia,
Poland and the Czech Republic, all of which accounted for nearly $150 billion in net domestic
credit at end 2000, or about 65 percent of total97 for the reporting countries. Thus, on a weighted
97
$147.5 billion/$228.7 billion = 64.5 percent.
61
basis, state bank shares of net domestic credit remained significant in the transition countries at
end 2000. Moreover, state banks have the greatest amount of exposure in countries that are often
considered to be advanced in the reform process. While some of the largest banks have been
privatized since end 2000, such as VUB in the Slovak Republic and Komercni in the Czech
Republic, state banks continue to hold significant credit stocks. As noted above, these are often
in the form of Government securities, rather than loans.
The table below also shows that the average state bank had $765 million in net domestic credit at
end 2000, as compared with only $67 million for the average private bank.98 This compares with
1995 figures that show the average state bank had $480 million in net domestic credit exposure,
suggesting that state banks’ average lending and investment in Government securities has
increased significantly since the mid-1990s due partly to the major decline (from 200 to about
108) in the number of major state banks in transition countries. Meanwhile, the average private
bank had only $31 million in credit exposure in 1995, suggesting that the average private bank
remains small, but has grown in lending and investment activity.
On a regional basis, there is some consistency in growth trends. In the CEE countries, the
average state bank’s credit exposure has increased since 1995 (from $709 million to $846
million), while the average private bank has shown an increase in credit exposure (from $158
million to $243 million). CIS state banks have shown an increase in credit exposure (from $253
million in 1995 to $707 million in 2000), while the average private bank remains small. In the
Baltic states, average credit exposure has increased slightly at state banks among the last few
remaining state banks, while private banks have grown.
98
These averages assume 108 state banks and 2,181 private banks at end 2000. In fact, there were more than
108 state banks. These represent the major state banks. The disparity in total state banks would primarily result from
the nearly 700 banks in which non-private authorities in Russia have shares in banks or other lending institutions.
The number of private banks is estimated from the total recorded in the EBRD Transition Report for 2001 less the
108 major state banks.
62
Figure 5.5 Banks' Net Domestic Credit Exposure at end 2000 (percent)
100
90
80
70
60
50
40
30
20
10
0
88.2
66.8
44.5
33.2
55.5
11.8
CEE
Baltic
State Bank Credit
CIS
Private Bank Credit
Notes: Figures are for 2000 unless not available (1999 then used as alternative); net domestic credit includes claims
on central/local governments; state share of credit based on state bank statements, with private bank shares serving
as residual; in some cases, statistics appear inconsistent, such as in Belarus and Turkmenistan, where negative loans
are shown for private banks; no figures available for Tajikistan state banks, or bank figures.
Sources: IMF (International Financial Statistics); Bank Scope (Fitch IBCA); EBRD; authors’ calculations
Loan figures show growth in all regions, both in the aggregate and on average. Although not
broken out by bank ownership, the following table shows aggregate loans increased from $139
billion in 1995 to $163 billion in 2000. Average loan exposure per bank at the end of 2000 was
$232 million in CEE, $100 million in the Baltic states, and only $26 million in CIS.
Table 5.4 Summary of Loan Exposure Trends (millions US dollars)
1995
2000
Total Loans
Average per Bank
Total Loans Average per Bank
101,179
188
112,898
232
CEE
1,919
26
4,107
100
Baltics
35,472
11
46,345
26
CIS
Total
138,569
37
163,350
71
Notes: Loan figures were derived from total loans to state enterprises and the private sector (from IFS).
Sources: Sources: IMF (International Financial Statistics); Bank Scope (Fitch IBCA); EBRD; authors’
calculations
63
Total Assets99
Data from 2000 indicate that state banks’ had more than $97 billion in total assets on their
balance sheets. These assets account for about 31 percent of total banking system assets in the 25
countries for which data are available. Thus, in terms of comparative indicators, state banks in
transition countries are relatively small in general. However, they remain influential in terms of
banking development in their individual markets.
Of these assets, about 86 percent were estimated to be in the form of net domestic credit,100
including securities investments (see figures above). About 61 percent of total state bank assets
were in Central European countries,101 mostly Poland and the Czech Republic. These two
countries accounted for $36 billion in state bank assets. When added to Russia’s $27 billion in
state bank assets, the three countries accounted for 66 percent of total state bank assets.102
Many countries have high proportions of state bank assets to total. Among CEE countries,
Albania, Romania and Slovenia had more than half of total assets in state banks at end 2000.
Meanwhile, among CIS countries, Azerbaijan and Belarus had more than half their banking
system assets in state hands. Tajikistan, Turkmenistan and Uzbekistan also had virtually all bank
assets in state hands.
99
Three sources of data are used for bank assets (IMF, EBRD, Fitch IBCA), of which the last two are used
for state banks’ figures. These figures are not always identical, and marginal differences appear in some of the tables
as a result. However, as with other balance sheet measures, the differences in the figures are not considered material
relative to the analysis.
100
$82,537 million/$96,426 million = 85.6 percent.
101
$58,600 million/$96,426 million = 60.8 percent.
102
$63,253 million/$96,426 million = 65.6 percent.
64
BOX 5.1 BALANCE SHEET CONCENTRATION IN THE INTERNATIONAL BANK OF AZERBAIJAN
Tackling the issue of state-owned banks has proved to be one of the Government of Azerbaijan’s most difficult and
complex tasks. Despite early attempts to recapitalize, restructure and privatize state-owned banks since 1996, state
ownership in the banking sector remains high, dominated by the International Bank of Azerbaijan (IBA). This bank
was left with a near monopoly when the government consolidated its three other troubled state-owned banks into a
single entity—United Universal Bank—in 2000. While this step marked significant progress in reducing public
ownership, the banking system remains highly concentrated and underdeveloped.
IBA has 75 percent market share of banking sector assets, and 40 percent of retail deposits. In 2000, bank assets
stood at $614 million, and its loan portfolio grew by 22 percent. The bank has close links to many government
departments and state organizations, including the important Oil Fund, and acts as an intermediary for governmentguaranteed credit lines to Azerbaijan.
In 2001, the government reiterated its commitment to privatize IBA and issued a presidential decree to that effect.
At present, the Ministry of Finance owns 50.2 percent of the bank’s shares. The EBRD, which has been providing
support for the IBA in the form of a credit line targeted to small and medium enterprises, has indicated an interest
in taking on a 20 percent equity stake. The remaining state shares are to be auctioned at a later date.
Despite its dominant position, IBA faces many governance and management problems and is plagued by
inefficiency. Its profitability was weak in 2000, with after-earnings of only $9 million. The slight increase in profit
resulted from the net interest income earned on the placement of funds of the Azeri Oil Fund. These revenues were
not expected to recur in 2001. Further, the level of overdue loans rose in 2000 (as did loan loss provisions), and
IBA’s loan loss reserve cover was only 12.5 percent of gross loans at end 2000.
While the government’s recent moves related to IBA and United Universal represent progress, privatization is just
one element of the financial sector reforms that are necessary. The broader challenge is to make banks more central
to economic activity in Azerbaijan in terms of deposit mobilization, lending, and an increased array of services.
As a share of total banking system assets, CIS countries show a higher share of total, at about 46
percent. The CEE countries have about 26 percent of total bank assets in state hands. The Baltic
states’ public banks had only 8 percent of total assets at end 2000. The following table highlights
these figures.
65
Table 5.5 State Banks' Assets at end 2000 (million US dollars)
Albania
Armenia
Azerbaijan
Belarus
Bosnia
Bulgaria
Croatia
Czech Republic
Estonia
FYR Macedonia
Georgia
Hungary
Kazakhstan
Kyrgyz
Latvia
Lithuania
Moldova
Poland
Romania
Russia
Slovak Republic
Slovenia
Tajikistan
Turkmenistan
Ukraine
Uzbekistan
Yugoslavia
TOTAL
CEE total
Baltic total
CIS total
Total Bank Assets ($)
State Bank % of Assets
1,993
348
1,010
2,207
2,774
4,622
13,521
49,265
3,162
1,279
322
24,714
3,302
96
4,017
3,025
323
87,744
7,607
61,573
15,252
12,847
N/A
2,075
5,799
4,432
N/A
313,309
221,618
10,204
81,487
61.7
2.6
64.7
77.1
10.2
20.1
10.9
25.9
0.0
1.1
0.0
7.8
23.3
9.4
9.2
13.8
10.8
26.6
60.0
44.1
32.2
56.0
N/A
100.0
13.6
100.0
N/A
31.0
26.4
7.7
46.2
State Bank Assets ($)
1,230
9
653
1,702
284
931
1,475
12,757
0
14
0
1,931
769
9
369
417
35
23,315
4,564
27,181
4,911
7,188
9
2,075
790
4,432
N/A
97,050
58,600
786
37,664
Notes: Figures are for 2000 unless not available (1999 then used as alternative); reliable figures for Yugoslavia not
available; there are slight discrepancies in these figures with total state bank assets presented below, suggesting some
smaller state banks are included in the table below but not in this table.
See table 5.3 for list of banks included in data analysis.
Sources: IMF (International Financial Statistics); Bank Scope (Fitch IBCA); authors’ calculations
The following table compares total bank assets in state banks with those in private banks. The
figures show that the CEE countries have significantly larger private banks in total and on
average, even though they also have larger aggregate state bank assets. Even though Central
European state bank assets are 1.55 times greater than those in CIS countries, private bank assets
for Central Europe are nearly four times private banks’ assets in CIS. Meanwhile, the Baltic
states had the highest private share of bank assets at end 2000, at about 92 percent of total.
66
As for specific countries, about one-third had state bank assets in excess of half of total.
However, the largest aggregate figures for state bank assets were in Russia, Poland and the
Czech Republic. These three countries combined had $63 billion in state bank assets, which was
equivalent to 20 percent of total banking system assets in all reporting transition countries. This
shows the level of concentration of banking system assets, as these three countries combined
accounted for 63 percent of total assets.103
The table below also shows that the average state bank had about $900 million in total assets at
end 2000, as compared with only $99 million for the average private bank. This shows an
increase from 1995, when state bank assets averaged $664 million. The increase has primarily
come from the CIS region, where average state banks had $335 million in assets in 1995,
compared with $876 million in 2000. Sberbank of Russia is largely responsible for these
changes, along with the general decrease in the number of state banks as a result of privatization,
consolidation and failure.104 CEE and Baltic countries’ state banks showed roughly the same
level of assets, with the Baltic state banks showing a bit more of a proportional increase.
Meanwhile, private banks are considerably smaller than state banks in both Central Europe and
CIS countries, whereas they are larger on average in the Baltic states. Private banks continue to
grow in the CEE region, and the statistics would shift dramatically if the Komercni privatization
in 2001 were included in the analysis, just as the statistics will shift even more when PKO BP of
Poland is eventually privatized. Meanwhile, CIS private banks remain very small, at only $26
million in assets, about 10 percent of the average Baltic private bank.
Figure 5.6 Banks' Assets in 2000 (percent)
100
90
80
53.8
70
60
73.6
92.3
50
40
30
46.2
20
10
26.4
7.7
0
CEE
Baltic
State Bank Assets
103
CIS
Private Bank Assets
$198.6 billion/$313.3 billion = 63.4 percent.
104
The average asset size of CIS state banks would be considerably smaller if the nearly 700 banks in which
the Russian government, central bank, or other public sector agency had a minority share were included in the
denominator.
67
Notes: Figures are for 2000; estimates in state/private bank shares made for FYR Macedonia, Turkmenistan and
Uzbekistan; figures for Yugoslavia are not included due to expected write-offs of about $6 billion-equivalent as a
result of liquidation procedures for the major banks.
Sources: IMF (International Financial Statistics); EBRD Transition Report 2001; authors’ calculations
Deposits
Data from 2000 indicate that state banks’ had about $77 billion in deposits105 or about 37 percent
of total banking system deposits for reporting countries. About 62 percent of the state banks’
deposit total was in Central European countries.106 Russia and Poland alone accounted for 56
percent of the total, attesting to the importance of Sberbank and PKO BP in transition country
deposit mobilization. These two countries combined with the Czech Republic, Romania,
Slovenia and the Slovak Republic accounted for 86 percent of total state bank deposits at end
2000.
As a share of total average country deposits, CIS countries show a higher share of total, at about
58 percent, much higher than their credit figures. The Central European countries have about one
third of total deposits in state banks, about the same as state bank credit shares. The Baltic states’
public banks were similar to their counterparts in Central Europe in terms of matching deposit
and credit shares. However, as a percent of total, the Baltic states had only about 12 percent of
total deposits in state banks at end 2000. The following table highlights these figures.
Table 5.6 State Banks' Deposit Figures at end 2000 (million US dollars)
Total Bank
Deposits($)
Albania
Armenia
Azerbaijan
Belarus
Bosnia
Bulgaria
Croatia
Czech Republic
Estonia
FYR Macedonia
Georgia
Hungary
Kazakhstan
State Bank % Deposits
1,605
167
546
1,156
834
2,785
8,085
32,796
1,590
531
156
17,814
1,981
73.3
5.4
88.8
111.2
18.9
28.1
8.9
30.2
0.0
0.0
0.0
7.4
32.7
105
State Bank Deposits($)
1,176
9
485
1,285
158
782
720
9,915
0
0
0
1,314
648
Differences in this figure with other figures show up in Lithuania, Slovenia and Yugoslavia. In Lithuania,
the higher figures include the now private Savings Bank. In Slovenia, there may be some double-counting in terms
of deposits. In Yugoslavia, the lower figure excludes deposits due to the liquidation process under way.
106
$47,538 million/$77,153 million = 61.6 percent.
68
Kyrgyz
Latvia
Lithuania
Moldova
Poland
Romania
Russia
Slovak Republic
Slovenia
Tajikistan
Turkmenistan
Ukraine
Uzbekistan
Yugoslavia
TOTAL
CEE total
Baltic total
CIS total
68
1,447
1,946
170
62,837
6,145
39,903
11,265
8,277
N/A
434
3,387
2,384
N/A
208,309
152,974
4,983
50,352
10.3
19.4
16.5
15.3
31.7
58.9
58.0
34.8
72.3
N/A
100.0
17.1
100.0
N/A
37.0
31.1
12.1
57.6
7
281
322
26
19,944
3,619
23,156
3,922
5,988
8
434
578
2,384
N/A
77,153
47,538
603
29,012
Notes: Deposits = "customer and short-term funding"; Turkmenistan and Uzbekistan total deposits estimated for 2000.
See table 5.3 for list of banks included in data analysis.
Sources: IMF (International Financial Statistics); Bank Scope (Fitch IBCA); authors’ calculations
The following figure shows the comparison of state banks to private banks in terms of deposit
mobilization figures at end 2000. The figures indicate about one-third of transition countries still
had very high levels of state bank deposit concentration, exceeding 50 percent of total. These
countries included Russia, with nearly 60 percent of total banking system deposits in state banks,
mainly Sberbank.107. Another five countries had between 20-50 percent of total deposits in state
banks, including Poland, the country with the highest level of bank deposits among all transition
countries.108.
As noted above, there is significant country concentration in terms of deposit mobilization.
About six countries account for 86 percent of total state bank deposits. Aggregate figures show
that Poland, Russia, the Czech Republic and Hungary account for 74 percent of total transition
country deposits109 among reporting countries.
The table below also shows that the average state bank had $714 million in deposits at end 2000,
as compared with the average private bank that had only $60 million in deposits. These
differences are most dramatic in the CIS region, where the average state bank had $675 million
in deposits, as compared with the average private bank with only $12 million. This largely
reflects the near monopoly savings banks have had in CIS countries, particularly in local
107
Sberbank alone accounted for about three quarters of domestic currency deposits, and about half of hard
currency deposits in Russia in late 2001.
108
Poland accounted for about 30 percent of total transition country deposits as of end 2000.
109
$153.4 billion/$208.3 billion = 73.6 percent.
69
currency. It is also important to recognize the significant growth in average deposits for CIS state
banks, which had less than $200 million in 1995. Again, as with other indicators, these averages
would decline significantly if the full number of banks in which the Russian state authorities had
shares were included in the denominator. Meanwhile, state banks in CEE countries remain large
on an average deposit basis, with $779 million in deposits, more than three times the average
CEE private bank. It is noteworthy that both state and private banks in CEE have experienced
deposit growth on average since 1995, with the average private bank nearly doubling deposits. It
is also noteworthy that state banks in the CEE region have increased average deposits about 1.4
times the average private bank.110 In the Baltic region, private banks were smaller than in CEE
countries, but larger on an average deposit basis than private banks in the CIS countries. Baltic
state banks were smaller on average than state banks in both CEE and CIS.
Figure 5.7 Banks' Deposits at end 2000 (percent)
100
90
80
70
60
42.4
69
87.9
50
40
30
20
10
57.6
31
12.1
0
CEE
State Bank Deposits
Baltic
CIS
Private Bank Deposits
Notes: Deposits = "customer and short-term funding"; Turkmenistan and Uzbekistan total deposits estimated for
2000; figures for Yugoslavia not used due to liquidation procedures in place for major banks; statistical issues
recognized in the case of Belarus, where negative deposits appear for private banks.
Sources: IMF (International Financial Statistics); Bank Scope (Fitch IBCA); authors’ calculations
As for loan-to-deposit ratios, end 2000 figures suggest that most ratios are conservative and
prudent except with regard to private banks in the CIS countries. Here, loans account for about
1.4 times deposits. Should there be any erosion in loan quality among these banks, this would
endanger the safety of deposits. Private banks in the CEE countries and the Baltics show loans at
about 85 percent of deposits, which appears to be about as high a ratio that is prudent given that
classified loans in these countries are estimated to have averaged about 16.3 percent at end
110
The average CEE state bank increased deposits $161 million from 1995 to 2000. The average private CEE
bank increased deposits $114 million. Thus, $161/$114 = 1.41 times.
70
2000.111. This would have equated with 12 percent of total deposits in the CEE and Baltic
banks.112
In general, loan-to-deposit ratios in state banks appear fairly conservative. This means their
credit risk is fundamentally a mix of Government and company risk, as the balance of net
domestic credit is in Government securities. Meanwhile, private banks need to focus on their
exposures to enterprise credit risk, as most of their earning assets are exposed to companies (and
households) as opposed to Government. As noted above, private banks in the CIS also need to be
on their guard for domestic debt risk, as their overall credit exposure to Government securities is
about 22 percent. All together, Central European banks have the lowest loan-to-deposit ratios at
74 percent, with the Baltics and CIS banks having ratios about 10-20 percent higher on average.
Table 5.7 Comparative Distribution of Loans and Deposits: 2000 (million US dollars)
State Banks
Private Banks
All Banks
Loans
Deposits
Loans
Deposits
Loans
Deposits
22,864
47,538
90,034
105,436
112,898
152,974
CEE
350
603
3,757
4,380
4,107
4,983
Baltics
16,742
29,012
29,603
21,341
46,345
50,352
CIS
Total
42,282
77,153
123,395
131,156
163,350
208,309
Loan-to-Deposit Ratios by Region and in Total (in percent)
State Banks
Private Banks
All Banks
48.1
85.4
73.8
CEE
58.0
85.8
82.4
Baltics
57.7
138.7
92.0
CIS
Total
54.8
94.1
78.4
Notes: Loan figures not available for Tajikistan; figures for Yugoslavia not used due to liquidation of banks in
process; private loan figures derived from total loans to state enterprises and the private sector (from IFS) less loans
on state banks’ balance sheets.
Sources: IMF; Fitch IBCA; authors’ calculations
Capital
Data from 2000 indicate that state banks had about $10.4 billion in “net capital” 113 on their
balance sheets, little more than 20 percent of total bank capital in transition countries. This figure
is less than state banks’ comparable shares of credit, assets and deposits, and points to the
possibility that these banks are undercapitalized relative to their private bank peers.
Alternatively, the lower capital figures relative to other balance sheet measures may partly reflect
more conservative risk-weighting due to the higher proportion of Government securities, or
111
$19 billion/$117 billion = 16.3 percent. NPLs were higher in CEE countries than in the Baltic states.
112
$19 billion/$158 billion = 12.1 percent
113
Net capital is derived from IFS, and subtracts (or adds if positive) “other items net” from “capital accounts”
for banking/deposit-taking institutions.
71
implicit guarantees by the state that these banks would be rescued should they face serious
solvency or liquidity issues. This has already occurred in many transition countries, and
continues to pose a macroeconomic risk and potential competitive distortion in markets where
their roles are particularly active.
CEE countries’ state banks had about $6.2 billion in capital at end 2000, mainly in Poland and
the Czech Republic. Russia was the other major market where state banks had fairly sizeable
capital as a percentage of total. Overall, these three countries accounted for $5.9 billion in state
bank capital, or 56 percent of total.
On a percentage basis relative to total capital in domestic systems, Belarus, Romania,
Turkmenistan and Uzbekistan showed high levels of state bank capital to total. However, on an
aggregate basis, this only amounted to about $1.9 billion, with Uzbekistan representing the
largest proportion. Other countries with 20-50 percent levels of state bank capital to total were in
Central Europe, and included Bosnia-Herzegovina, Croatia, Hungary, the Slovak Republic and
Slovenia. Several of these Central European countries have reduced their state shares since 2001.
As a share of total average country state bank capital, the CEE and CIS countries all averaged
about 21-22 percent of total at end 2000. The Baltic states’ $53 million in state bank capital
accounted for only five percent of total system capital at end 2000. The following table
highlights these figures.
Table 5.8 State Banks' Capital at end 2000 (million US dollars)
Total Bank Capital
($)
Albania
Armenia
Azerbaijan
Belarus
Bosnia
Bulgaria
Croatia
Czech Rep.
Estonia
FYR Macedonia
Georgia
Hungary
Kazakhstan
Kyrgyz
Latvia
Lithuania
Moldova
Poland
Romania
Russia
Slovak Rep.
Slovenia
State Bank % of
Capital
292
27
184
378
298
1,027
1,976
5,335
408
404
100
2,404
794
11
305
307
90
12,758
594
15,317
2,699
1,693
11.3
0.0
13.0
85.0
32.2
11.2
23.0
21.4
0.0
1.0
0.0
21.0
9.6
12.9
6.9
10.4
4.5
14.6
116.2
18.6
21.8
40.2
72
State Bank Capital($)
33
0
24
321
96
115
454
1,144
0
4
0
504
76
1
21
32
4
1,857
690
2,849
588
681
Tajikistan
Turkmenistan
Ukraine
Uzbekistan
Yugoslavia
TOTAL
CEE total
Baltic total
CIS total
N/A
21
1,225
851
N/A
49,496
29,480
1,020
18,997
N/A
100.0
4.9
100.0
N/A
21.0
20.9
5.2
22.1
N/A
21
60
851
N/A
10,408
6,153
53
4,202
Notes: Figures are for 2000 unless not available (1999 then used as alternative); “capital” = “capital accounts” +/“other items net”; state share of capital is based on state share of assets applied to capital, with private bank shares
serving as a residual; reliable data on bank capital for Tajikistan and Yugoslavia not available.
See table 5.3 for list of banks included in data analysis.
Sources: IMF (International Financial Statistics); Bank Scope (Fitch IBCA); EBRD; authors’ calculations
The following figure shows the comparison of state banks to private banks in terms of capital.
The figures show private banks accounted for about 79 percent of total system capital among
transition countries at end 2000, with the Baltic states having the highest proportion of private
capital. The vast majority of countries showed fairly high levels of private capital, with only a
few countries (noted above) having predominantly state capital. All together, private bank capital
was $39 billion, about 60 percent of it in Central European banks.114
Most banks in transition countries remain small, with capital only $22 million on average per
bank. This is particularly true in the CIS region, where the average bank had $11 million in
capital. Baltic banks had about $25 million, and CEE banks had $61 million.
The average state bank had $97 million in capital, as compared with the average private bank,
which had only $18 million. By region, state banks in the CEE region were slightly larger on
average in terms of capital ($101 million), compared with CIS state banks ($98 million) and
Baltic state banks ($13 million). Private banks in CEE countries were considerably larger than
their private bank counterparts in the Baltic region and CIS. In particular, private CIS banks
showed very little capital at the end of 2000. In fact, total private bank capital in the CIS region
at the end of 2000 was only $14.8 billion, equivalent to total private bank capital for Poland and
the Czech Republic. Moreover, Russia accounted for $12.5 billion in private bank capital. This
means that all other CIS private banks had only $2.3 billion in bank capital, about $5.5 million
per private bank115 net of private banks in Russia. Meanwhile, private Russian banks themselves
were not particularly large, averaging less than $10 million in capital at end 2000. 116 This is
much smaller than private banks in the CEE and Baltic markets.
114
$23,327 million/$39,088 million = 59.6 percent.
115
$2,326 million/422 = $5.5 million. There are 422 private banks in CIS countries apart from Russia.
116
$12,468 million/1,309 = $9.5 million. There were a reported 1,309 private banks in Russia in 2000.
73
Figure 5.8 Banks' Capital at end 2000 (percent)
100
90
80
70
60
77.9
79.1
94.8
50
40
30
20
10
22.1
20.9
5.2
0
CEE
Baltic
State Bank Capital
CIS
Private Bank Capital
Notes: Figures are for 2000 unless not available (1999 then used as alternative); “capital” = “capital accounts” +/“other items net”; state share of credit based on public bank statements, with private bank shares serving as residual;
statistical problems recognized for Romania; no reliable capital figures available for Tajikistan or Yugoslavia.
Sources: IMF (International Financial Statistics); Bank Scope (Fitch IBCA); EBRD; authors’ calculations
Straight capital-to-asset ratios indicate that private banks had nearly four times the capital ratios
of state banks. Private banks’ capital-to-asset ratios were about 12.5 percent for all transition
countries, while state banks showed only 3.3 percent. This cannot be automatically associated
with risk or asset quality, as banks with high ratios may still be insolvent while banks with
relatively modest ratios may be in sounder financial condition. However, the 3.3 percent ratios
for state banks are low and would ordinarily require corrective action unless the bank was not
assuming any risk. Conversely, if the bank is not assuming any risk, there are then questions
about its earnings stream, its ability to increase capital from ordinary banking operations, and its
long-term viability. To the extent that many state banks have low capital to assets because of
heavy investment in Government securities,117 this then raises the question of whether income
from securities is enough for these banks to recapitalize for long-term commercial viability and
competitiveness. If so, this then points to the question of fiscal stability, and whether this is the
best use of these countries’ fiscal resources. To the extent that fiscal prudence keeps such an
earnings stream low, this once again raises the question of the bank’s cash liquidity, solvency,
and long-term commercial viability. In any event, state banks show low levels of capital to assets
in most transition countries, with the exceptions being Belarus, Romania and Uzbekistan.
Meanwhile, the private banks’ 12.5 percent capital-to-assets ratio compares favorably with
general 8-10 percent BIS guidelines, although these would have to be tested for adequacy with
117
Government securities are usually assigned a zero risk weight for regulatory capital (capital adequacy)
purposes. However, several countries (including Russia and Ukraine) have defaulted on their domestic debt. This
suggests that zero risk weights should not be automatic, and that capital should be higher as a result.
74
regard to levels of risk assumed. About half the countries’ private banks’ capital-to-asset ratios
are at double-digit levels, although there are many exceptions. Given the high levels of nonperforming loans (equivalent to more than 50 percent of capital) at end 2000 in Azerbaijan,
Belarus, Bosnia-Herzegovina, Croatia, the Czech Republic, Kyrgyz Republic, Poland, Slovak
Republic, and Ukraine, it is possible that state and/or private banks are undercapitalized in these
countries.
Table 5.9 Comparative Bank Capital-to-Asset Ratios at end 2000
Total Banks'
State Banks’
Capital ($)
Assets ($)
CARs (%)
292
1,993
1.7
Albania
27
348
0.0
Armenia
184
1,010
1.9
Azerbaijan
378
2,207
14.5
Belarus
298
2,774
3.5
Bosnia
1,027
4,622
2.2
Bulgaria
1,976
13,521
3.4
Croatia
5,335
49,265
2.3
Czech Republic
408
3,162
0.0
Estonia
404
1,279
0.3
FYR Macedonia
100
322
0.0
Georgia
2,404
24,714
2.0
Hungary
794
3,302
2.3
Kazakhstan
11
96
1.5
Kyrgyz
305
4,017
0.5
Latvia
307
3,025
1.1
Lithuania
90
323
1.2
Moldova
12,758
87,744
2.1
Poland
594
7,607
9.1
Romania
15,317
61,573
4.6
Russia
2,699
15,252
3.9
Slovak Republic
1,693
12,847
5.3
Slovenia
N/A
N/A
N/A
Tajikistan
21
2,075
1.0
Turkmenistan
1,225
5,799
1.0
Ukraine
851
4,432
19.2
Uzbekistan
N/A
N/A
N/A
Yugoslavia
TOTAL
49,496
313,309
3.3
CEE total
29,480
221,618
2.8
Baltic total
1,020
10,204
0.5
CIS total
18,997
81,487
5.2
Private Banks’
Capital (%)
13.0
7.8
16.3
2.6
7.3
20.0
11.3
8.5
12.9
31.3
31.1
7.7
21.7
10.4
7.1
9.1
26.6
12.4
-1.3
20.2
13.8
7.9
N/A
N/A
20.1
N/A
N/A
12.5
10.5
9.5
18.2
Notes: Figures are for 2000 unless not available (1999 then used as alternative); “capital” = “capital
accounts” +/- “other items net”; state share of credit based on state bank statements, with private
bank shares serving as residual; statistical problems are recognized for Romania; no reliable figures
available for Tajikistan or Yugoslavia.
Sources: IMF (International Financial Statistics); Bank Scope (Fitch IBCA); authors’ calculations
Asset Quality
75
In terms of asset quality, bad loans in transition economy banks were a troubling $26 billion at
end 2000,118 equivalent to about 16 percent of total loans. Nearly $19 billion was in CEE banks,
and less than $7 billion in CIS banks. The latter may be understated, as some CIS countries
reported suspiciously low levels of bad loans. For example, Uzbekistan reported zero percent
non-performing loans, and Turkmenistan only 0.5 percent. There is also the larger issue of the
degree of bad credit in the economy as a whole, which is often captured outside the banking
system in the form of arrears to power and utility companies, fiscal accounts, employee wage
accounts, and obligations to other enterprises.119 As noted in arrears figures cited below (see
Table 6.3 and Annex 5), these issues are particularly problematic in CIS countries and, to some
degree, in many of the Balkan states of southeast Europe. All together, bad loan figures were
equivalent to only 12.5 percent of total deposits, but more than half of total capital for banks in
transition countries.
The high bad loan-to-capital ratio points to the risk of undercapitalization, as noted above. In
particular, the problem appears to be most acute in Poland, the Czech Republic and Russia,
where an estimated $18.2 billion in bad loans are housed with banks. While specific links cannot
be made to specific institutions, 2000 figures for the major state banks reporting in these
countries showed loan loss reserves to be in the 5-15 percent range.120 If these loans were to
deteriorate further, this would likely trigger the need for additional injections of capital. In fact,
several countries are in the range of at least 75 percent bad loan-to-capital ratios for 2000,
including Azerbaijan, Bosnia-Herzegovina, the Czech Republic, the Kyrgyz Republic, the
Slovak Republic, and Ukraine. In some cases, corrective measures have already been taken or
are being planned. Bosnia-Herzegovina is in the process of liquidating and privatizing many of
its remaining state banks. The Czech Republic has privatized Komercni. The Kyrgyz Republic
has essentially placed Kairat Bank under administration. The Slovak Republic has successfully
privatized VUB. However, in Ukraine, there are still reported to be problems associated with
several banks, including possible risks associated with the recently intensified lending activities
of wholly state-owned Oschadny Bank.121
118
Bad loan percentages are based on an EBRD survey of central banks, and include sub-standard, doubtful
and loss loans as a percentage of total loans.
119
For more on this topic, see Siegelbaum, Sherif, Borish and Clarke, “Structural Adjustment in the
Transition: Case Studies from Albania, Azerbaijan, the Kyrgyz Republic and Moldova,” World Bank Discussion
Paper 429, 2002.
120
For example, Komercni (Czech Republic) reported loan loss reserves at end 2000 of 14.03 percent of gross
loans, little changed from 14.56 percent at end 1999. Sberbank’s loan loss reserves were 11.96 percent of end 2000
gross loans, down from 18.41 percent in 1999. Meanwhile, in Poland, PKO BP reported loan loss reserves of less
than 5 percent, and BGZ had no figures available, but reported a reversal of provisions on the income statement in
2000. This would suggest that the bad loan problem in Poland could be more of an issue for private banks than with
state banks.
121
Oschadny Bank is the traditional savings bank. Its lending has increased significantly in recent years. While
Ukraine’s economy has shown real growth since 2000, there is a general risk that more aggressive lending to
generate increased earnings could backfire and require further capital and/or liquidity support should there be a
downturn in the economy. This would be particularly serious as significant funding is derived from a major share of
the overall household deposit market.
76
BOX 5.2 UKRAINE’S OSCHADNY BANK: BECOMING COMPETITIVE, OR RISKING FAILURE
AND CRISIS?
Oschadny is one of the largest banks in Ukraine due to its asset size and retail network. As of late 2000, Oschadny had
about 35,000 employees, and controlled 25-30 percent of household deposits in the banking system. However, the
amount of household deposits was only about $330 million in late 2000, small for a country of 50 . Thus, while
perceived to be “large” in Ukraine, Oschadny is not really a significant bank in terms of aggregate intermediation,
reflecting the comparative insignificance of banking and financial intermediation in the economy.
Similar to other state and quasi-state banks, Oschadny’s financial situation deteriorated in the late 1990s. The bank is
characterized by (i) high operating costs associated with excessive branch structures and employment, and other
operating inefficiencies; (ii) government-directed lending that has resulted in substantially impaired portfolios, reduced
ratios of earning assets, and after-tax losses; (iii) ongoing governance problems associated with central and regional
government involvement in decision-taking, and with the wholly non-transparent interventions of key business groups
connected to the bank’s management and related authorities; (iv) the inability or unwillingness of the government to
honor financial obligations to the bank in the form of payments on guarantees and capital contributions; and (v) lagging
performance in the upgrading of management systems and informational technologies to lower costs, and to enforce
centralized policies on the bank’s regional offices.
Oschadny experienced after-tax losses of $22 million in 2000, and there are concerns that its losses may have been
more severe since, or that earnings may be artificially inflated due to questionable loan classification practices.
Meanwhile, despite its traditional savings bank orientation and portfolio problems, Oschadny increased lending rather
than pursuing a more prudent program of corrective actions. Oschadny was also appointed by the government in mid2000 to act as the authorized bank to service clearing accounts of electricity utility companies and their branches.
Oschadny performed this responsibility until October 2001, and the potential losses from these operations and
incremental lending remain to be seen.
Solving the problem of Oschadny depends largely on the willingness and capacity of the Ukrainian authorities to take
prompt action in terms of governance and strategy. Although strict market logic argues for the bank’s closure, its
crucial place in Ukraine’s social fabric makes this solution unlikely in the foreseeable future. To reverse current losses,
the bank’s management has pursued a cost-reduction strategy by closing some non-viable offices and releasing staff.
The bank closed 148 branches and 2,933 operational offices (agencies) from January 1, 1998 to December 31, 2000.
However, the financial and institutional gap is still so large that it is questionable whether Oschadny can become
competitive without a major acceleration of restructuring and cost reduction coupled with major assistance from the
government. Preliminary estimates done in early 2001 indicate that Oschadny would need to reduce its costs by about
40 percent to achieve breakeven.
The key condition for stabilizing the situation requires that Oschadny not be used as a quasi-fiscal institution, or as a
vehicle for directed lending as it so often has been in the past. Such practices subject the institution and government (as
its sole shareholder) to a high level of financial risk. At a minimum, firewalls and safeguards need to be put in place to
ensure that Oschadny decision-making is grounded in commercial principles. "Social" or "governmental" activity
should be off-balance sheet and subject to commercial pricing. Any lending or investment should be explicitly
guaranteed (in documented form) so that Oschadny is utilized strictly as an agent that assumes no risk.
Due to the depth of financial distress, there is a risk that Oschadny will seek to grow out of its problems,
attempting to leapfrog from its current status as a specialized savings bank to a full-service "universal" bank. This
is premature due to the weak financial condition and limited institutional capacity of the bank. Under such
circumstances, there is a risk that Oschadny would assume excess risk to generate high earnings and reverse the
losses that have accumulated for years. There is a serious risk of adverse selection under such circumstances,
especially since the bank does not accurately measure risk and return.
Bad loan figures suggest that the problem of bad loans is not just an issue for state banks, but
applies as well to private banks. This raises several issues with regard to banking sector
modernization, including the drag on earnings that bad loans present for banks, and the degree to
which such weakness in earnings undercuts the ability of banks to modernize (see below). This is
not just a basic systems issue, but one in which modern banks require major resources for
77
investment in product diversification, information technologies and management, market
research, and internal requirements (e.g., improved standards of governance, management and
general staff (re-) training, etc.). As such, considerable capital investment is still needed in CEE
(where bad loans accounted for 64 percent of end 2000 capital) to assist with modernization,
although this effort is already well under way in many countries, as it is in the Baltic states.
The lower bad loan to capital figure in CIS countries may very well be a mistake. First, it likely
represents an understatement of bad loans,122 as noted above with regard to figures reported by
Turkmenistan and Uzbekistan. Beyond that, it understates the problems of barter, netting and
arrears that have functioned almost in parallel to the formal banking and fiscal systems for nearly
a decade. As such, while bad loans may only be about 14 percent of deposits and 37 percent of
capital in CIS countries, deposits and capital are lower in these countries partly because of the
problems households, enterprises, and formal institutions face. This makes it difficult for well
functioning systems to emerge, let alone to operate and go through the “growing pains” needed
for eventual competitiveness and modernization. Such a bifurcation in development patterns
between the CIS on the one hand, and much of Central Europe and the Baltics on the other
represents one of the major structural challenges among transition countries today. For the
foreseeable future, until these issues are addressed and confidence is gradually restored, the CIS
will continue to lag other regions, notwithstanding better bad loan to deposit or capital ratios.
The following table highlights key asset quality figures.
122
This problem is not restricted to CIS. While the bad loan figure for Yugoslavia increased in 2000 from
earlier years (implying more overt recognition of bad loan problems), the 27.8 percent figure is understated relative
to the billions of dollars in loans that may eventually be written off with the liquidation of the major banks. Other
countries appear to have faced up to their bad loan problems, at least in terms of making a stronger effort at
realization of the magnitude of these potentially bad loans (for monetary and financial sector stability). However,
many countries still have weak loan classification practices. Other weaknesses, such as the absence of consolidated
accounting or limited capacity to assess political/market risk, may also contribute (unwittingly) to an understatement
of bad loans. Many supervisory authorities are aware of these weaknesses, and are in the process of addressing them.
Likewise, banks themselves are often in the process of strengthening their internal reporting processes to capture
risks. However, continued weaknesses add to the risk that portfolio quality may be overstated.
78
Table 5.10 Banks' Comparative Bad Loans and Impact on Banks’ Financial Condition at end 2000
(million US dollars)
Total
State
Private
Bad Loans
Bad Loans as a % of:
Loans Loans
Loans
%
$
Deposits
Capital
182
10
172
42.6
77
4.8
26.5
Albania
0
0
0
6.2
0
0.0
0.0
Armenia
446
184
262
37.2
166
30.4
90.3
Azerbaijan
1,254 1,075
179
15.2
191
16.5
50.5
Belarus
2,052
89
1,963
15.7
322
38.6
108.1
Bosnia
1,970
343
1,627
10.9
215
7.7
20.9
Bulgaria
7,258
647
6,611
19.7
1,430
17.7
72.4
Croatia
26,483 3,752
22,731
19.3
5,111
15.6
95.8
Czech Republic
1,332
0
1,332
1.5
20
1.3
4.9
Estonia
643
8
635
26.9
173
32.6
42.8
FYR Macedonia
226
0
226
5.6
13
8.1
12.7
Georgia
4,469
599
3,870
3.1
139
0.8
5.8
Hungary
2,338
385
1,953
5.8
136
6.8
17.1
Kazakhstan
56
2
54
16.4
9
13.5
83.5
Kyrgyz
1,399
149
1,250
6.3
88
6.1
28.9
Latvia
1,377
201
1,176
10.8
149
7.6
48.5
Lithuania
182
13
169
20.6
38
22.1
41.9
Moldova
50,328 10,179
40,149
15.9
8,002
12.7
62.7
Poland
2,641
1,015
1,626
3.8
100
1.6
16.9
Romania
33,420 10,234
23,186
15.3
5,113
12.8
33.4
Russia
10,105 2,723
7,382
26.2
2,647
23.5
98.1
Slovak Republic
6,767 3,499
3,268
8.5
575
6.9
34.0
Slovenia
N/A
N/A
N/A
10.8
N/A
N/A
N/A
Tajikistan
1,884
1,803
81
0.5
9
2.2
44.8
Turkmenistan
3,815
322
3,493
32.5
1,240
36.6
101.2
Ukraine
2,525 2,525
0
0.0
0
0.0
0.0
Uzbekistan
N/A
N/A
N/A
27.8
N/A
N/A
N/A
Yugoslavia
TOTAL
163,152 39,757
123,395
15.9
25,963
12.5
52.5
CEE total
112,898 22,864
90,034
16.6
18,792
12.3
63.7
Baltic total
4,107
350
3,757
6.3
257
5.2
25.2
CIS total
46,147 16,543
29,603
15.0
6,914
13.7
36.4
Notes: Bad loan figures are for 2000 unless not available (1999 figures used or Azerbaijan, Kazakhstan and
Turkmenistan; 1998 figures are used for Latvia).
Sources: IMF (International Financial Statistics); Bank Scope (Fitch IBCA); EBRD; authors’ calculations
Earnings Performance and Solvency Issues
Earnings performance among state banks has varied. After-tax earnings were generally poor in
CEE and the Baltic markets among state banks in 2000, while CIS countries reported more
favorable earnings influenced mainly by the results of Sberbank of Russia. The latter was partly
supported by a rebound in commodity prices and improvements in several CIS economies (e.g.,
79
Russia, Ukraine, Kazakhstan). However, there are also questions about the veracity of the CIS
earnings data due to loan classification standards, accounting and audit practices, and the general
investor view that risk-related information is insufficiently disclosed. Thus, it is hard to ascertain
the degree of real earnings among CIS state banks, as well as the return figures (i.e., assets,
equity) against which they are measured.
Taking these caveats into account, CIS state banks reportedly generated $710 million in after-tax
earnings, most of it in Russia. These figures represented a 2.1 percent return on assets, and 19.3
percent return on equity. By contrast, CEE state banks only generated $118 million in after-tax
earnings (net of Yugoslavia), about $2 million per state bank. ROA was only 0.2 percent, and
ROE was 2.0 percent. If Yugoslavia is included in these measures, they all turn negative,123 as
shown in the table below. The Baltic state banks showed better return measures in terms of assets
and equity, but only had $5 million in after-tax earnings.
The table below shows about $152 million in after-tax earnings in 2000. This is based on reports
from about 65 banks, and is about $170 million less than other estimates from varied sources.
Irrespective of the figures, there was a high level of concentration of major profits, with only
three banks generating more than $100 million in after-tax earnings. Several countries’ state
banks showed losses in 2000. This included state banks in Croatia, Hungary, Kazakhstan, the
Kyrgyz Republic and Romania. Since then, some of the loss-makers have been privatized (e.g.,
Bank Agricola in Romania, Dubrovacka in Croatia) or put under administration (e.g., Kairat in
the Kyrgyz Republic). Several other state banks that showed low earnings have also been
privatized (e.g., Komercni in the Czech Republic).
123
Beobanka Belgrade reported an estimated $500 million in after-tax losses in 2000, and Invest Banka
reported $181 million in losses. These losses alone would turn the CEE figures into net losses for the region.
80
Table 5.11 State Banks' After-tax Earnings and Return Measures at end 2000 (million US dollars)
After-tax
Earnings ($)
RoA (%) RoE (%)
State Banks Included in the Figures
26
2.1
-173.3
Savings Bank
Albania
Armenia
Azerbaijan
0
0.0
0.0
10
2.1
55.6
Armenia Savings Bank
IBA, United Universal
Belarus
10
0.6
2.8
Belpromstroibank, Belagroprombank,
Belbusinessbank, Belgazprombank, Belarusbank,
Belvnesheconombank
Bosnia
2
0.6
1.5
Investment Bank, Central Profit Bank,
Gospodarska, Privredna
13
1.5
12.4
DSK, Biochim, Central Cooperative
Bulgaria
-33
-2.2
-6.9
Dubrovacka, Croatia, Croatian Bank for
Reconstruction and Development, Hrvatska
Postanska
16
0.1
1.4
Komercni, Ceskomoravska Zarucni, Ceska
Exportni
Estonia
0
0.0
0.0
No state banks
FYR Macedonia
0
0.0
0.0
Macedonian Development Bank (estimated)
Georgia
0
0.0
0.0
No state banks
-17
-0.8
-3.9
Magyar Fejlesztesi, Postbank
Kazakhstan
-5
-0.8
-6.7
Export-Import Bank, Halyk
Kyrgyz
-1
-11.1
-82.5
Latvia
3
0.9
14.6
Lithuania
2
0.5
6.5
Moldova
3
10.7
136.4
19
0.1
1.0
-90
-1.8
-17.2
Croatia
Czech Republic
Hungary
Poland
Romania
Russia
Slovak Republic
Slovenia
577
2.4
Kairat, Energo Bank
Latvian Mortgage and Land Bank, Latvian
Savings Bank
Agricultural Bank
Banca de Economii
PKO BP, BGZ, National Economy Bank, Bank
Ochrony Srodowiska
Banca Agricola (1999), BCR, CEC, EXIMBank
24.2
Sberbank, Medium & Long Term Credit Bank,
Vnesheconombank, Russian Bank for
Development
VUB, Investicna a Rozvojova, First Building
Savings, Slovenska Zarucna a rojvojova, Banka
Slovakia, Exportno-Importna
101
2.0
17.5
81
1.1
12.0
81
Nova Llubljanska, Nova Kreditna Maribor, Postna
Banka, Slovene Export Corporation, Slovenska
Table 5.11 State Banks' After-tax Earnings and Return Measures at end 2000 (million US dollars)
After-tax
Earnings ($)
RoA (%) RoE (%)
State Banks Included in the Figures
Investicijska
Tajikistan
N/A
N/A
N/A
Insufficient data available
Turkmenistan
3
0.2
15.4
Bank for Foreign Economic Affairs
Ukraine
9
1.3
17.0
Ukreximbank, Oschadny
13.5
State Housing Savings Bank, Asaka,
Uzpromstroybank, National Bank for Foreign
Economic Activity
Uzbekistan
104
Yugoslavia
-681
TOTAL
CEE total
Baltic total
CIS total
2.3
N/A
N/A
152
0.2
1.6
-563
-1.0
-9.7
5
0.7
9.7
710
2.1
19.3
Notes: Figures are for 2000 unless not available (1999 then used as alternative); banks highlighted in bold have been
privatized or liquidated since end 2000; reliable data for Tajikistan not available; several banks’ profits derived from
taking RoA and applying to average assets for 1999-2000.
Sources: IMF (International Financial Statistics); Bank Scope (Fitch IBCA); authors’ calculations
The $152 million in after-tax income is particularly modest given the number of major state
banks (108), and the size of some of the state banks in 2000.124 On average, such after-tax
earnings translate into only $1.4 million in earnings per state bank, not enough for meaningful
investment to modernize and become competitive by global standards. Netting out the $843
million in after-tax earnings for the four banks with greater than $100 million in 2000 earnings
and offsetting the $681 million in losses from Yugoslavia, the other state banks were basically
flat in their net earnings (at a $10 million loss across 100 banks). In general, as indicated by the
aggregate statistics, return on (average) assets was only 0.2 percent for state banks, well below
the 2-3 percent norms established in OECD and EU markets.
Net capital for state banks increased from $8.7 billion to $10.4 billion in total capital, well above
the reported $152 million in after-tax earnings. Netting out Yugoslavia, this suggests that state
banks increased capital from retained earnings as well as other sources. However, this increase in
capital is still in stark contrast to the private banks in transition countries that showed a net
increase in capital of $5.8 billion, about 3.4 times state bank incremental capital. The latter trend
is likely a combination of retained earnings and direct investment, the latter of which is a more
difficult prospect for state banks given the precarious position of many countries’ monetary and
fiscal positions where state banks play a prominent role in the economy. However, the capital
124
Komercni, PKO BP and Sberbank combined for only $568 million in after-tax earnings on $45 billion in
average assets in 2000. This is only a 1.3 percent ROA, suggesting high costs, weak operations, inefficient use of
assets, and insufficient earnings from other sources/activities.
82
increase for private banks also should not be overstated. Given the 2,181 private banks operating
in transition countries in 2000, this only amounted to a net capital increase per private bank of
$2.6 million, far less than the $15.7 million increase for average state banks.125 Netting out
Sberbank’s approximately $315 million capital increase from 1999 to 2000,126 state banks still
showed increases of about $12.9 million on average in 2000.127
While the after-tax earnings of state banks were positive, this does not account for various tax
breaks, forbearance, and other forms of “corrective action” needed to improve their solvency and
liquidity positions. This suggests there is either little or no investment capital interested in these
banks short of privatization, and the cost of keeping them afloat as “going concerns” requires
continued tax breaks, forbearance and related benefits to be commercially viable to the extent
that results barely above breakeven are viewed as commercially viable. There is greater risk due
to many of these banks having higher personnel loads, and the relative lack of investment in new
technologies. This perpetuates a manual cycle of inefficiency that makes it difficult for these
banks to compete without preferential treatment or protection.
One of the main problems these banks face in reducing costs and boosting earnings is their heavy
head count, which is symptomatic of their traditional manual processing and symbolic of labor
protection. Rather than operating as commercial banks, they often continue to operate as “social”
organizations in which stakeholder rights (e.g., of employees) are equal or superior to
shareholder rights. This has weakened earnings, and perhaps more importantly, undermined the
ability of state banks to invest in the systems and technologies needed to modernize. Of course,
competitiveness and efficiency require more than new technologies and systems. Also required
are better incentives for performance, professional management, autonomous and critical internal
audit, and qualified boards for sound oversight. (Annexes 1-2 include operational measures for
state banks, and head count where available.)
In general, the issue of undercapitalization appears to have been recognized in many countries as
the basis for reversing financial weakness and helping to build sound financial systems. The
small average capital of most banks has been noted above. Absent sufficient capital, it is
questionable if many of the existing banks will have the financial wherewithal to invest as
needed to upgrade systems, train personnel, and be competitive in a dynamic marketplace. As
noted in the 2000 earnings, most state banks generated losses or were barely above breakeven,
raising issues of long-term viability. However, private banks appear to recognize the need for
greater capital, and this was evident in trends in 2000. Overall, transition countries’ bank capital
125
Private: $5,768 million/2,181 = $2.6 million. State: $1,693 million/108 = $15.7 million.
126
2000: Equity-to-Assets ratio was 7.55 percent on $20 billion in total assets = $1,510 million in equity.
1999: Equity-to-Assets ratio was 7.47 percent on $16 billion in total assets = $1,195 million in equity. Therefore,
Sberbank’s equity increased about $315 million.
127
$1,378 million/107 = $12.9 million. Meanwhile, PKO BP ($139 million) and Komercni ($43 million)
accounted for $182 million of the remaining $1,378 million in state banks’ capital increases. Thus, net of Sberbank,
PKO BP and Komercni, the other state banks averaged about $11.4 million in net capital increases in 2000.
83
increased 45.6 percent in the aggregate relative to asset increases in 2000.128 This is significant,
and was particularly apparent among Russia’s private banks.
Table 5.12 Bank Capital Increases: 1999-2000 (million US dollars)
Private Banks
State Banks
1999
2000
Net
1999
2000
Capital Capital Increase Capital
Capital
326
259
-67
-63
33
Albania
36
27
-10
0
0
Armenia
15
0
-15
12
19
Azerbaijan
89
57
-33
404
321
Belarus
152
202
50
102
96
Bosnia
916
925
9
94
102
Bulgaria
1,451
1,522
71
504
454
Croatia
5,957
4,191
-1,766
1,130
1,144
Czech Republic
374
408
34
0
0
Estonia
392
400
8
4
4
FYR Macedonia
95
100
5
0
0
Georgia
2,042
1,980
-62
362
504
Hungary
524
718
194
74
76
Kazakhstan
9
10
1
1
1
Kyrgyz
169
284
115
20
21
Latvia
252
275
23
30
32
Lithuania
71
86
15
0
4
Moldova
8,332
10,901
2,569
1,771
1,857
Poland
175
-96
-271
356
690
Romania
8,265
12,468
4,203
1,914
2,849
Russia
1,679
2,111
432
573
588
Slovak Republic
1,045
1,012
-33
668
681
Slovenia
N/A
N/A
N/A
N/A
N/A
Tajikistan
N/A
N/A
N/A
18
21
Turkmenistan
870
1,165
295
46
60
Ukraine
N/A
N/A
N/A
695
851
Uzbekistan
N/A
N/A
N/A
N/A
N/A
Yugoslavia
TOTAL
33,235 39,003
5,768
8,715
10,408
CEE total
22,467 23,407
940
5,501
6,153
Baltic total
795
967
172
50
53
CIS total
9,973
14,629
4,656
3,164
4,202
Net
Increase
96
0
7
-83
-6
8
-50
14
0
0
0
142
2
0
1
2
4
86
334
935
15
13
N/A
3
14
156
N/A
1,693
652
3
1,038
TOTAL
Net
Increase
29
-10
-8
-116
44
17
21
-1,752
34
8
5
80
196
2
116
25
19
2,655
63
5,138
447
-20
N/A
3
309
156
N/A
7,461
1,592
175
5,694
Notes: Figures are for 2000 unless not available (1999 then used as alternative); reliable data for banks in
Tajikistan and Yugoslavia not available, nor is reliable information available for private banks in Turkmenistan or
Uzbekistan.
Sources: IMF (International Financial Statistics); Bank Scope (Fitch IBCA); authors’ calculations
The table below highlights bank asset increases in 2000 (vs. 1999), which also shows that banks
in Poland and Russia were responsible for most of the asset growth in transition economies in
2000. The Czech Republic and Hungary experienced major declines in total bank assets.
128
$7,461 million in incremental capital/$16,367 in incremental assets = 45.6 percent.
84
Noteworthy with regard to 1999-2000 trends is that Russia’s private banks declined in assets,
whereas state banks grew. In Poland, private banks were the primary drivers of growth, although
state banks also showed increases in total assets. In general, state banks grew more than private
banks in terms of assets, the inverse of what happened in terms of capital.
Table 5.13 Bank Asset Increases: 1999-2000 (million US dollars)
Private Banks
State Banks
1999
2000
Net
1999
2000
Net
Assets
Assets Increase Assets
Assets Increase
684
763
79
1,197
1,230
33
Albania
279
339
60
9
9
0
Armenia
423
357
-66
307
653
346
Azerbaijan
369
505
136
1,836
1,702
-134
Belarus
2,775
2,490
-285
259
284
25
Bosnia
3,712
3,691
-21
795
931
136
Bulgaria
10,679 12,046
1,367
1,564
1,475
-89
Croatia
40,400 36,508
-3,892
11,975 12,757
782
Czech Republic
2,725
3,162
437
0
0
0
Estonia
1,202
1,265
63
14
14
0
FYR Macedonia
255
322
67
0
0
0
Georgia
24,607 22,783 -1,824
2,076
1,931
-145
Hungary
1,712
2,533
821
477
769
292
Kazakhstan
84
87
3
9
9
0
Kyrgyz
2,797
3,648
851
265
369
104
Latvia
2,322
2,608
286
384
417
33
Lithuania
231
288
57
21
35
14
Moldova
55,494 64,429
8,935
20,751 23,315
2,564
Poland
2,656
3,043
387
5,296
4,564
-732
Romania
36,039 34,392 -1,647
21,367 27,181
5,814
Russia
10,144 10,341
197
5,458
4,911
-547
Slovak Republic
5,685
5,659
-26
7,022
7,188
166
Slovenia
N/A
N/A
N/A
N/A
N/A
N/A
Tajikistan
N/A
N/A
N/A
1,827
2,075
248
Turkmenistan
3,470
5,009
1,539
586
790
204
Ukraine
N/A
N/A
N/A
4,703
4,432
-271
Uzbekistan
N/A
N/A
N/A
N/A
N/A
N/A
Yugoslavia
TOTAL
208,744 216,268 7,524
88,198 97,041
8,843
CEE total
158,038 163,018 4,980
56,407 58,600
2,193
Baltic total
7,844
9,418
1,574
649
786
137
CIS total
42,862 43,832
970
31,142 37,655
6,513
TOTAL
Net
Increase
112
60
280
2
-260
115
1,278
-3,110
437
63
67
-1,969
1,113
3
955
319
71
11,499
-345
4,167
-350
140
N/A
248
1,743
-271
N/A
16,367
7,173
1,711
7,483
Notes: Figures are for 2000 unless not available (1999 then used as alternative); reliable data for banks in
Tajikistan and Yugoslavia not available, nor is reliable information available for private banks in
Turkmenistan or Uzbekistan.
Sources: IMF (International Financial Statistics); Bank Scope (Fitch IBCA); authors’ calculations
85
CHAPTER SIX: APPROACHES: WHAT HAS AND HAS NOT BEEN
DONE?
THE COSTS OF MAINTAINING THE STATE BANK SYSTEM
State banks have long served as vehicles for government spending, directed lending, tax
collection and processing, and other quasi-fiscal functions. Their most prominent roles have
traditionally been to lend to the state enterprise and farm sector, to serve as savings institutions
(sometimes with a state guarantee for deposits), to serve as a lender and agent for export-import
financing on behalf of state ministries and trading companies, and more recently, to operate in
the non-bank sector by managing securities brokerages, investment funds, and private pension
funds. State banks have sometimes held sizeable shares of state insurance companies as well.
In terms of their main activities, the state banks have served as overdraft providers for troubled
enterprises and farms. While this role has steadily diminished over the years, the marginalization
of this role has evolved in different ways. In most CEE and Baltic countries, lending decreased
once new prudential norms were introduced and enforced, and as banks recognized the need to
recapitalize.129 Continued lending to troubled enterprises only jeopardized their ability to
comply, while investment in Government securities was a far easier way to generate the profits
needed to rebuild their balance sheets.130 This has coincided in these countries with an
improvement in the legal and institutional environment for creditors, resolution of problem
assets, and enhanced financial discipline on the part of private borrowers. The result has been an
improvement in the returns and capital positions of banks, a general increase in competition, a
wide array of financial products, and improved service levels.
In contrast, CIS countries experienced erosion in lending to all sectors. This has not been
accompanied by an improvement in the environment (for creditors or debtors), nor has
confidence fully returned after hyperinflation and numerous banking crises. As such, the deposit
and capital base of the banking system in the CIS countries is weaker, financial intermediation is
much lower, financial products are limited, and service levels are often considered poor.
129
The latter occurred in different ways, sometimes directly from the budget, and in other cases from other
approaches involving monetary mechanisms, forbearance, and related tools.
130
In the mid-1990s, net spreads on Government securities investments to deposits were often in the 10
percent range. As these were perceived to be risk-free, they involved little credit risk analysis. Further, it was far
easier for banks to comply with capital adequacy and regulatory liquidity requirements. By contrast, enterprise loans
in a risky environment required greater effort and made it more difficult to comply with prudential norms. Only
when the environment stabilized, competition increased, net spreads on Government securities declined and
incentives for lending improved did banks begin to restore lending to the real sector.
86
BOX 6.1 TWO DIFFICULT LIQUIDATION DECISIONS: ROMANIA’S BANCOREX AND
UKRAINE’S BANK UKRAINA
Bancorex: Bancorex (BX), the former foreign trade
bank, was the largest and most troubled of the four
fully state-owned banks in Romania prior to its
closure in 1999. Accounting for about one-fourth of
total banking sector assets and about half of foreign
currency loans in the early to mid-1990s, BX
financed a significant portion of Romania's energy
import requirements, as well as imports of capital
goods. The authorities also used BX as a major
vehicle to subsidize the state-owned energy sector
and energy-intensive industrial sector, also primarily
controlled by the state. At the end of 1997, BX
received an equivalent of $600 million in government
bonds (2 percent of GDP) to restructure
nonperforming loans in the portfolio. However, the
restructuring of BX, which was to accompany the
recapitalization, never took . Although a new
management team was appointed in April 1998 and
other steps were taken, a comprehensive restructuring
plan was never implemented and the bank's situation
deteriorated further. When BX was again in crisis in
late 1998, the authorities considered restructuring
measures with a view to privatizing the bank,
although international experience would have favored
liquidation. The authorities were concerned about the
systemic risk potentially associated with liquidation,
and contemplated an up-front recapitalization,
followed by restructuring and privatization. However,
as the depth of the bank's problems became more
fully known, it became clear that BX was in much
worse shape than expected, and that privatization
with recapitalization would be prohibitively costly. A
recapitalization would have required up to $2 billion
from the budget, or almost 6 percent of GDP. Finally,
in April 1999, BX collapsed as depositors lined up to
withdraw their money. It became clear that a rapid
liquidation was the only solution that would avoid
further runs on the bank and a systemic crisis amid a
fragile external economic period. Realizing the
magnitude of BX's problem, in April 1999, the
authorities finalized a liquidation plan aimed at the
orderly removal of BX from the banking system.
Bank Ukraina: Bank Ukraina (BU) was the traditional
specialized agricultural bank that became a “privatized”
institution, but without the restructuring and changes in
governance to become viable. In the case of BU, the
government exerted direct influence on the decisionmaking process by keeping a residual state stake of at
least 13 percent until 1998. Specifically, the government
manage the institution through the Ministry of
Agriculture, Ministry of Finance, and the National Bank
of Ukraine (NBU). Regional authorities appeared to
exercise some control over regional offices. This
complicated governance structure effectively turned the
bank into a series of regional banks operating under the
same name. The practice of government-directed loans
to mostly non-viable state-owned enterprises that were
approved under some form of “instruction” by local
governments, ministerial resolutions, or presidential
decrees proved to be particularly harmful to BU’s
financial health. This was because most of the directed
loans were never intended to be repaid. The situation of
the bank deteriorated dramatically from 1998. share of
bad loans became unsustainable even by Ukrainian
standards, and BU had to rely on central bank credits be
maintain its liquidity position. IMF-led diagnostic
review of the bank in the same year confirmed its deep
insolvency. The state-protected bank came to be seen as
having wasted the country's financial resources by
subsidizing loss-making industries and the largely
unreformed agricultural sector. In November 1998, the
authorities finally put it into a rehabilitation program,
and in June 1999 the NBU instructed BU to sign a
Commitment Letter aimed at bank recovery. However,
the bank failed to the financial targets of the program.
Given the high level of deterioration in its loan portfolio
(approximately 75 percent of which was non-performing
by the end of 2000, although estimated as high as 90
percent if reclassified under IAS), negative liquidity, and
capital erosion, the bank's financial condition became
dangerous enough to be a potential threat to the entire
system. This resulted in the introduction of Provisional
Administration in the bank as of September 25, 2000.
Continued state ownership in the banking system of transition countries has often shown itself to
be harmful to the economy, and particularly problematic in the year or so running up to elections.
Moreover, the continued presence of these banks has often deterred prime-rated foreign
investment from the market, or deterred these and other banks from taking on more risk due to
potential distortions resulting from such patronage or preferential treatment. Consequently, in
countries where state banks continue to play a prominent role, lending has tended to be less
87
available and more costly to the enterprise sector. This, in turn, has undercut financial
intermediation as a whole, as enterprises have less incentive to place funds with banks since they
find it difficult or uneconomical to borrow from banks. The following table provides a summary
of the net spreads on loans (to deposits), levels of bad loans, and the relative degree of state
ownership in the banking system from 1996-2000. The figures indicate that in virtually every
country where state ownership in the banking system has been high, non-performing loans have
been a problem, and net spreads between loans and deposits have been costly for enterprises.
The figures also show that portfolio quality and intermediation costs are not just a function of
ownership, and that they are highly interdependent with the macroeconomic framework and
standards of governance. Thus, there are several countries (e.g., Albania, Croatia, FYR
Macedonia, Georgia, Kyrgyz Republic, Moldova, Romania, Ukraine) in which state ownership
of bank assets has diminished in recent years, yet non-performing loans and net spreads have
stayed high or increased. Part of this has to do with banks’ need to increase earnings (e.g., from
net spreads) to recapitalize, particularly when tougher prudential norms are in place (as
manifested in clearer recognition of non-performing loans) and the government eliminates or
reduces refinancing options for poorly performing banks. The table below highlights some of the
trends in state ownership of the banks, and non-performing loans by country and region from
1996-2000.
88
Table 6.1 State Ownership, Non-performing Loans and Net Spreads: 1996-2000 (in percent)
1996
1998
2000
State% NPLs Spreads State% NPLs Spreads State% NPLs Spreads
93.7
40.1
7.2
85.6
35.4
8.5
64.8
42.6
13.8
Albania
3.2
22.6
34.2
3.7
10.4
23.6
2.6
6.2
13.5
Armenia
77.6
20.2
20.0
65.5
19.6
16.8
60.4
N/A
15.0
Azerbaijan
54.1
14.2
29.9
59.4
16.5
12.7
66.0
15.2
30.1
Belarus
N/A
N/A
N/A
N/A
N/A
21.6
55.4
15.7
15.8
Bosnia
82.2
15.2
48.8
56.4
11.8
10.3
19.8
10.9
8.4
Bulgaria
36.2
11.2
16.9
37.5
12.6
11.1
5.7
19.7
8.3
Croatia
16.6
21.8
5.8
18.6
20.3
4.7
28.2
19.3
3.7
Czech Rep.
6.6
2.0
7.6
7.8
4.0
8.6
0.0
1.5
3.9
Estonia
0.0
21.7
8.0
1.4
7.8
9.4
1.1
26.9
7.7
FYR Macedonia
0.0
6.3
27.3
0.0
6.5
30.0
0.0
5.6
28.6
Georgia
16.3
9.0
5.1
11.8
6.8
3.1
8.6
3.1
3.0
Hungary
28.4
19.9
24.1
23.0
4.7
3.9
1.9
2.1
4.3
Kazakhstan
5.0
26.1
28.3
7.1
0.2
37.6
7.1
16.4
33.5
Kyrgyz
6.9
20.0
14.1
8.5
6.8
9.0
2.9
5.0
7.5
Latvia
54.0
32.2
7.6
44.4
12.5
6.2
38.9
10.8
8.3
Lithuania
0.3
46.0
11.3
0.3
32.0
10.6
9.8
20.6
10.5
Moldova
69.8
14.7
6.1
48.0
11.8
6.3
24.0
15.9
5.8
Poland
80.9
48.0
14.7
75.3
58.5
16.6
50.0
3.8
20.3
Romania
37.0
13.4
91.7
41.9
30.9
24.7
41.9
15.3
17.9
Russia
54.2
31.8
4.6
50.0
44.3
4.9
49.1
26.2
6.4
Slovak Rep.
40.7
10.1
7.5
41.3
9.5
5.5
42.2
8.5
5.7
Slovenia
5.3
2.9
13.0
29.2
3.2
34.0
6.8
10.8
-8.4
Tajikistan
64.1
11.4
70.0
77.8
2.2
34.4
N/A
N/A
N/A
Turkmenistan
N/A
N/A
46.3
13.7
34.6
32.3
11.9
32.5
27.8
Ukraine
75.5
0.0
22.0
67.3
0.1
21.0
77.5
0.0
N/A
Uzbekistan
92.0
12.3
162.4
90.0
13.1
44.1
90.9
27.8
43.3
Yugoslavia
CEE Avg.
53.0
23.6
23.9
43.0
22.2
12.2
36.7
22.6
11.9
Baltic Avg.
22.5
18.1
9.8
20.2
7.8
7.9
13.9
5.8
6.6
CIS Avg.
31.9
16.6
34.8
32.4
13.4
23.5
26.0
11.3
17.3
Notes: For regional averages, countries are excluded from the denominator if no data are available.
Sources: IFS (IMF); EBRD; authors’ calculations.
While there is clearly a link between bad policy and poor credit management, another look at the
data shows that the link between NPLs and collapse is not fully predictable in terms of timing
and impact. Given the prominence of state banks in much of the directed lending to loss-making
state enterprises, there is a correlation between state control of banks, the link between peak
levels of NPLs and state ownership in the banking system, and eventual collapse in the economy.
In this regard, problems of loan quality, ownership and, by extension, governance and
management, are all linked. However, the data below show that in only three countries,131 NPLs
peaked shortly (within two years) in advance of the country’s poorest output performance.
131
Bulgaria, Kazakhstan and the Kyrgyz Republic.
89
Bulgaria probably represents the best case of causality, with peak NPLs in 1996, the year in
which the economy collapsed. Figures in 1997 reached their nadir as a result. In eight countries,
peak NPLs appeared to be an after-effect (within two years) of the output collapse.132 This
occurred at different times, with most of these countries recognizing the problem early in the
1990s or by the mid-1990s. For example, in Armenia, a high-level strategy committee on bank
restructuring was established in late 1996 (when NPLs were nearly 23 percent of total) to
develop a restructuring strategy for the remaining three state banks based on individual
rehabilitation agreements signed with each of the three banks. 133 By 1998, NPLs had dropped to
10 percent of total, and net spreads had declined substantially. In three countries, 134 these figures
converged in the same year, suggesting there was fairly simultaneous recognition of the link.
Estonia and Hungary recognized these problems relatively early on, and both took resolute action
on their portfolios and banking systems thereafter.135
In about half the transition countries, the relationship was less connected. For example, in
Albania, output reached its lowest level in 1992, yet 1997 was the worst year for recorded nonperforming loans. This is more related to the collapse of the pyramid schemes than anything else,
but reflects poor institutional capacity and distorted incentives that made these schemes possible.
In some countries, the ruble collapse proved decisive in terms of peak NPLs (Belarus) and output
(Russia). Azerbaijan’s peak NPLs in 1999 were likely an accumulation and a reflection of
delayed recognition. However, this might have also have been affected by the ruble collapse at
the traditional agricultural, industrial and savings banks that are now reconstituted. The peak
NPL problem in Latvia represents problems that culminated in the 1995 collapse of Bank Baltija.
Moldova’s output collapse in 1999 is more linked to the ruble collapse. That this occurred three
years after peak NPLs and most privatization suggests the banks (and the National Bank) were
addressing loan quality problems years before general output collapse. In Romania, peak NPLs
in 1997 reflect delayed recognition and slow reform. It should be noted that recognition of NPLs
often tightened up after macroeconomic and structural collapse as a necessity, and that peak
NPLs may have reached higher proportions in earlier years with better accounting information
and classification standards.
The following table seeks to provide some figures and relationships between NPLs and output
collapse, and the role of state banks in these dynamics. In most countries, the state share of bank
132
Armenia, Czech Republic, FYR Macedonia, Georgia, Lithuania, Poland, Slovenia and Tajikistan.
133
The strategy required each of the banks to (i) raise specified amounts of additional capital over a short
period; (ii) meet key prudential requirements on an accelerated basis (relative to other banks in the system); and (iii)
suspend dividend payments (in two of the banks). In addition, a timetable was set for the removal of the main
government representatives on bank boards throughout 1997. The agreements also envisaged that banks, if in
compliance with prudential norms, would be compensated for the bad loans they made before 1996 under
government pressure. With these loans estimated at about 2 billion drams, such compensation would have been
equivalent to about 15.4 percent of total system bank capital at end 1997. (According to IFS, banking system capital
was about 13 billion dram when netting out “other items” from bank capital.)
134
Estonia, Hungary and Turkmenistan.
135
Estonia liquidated problem banks and moved towards consolidation and full privatization of the banking
system. Hungary introduced its revised Privatization Law in 1995 and moved aggressively with strategic
privatization thereafter.
90
assets in the peak year for NPLs was fairly high. Considering the late recognition of many
problem loans, bank assets in general would have been lower had there been earlier recognition
(as warranted) in most transition countries. Likewise, the use of “private” banks for directed and
patronage lending understates the role of the “state” banks in the overall relationship, as many of
these banks were effectively owned by state-owned enterprises, but considered “private.”
Table 6.2 Comparative Loan Portfolio Problems Among Transition Countries
Year of Worst Peak NPLs Peak Year
State % of
Output
as % of
for NPLs
Bank Assets in
Performance
Total Loans
Peak NPL Year
1992
91
1997
90
Albania
1993
36
1995
<3
Armenia
1995
>60
1999
>70
Azerbaijan
1995
16.5
1998
59.5
Belarus
1997
15
1996
82
Bulgaria
1993
15
1998
38
Croatia
1992
36
1994
N/A
Czech Republic
1994
<4
1994
28
Estonia
1995
42
1996
N/A
FYR Macedonia
1994
41
1995
46
Georgia
1993
26
1993
75
Hungary
1998
20
1996
28
Kazakhstan
1995
92
1994
77
Kyrgyz Republic
1993
20
1996
7
Latvia
1994
32
1996
55
Lithuania
1999
17
1996
0
Moldova
1991
36
1993
86
Poland
1992
57
1997
80
Romania
1998
6
1995
N/A
Russia
1993
44
1998
50
Slovak Republic
1992
22
1994
40
Slovenia
1996
3
1996-98
30
Tajikistan
1997
14
1997
68
Turkmenistan
1999
N/A
N/A
N/A
Ukraine
1995
N/A
N/A
N/A
Uzbekistan
Notes: Data not available for Bosnia-Herzegovina and Yugoslavia
Source: IMF; EBRD; Finance & Development
NPL-State
Share
Correlation
High
Low
High
High
High
Medium
High
Medium
High
High
High
Medium
High
Low
High
Low
High
High
High
High
High
High
High
High
High
On a more positive note, several countries show that private ownership has generally led to an
improvement in loan quality and reduced intermediation spreads. Examples of this trend include
Armenia, Bulgaria, Estonia, Hungary, Kazakhstan, Latvia, and Lithuania (in terms of loan
quality).
Overall by region, NPLs have remained high in CEE, although they appear to have diminished in
the Baltic states in particular, as well as in the CIS countries. However, as noted earlier, this is
not fully verified due to differing accounting and audit standards, levels of disclosure, and varied
approaches to loan classification.
91
Meanwhile, nominal net spreads have been cut in half in the CEE and CIS countries, while
coming down a third in the Baltic states. While this does not address the supply of credit, it does
suggest that more disciplined monetary policy, better enforcement of tougher prudential
requirements, and increased competition are bringing down net spreads. However, net spreads
remain very high in CIS countries at more than 17 percent in 2000. They are also high in the
CEE region at about 12 percent, and increasingly reasonable in the Baltic states at less than 7
percent. As these are unweighted averages, the distribution also shows that countries that have
been the most persistent with macroeconomic stabilization, structural reform and strategic
privatization in the banking sector have the lowest net spreads, as shown in the cases of the
Czech Republic, Estonia, Hungary, Poland, the Slovak Republic and Slovenia.136 Kazakhstan has
also shown low net spreads in recent years.
Notwithstanding these comparatively favorable examples, in most CIS countries and several
non-CIS countries, needed banking reforms have been delayed, governance remains weak, and
state banks (and some “private” banks) continue to be used as vehicles for non-commercial
purposes. In many of the late reforming countries, state banks continue to account for major
portions of bank assets, loans and deposits. However, due to poorly performing portfolios, loan
and asset values would shrink considerably if proper provisioning and write-down practices were
followed. Meanwhile, poor asset quality undermines earnings performance, slows capital
formation, and props up high real intermediation costs.
Delayed reforms in these countries have generally correlated with more sluggish economic
performance overall, except where a strategic commodity has been used as a source of cash to
insulate the economy from the negative consequences of slow reform. 137 Even where laws are
adequate, institutional capacity has been slow to emerge. In many cases, issues of financial
discipline, loan default, collateral, veracity of financial information, and other staples of marketbased banking have not been adequately addressed or developed. The failure or disappearance of
poorly performing banks has undermined public confidence in banks as a whole, particularly
where there is no deposit insurance and people have lost their savings. Under commercial
conditions, this has weakened incentives for lending. When commercial disputes occur, the
judicial process has frequently proved itself to be debtor-friendly, further reducing incentives for
banks to lend.
Meanwhile, because banks are now under pressure to comply with prudential regulations, they
often make decisions that are consistent with the prevailing incentive structure. This has
prompted a wholesale shift away from formal financial institutions in many CIS countries, where
136
There are some variations on this point. For example, Poland and the Slovak Republic delayed strategic
privatization in the banking sector until the late 1990s, and Slovenia has been even slower in privatizing its major
banks. Likewise, the Czech Republic only privatized Komercni in 2001. However, in general, these countries have
pursued disciplined monetary policies throughout the years, often (e.g., Estonia, Slovenia) fairly disciplined fiscal
policies, and been attractive to prime-rated investors due to favorable business environments and comparatively high
levels of purchasing power.
137
Several CIS countries have been able to leverage the effects of favorable oil and gas prices to present better
economic results. However, should these prices decline, this would be expected to weaken economic indicators. To
the extent the banking system is exposed to these trends, this would then adversely affect banking sector indicators.
92
central banks have often tried to instill some discipline by bringing down high inflation rates and
by seeking to achieve exchange rate stability (net of 1998-99 when exposure to the GKO market
hit many fragile CIS economies). As an example, the stock of barter and arrears throughout the
enterprise sector is many times higher than balance sheet figures of the banks. For example, in
Ukraine, net enterprise arrears (payables) are estimated to be four to five times total credit from
the banks to the enterprise sector. By 1999, overdue payments were estimated to be 92 percent of
GDP.138 In Russia, total arrears were estimated to be nearly 24 percent of 2000 GDP, with most
of it to non-bank accounts (i.e., arrears to suppliers, tax accounts, and off-budget funds).139
Belarus has likewise experienced arrears of 19-23 percent of GDP since 1998.140
Nor has this problem been restricted to CIS countries. In Bulgaria, state enterprise arrears
approximated 20 percent of GDP in 1999, although these have come down significantly since
1997. Arrears in 1999 to banks were only 1 percent of GDP, with the remaining 19 percent (of
GDP) of arrears to suppliers, government, the state pension fund, employees and other accounts.
In Croatia, arrears approximated 11.6 percent of 2001 GDP, and were as high as 20.1 percent of
GDP in 1999.141 More seriously, Romania’s arrears climbed steadily from 1994, reaching 42
percent of 1999 GDP, most of it to suppliers, Government and other accounts, and 6.44 percent
(of GDP) to banks.142 The following table provides a comprehensive breakdown of arrears
among selected transition countries. Annex 5 provides specific detail by types of arrears.
Table 6.3 Synopsis of Arrears in Selected Transition Countries as a percent of GDP (in percent)
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
60.6
100.2
68.3
96.8
148.2
166.1
200.0
215.6
N/A
N/A
Azerbaijan
N/A
N/A
30.4
13.5
18.2
13.3
23.1
19.2
22.4
19.1
Belarus
68.8
60.6
47.5
41.7
66.3
27.9
24.1
19.9
N/A
N/A
Bulgaria
N/A
N/A
3.4
6.2
7.4
8.1
11.4
20.1
14.4
11.6
Croatia
N/A
N/A
N/A
7.3
N/A
N/A
N/A
6.3
N/A
N/A
Kyrgyz
N/A
N/A
N/A
N/A
9.3
9.0
N/A
N/A
N/A
N/A
Lithuania
34.6
23.9
26.1
25.2
36.1
33.7
36.2
42.2
N/A
N/A
Romania
N/A
N/A
14.8
13.3
23.4
29.1
47.8
30.3
23.7
N/A
Russia
8.0
6.0
13.0
20.0
24.0
85.0
98.0
N/A
N/A
N/A
Ukraine
Notes: Enterprise arrears to government may not equal tax arrears since tax arrears include household arrears and enterprise
arrears to government can include other forms of arrears.
Sources: TACIS (2000) for Azerbaijan; 94-95 ECSPF (1998), IMF (2000, 2002) for Belarus; IMF (2001) for Bulgaria; World
Bank (2001) for Croatia; IMF (2000) for the Kyrgyz Republic; ECSPF (1998) for Lithuania; IMF (1998, 2001) for Romania;
93-94 Bagratian and Gurgen (1997), Russian European Center for Economic Policy (2002) for Russia; and IMF (1999) for
Ukraine. (All data for this table compiled by George Clarke.)
138
Estimate by IMF.
139
According to the Russian European Center for Economic Policy, total arrears were 23.7 percent of 2000
GDP. This was constituted by 10.1 percent arrears to suppliers, 4.9 percent to tax accounts, 4.6 percent to off-budget
funds, and 4.1 percent to banks.
140
Figures are from the IMF. These include arrears to government, workers and suppliers.
141
Figures are from the National Bank of Croatia and the IMF.
142
Figures are from the IMF. Of the 42.2 percent GDP figure in 1999, arrears were to suppliers (18.0 percent),
Government (8.3 percent), banks (6.4 percent) and other accounts (9.5 percent).
93
While payables alone are not the problem, long-term overdue payables are, and these are
symptomatic of major problems in the overall payment system of the economy. That these
enterprises are broadly cash-constrained or continue to maximize tax-avoidance opportunities at
the expense of long-term enterprise performance and competitiveness is also a reflection of the
unproductive incentives that have prevailed in many transition economies over the years. What is
striking about this is that most of these enterprises are state-owned, or are “privatized” but
running according to earlier methods. This has depleted cash and capital, and reduced or
eliminated credit worthiness according to traditional commercial banking measures. Moreover,
the poor condition of these state enterprises has reduced tax payments to the budget, including
for social insurance, exacerbating the poor state of public finances.
Where banks are still used for non-commercial purposes, they are often (although not always)
state-owned. As noted above, state banks generally account for a large share of balance sheet
values of banking systems. Their non-commercial approaches have often been reminiscent of
old-style management and governance, the use of directed lending for political purposes, the
traditional orientation of the bank catering to state farms and state enterprises, and the social
orientation of the bank’s culture (e.g., to finance production to meet output targets, to provide
branches everywhere to ensure nobody is without a place to retrieve savings or to initiate a cash
transfer, to ensure employment). Where there has been recognition of the unsustainability of
such an approach, hard decisions to restructure, streamline or foreclose on the bank (if
technically insolvent) have been put off because of the political difficulties associated with such
a move. Often, this approach has led to a financial crisis in the banking system, high levels of
corruption, and a major cost to the budget (or central bank resources).143 In cases where
traditional savings banks have been used for other purposes (e.g., the Czech Republic in the midto-late 1990s to absorb smaller banks; several countries to channel loans that later became nonperforming), this has also raised the issue of deposit safety and general levels of public
confidence.
These problems have also pointed to weaknesses in corporate governance structures, although
several countries have improved the accounting framework, introduced tougher requirements for
internal operations, strengthened the internal audit function, restricted the issuance of licenses
when “fit and proper” standards are not met, and called for more professional standards and
qualifications for board members. Much of this has been consistent with general monetary policy
strengthening, enhancement of banking supervision, implementation of stricter prudential norms,
and requirements for increased integration into the global marketplace. While corporate
governance performance (and the degree of preferential provisions for state banks) has varied
from country to country, and still remains weak in many cases, there has been a gradual
recognition of the need to address this weakness as a precondition for stable banking systems,
and as a preventive measure in advance of potentially damaging bank collapses (and associated
costs).
143
To the extent that leakage in the system has increased outside the banking system, closing down troubled
banks has been less of a problem as the issue of patronage has migrated to other parts of the economy (e.g., power
companies).
94
PROBLEM ASSETS, BANK RESTRUCTURING COSTS, AND APPROACHES IN
TRANSITION COUNTRIES
Among the 27 transition countries, numerous approaches have been taken to address the problem
of bad loans, and to build viable banking systems. These developments are clearly influenced by
a multitude of factors, not the least of which are stable business environments, functioning
institutions, stable macroeconomic frameworks, and credit worthy and “equity worthy”
enterprises and households. Solving financial sector issues in the absence of real sector progress
has frequently led to frustrating results, stifling the ability of banks and other financial
institutions to prosper even when inflation rates have been stabilized, banks have reformed, and
funds are available for lending and investment.
In general, apart from some of the Balkan countries that have been torn by war and related
conflagration, there is a general view that the northern CEE countries and Baltic states have
broadly attended to their fundamental financial sector weaknesses, and that underlying stability
is more likely to be sustained in these countries. There are clearly potential shocks and
disturbances that could challenge this point of view, particularly in small open markets (e.g.,
Baltic states) where their economies can fluctuate significantly on a year-to-year basis,
depending on developments in their major trading partners’ economies.144 Likewise, in countries
such as Romania, there is a risk of future instability due to delayed progress on structural reform,
notwithstanding their potentially large market and current improvement in economic
performance. However, in general, there is a view that CEE and Baltic countries have pushed
ahead with many of the needed reforms they have had to pursue to become competitive. The lure
of accession to the European Union, to which all three Baltic states and seven CEE countries
have been invited to negotiate, provides an incentive to these countries that is largely lacking in
the CIS.
Evidence of the improvement in the overall environment of many CEE and Baltic markets has
been found in the approach they have taken to the resolution of problem assets. This has taken
many forms and approaches, yet NPLs are now much less of a problem for their banks than they
are for CIS countries. In the case of the latter, most NPLs have been to either state enterprises
and farms, or to “privatized” firms that have operated along traditional lines rather than
competitive commercial criteria. The impact of the NPLs on CIS banks’ balance sheets has been
devastating, just as they were costly for CEE and Baltic banks. Part of the legacy of these
problems is the doubt surrounding after-tax earnings of CIS state banks relative to their
counterparts in several CEE countries. This relates back to questionable loan classification
standards, accounting practices, and associated issues of information management, reporting and
disclosure that are widely viewed to be weaker in CIS than in many other transition countries.
Estimates of cost have varied in terms of how these bad loans and delays in resolving structural
banking problems impacted CEE, Baltic and CIS banks. For example, one source notes that the
144
This was demonstrated during the 1998 ruble crisis. Reforms in these countries, particularly in Estonia, also
vindicated the position that they are able to maintain underlying stability on the condition that they continue to
attend to structural reforms and remain an attractive destination for direct investment from their Scandinavian and
Eurozone friends.
95
costs of bank restructuring and deposit compensation ranged from 13-30 percent of GDP from
1991-98145 in FYR Macedonia (29.6 percent), Bulgaria (26.0 percent), the Czech Republic (20.9
percent), Kazakhstan (18.4 percent), and Hungary (12.9 percent).146 More recently, the National
Bank of Croatia estimated the cost of bank rehabilitation to have approximated 26 percent of
GDP from 1991-2000.147 However, not all countries endured high explicit costs, with some
managing to work out problems over time (e.g., Poland, Estonia, Lithuania), while others have
experienced limited growth and development in their banking systems (e.g., Georgia, Kyrgyz
Republic, Latvia).148 For example, the costs of bank restructuring and deposit compensation in
these countries ranged from as low as 0.1 percent of GDP from 1991-98 in Georgia to 4.9
percent in the Kyrgyz Republic, with Estonia (1.4 percent), Poland (2.4 percent), Latvia (2.5
percent) and Lithuania (3.0 percent) showing lower explicit costs. However, these figures do not
necessarily take implicit costs into account in the form of higher net spreads, foregone lending to
sound companies for sound projects, foregone GDP growth, diversion of deposits out of the
banking system, etc.
BOX 6.2 THE CHALLENGING EXPERIENCE OF REFORM IN UZBEKISTAN
[This box will be filled out in the next version after revisions are made.]
What is broadly agreed is that long-term plans to provide ongoing financing so companies could
grow out of their problems have rarely been successful without major financial, managerial and
operational restructuring. Many countries deferred major restructuring at the bank level, only to
experience severe collapse late in the transition (e.g., Moldova, Russia, Ukraine all experienced
their worst output performance in 1998-99). In other cases, countries engaged in costly bank
restructuring programs, only to experience major collapse even afterwards (e.g., Bulgaria,
Kazakhstan).149 Likewise, several countries (e.g., Bulgaria, Croatia, the Czech Republic,
Hungary, Kazakhstan) have experienced multiple recapitalizations due to the insufficiency of
original measures. The question in the last two cases is the degree to which banking systems
adequately restructured, particularly as other countries engaged in less expensive restructuring
exercises (e.g., Poland, Estonia), did so only once, and ultimately emerged as more competitive.
However, in the case of the first approach that essentially assumed little restructuring at the bank
level, there is fairly clear recognition that banks and economies could not grow out of their
145
Costs are cumulative from 1991-98, and then measured against 1998 GDP.
146
See E. Zoli, “Cost and Effectiveness of Banking Sector Restructuring in Transition Economies,” IMF
Working Paper 01/157, October 2001.
147
Cedo Maletic, “Overview of Croatian Banking Sector: the Causes and Cost of the Two Recent Banking
Crises,” National Bank of Croatia, 2002.
148
See E. Zoli, “Cost and Effectiveness of Banking Sector Restructuring in Transition Economies,” IMF
Working Paper 01/157, October 2001.
149
Output performance figures from S. Fischer and R. Sahay, “Taking Stock,” Finance & Development,
September 2000.
96
problems without some form of structural adjustment, and that delays on this front only
perpetuated the problem and possibly added to the overall cost.150
In the case of CIS countries, enterprises, banks and depositors were all broadly left exposed and
not bailed out through formal recapitalization mechanisms—although there are some exceptions,
such as in Azerbaijan with the consolidation and recapitalization of four state-owned banks.151.
However, CIS enterprises (usually state-owned, or formerly state-owned) were bailed out
through bank rollovers of de facto non-performing loans, and the run-up of arrears. These
practices are still in evidence in many state-owned banks,152 and their continued practice has
undermined efforts to achieve competitiveness in the economy and banking sector.
THE GENERAL IMPACT OF BAD LOAN QUALITY AND THE PACE OF REFORM
The practice of rollovers is rooted in imprudent loan classification and provisioning practices. In
the process, this has deferred recognition of problem assets that ultimately have decapitalized
and marginalized banks. As noted before, many CEE and Baltic banking systems introduced
stricter prudential frameworks once banking system problems were uncovered. This often
resulted from external audits of major banks according to IAS, and the major variances that were
consequently uncovered relative to regulatory reports and norms. Once addressed and resolved,
these banking systems generally moved on to restore confidence, to improve credit management
skills, to boost resources and capital, and to become more effective intermediaries. However,
where these problems have not been resolutely addressed, NPLs have continued to be a drag on
bank liquidity, capital and general financial sector stability. This has applied to the banking
system as a whole, and not been specific to state vs. private ownership.
Much of the problem for banks in lagging economies has related to distortions in the credit
markets. Above all, given the reliance on secured transactions, there has been a major disconnect
between the legal environment and financial values assigned to collateral. In most transition
countries, bankruptcy legislation and enforcement have been weak. There has been progress in
some countries, but judicial capacity building and a restructuring of incentives towards creditors
(to increase their willingness to assume credit risk) has taken time. In most cases, the legal
environment has been weak, and the prospects for seizing and selling collateral to recover part of
bad loan values have been poor. Nonetheless, most banks have assigned higher values or
inadequate risk weights relative to real market values of what has been pledged in support of the
loans. This, in turn, has led to an overstatement of asset and capital values. By extension, this has
been predicated on an understatement of risk, which can also lead to distorted (lower) pricing
due to passive reliance on collateral and guarantees. Once problems emerge, this also provides an
150
To be fair, some countries are simply at a disadvantage. Moldova is an example, with only three million
people and limited resources, as opposed to Russia and Ukraine with their populations and opulent natural resources.
151
There are now two major state banks in Azerbaijan. The International Bank of Azerbaijan is the former
foreign trade and export-import bank. United Universal represents the new bank that consolidates the former
industrial, agricultural and savings bank following a carve-out of bad assets from the earlier banks’ balance sheets.
152
See M. Builov, “Who Owns Russia: Russia’s Banking Sector,” The Russia Journal, January 25, 2002, with
regard to the financing of enterprises in Russia.
97
opportunity for corruption, resulting in additional financing for some troubled enterprises on
clearly non-commercial lines. The prevalence of these relationships in the state sector has
exacerbated problems in lagging economies.
The persistence of state banking problems has been dangerous to overall financial sector
stability. State banks in particular are known for high cost-income ratios, excess overhead, much
higher head count and manual processing, and a lack of modernization. This has made it more
difficult for them to achieve profitability, or to do so sustainably and adequately relative to
competitive needs (e.g., investment in needed technologies). Due to traditional earnings
problems associated with state banks, this has often made them more willing to assume risk to
compensate for losses. By extension, this has sometimes led to imprudent cross-ownership, or
traditional exposure to affiliates and related parties. In the absence of consolidated supervision,
this has meant that state banks are vulnerable to large losses from exposures to leasing
companies, insurance firms, pension funds, investment funds, and other financial services
companies through ownership or exposure, as well as to enterprises. In particular, state savings
banks have been a target for these ventures, given their household deposits and retail networks.
In the end, the inability to manage these risks according to strict commercial guidelines has led
to adverse effects. When they occur, they have undermined public confidence, and often required
costly intervention by the state to contain losses.
The risk associated with imprudent cross-ownership and exposures applies to all institutions in
the financial sector. The absence of consolidated supervision has contributed to these problems.
However, this is only part of the problem. Imprudent cross-ownership and the move to universal
operations in the absence of good governance and sound management have been harmful across
the board. Many of the lingering problems faced by the Czech Republic relate back to
weaknesses associated with cross-ownership. The relatively recent ownership by banks in
investment funds in Romania has likewise raised questions about underlying financial sector
stability. In CIS countries, the prevalence of loss-making “pocket” banks has pointed to the weak
state of bank governance in most of these countries, partly due to the overall weakness of the
economy and incentive structures in place. While these banks are “private,” they generally
operate on non-commercial criteria until their losses mount, their liquidity dries up, and they are
not able to benefit from regulatory forbearance. The failure of most CIS banks to meet even $5
million in capital shows how poorly capitalized the great majority of CIS banks are. Under such
circumstances, particularly since many if not most remaining state banks are barely solvent or
are technically insolvent, the continued existence of state banks delays competitiveness and
market-based restructuring.
There is a regulatory and supervisory dimension to the problem of state banks. While banking
supervision has been tightening for years in transition countries as an extension of monetary
discipline, every system exercises a measure of forbearance. State banks have long benefited
disproportionately from such forbearance to permit them time to restructure and recapitalize,
even with privatization as an objective. In the case of privatization, this is legitimate, as private
investors will not buy an insolvent institution. However, in many cases, the process of
rehabilitation has been dragged out for non-commercial reasons, and this has distorted the
playing field. Several countries have protected their markets from foreign competition while
their state banks restructure. Meanwhile, because of the widespread and inconsistent use of
regulatory forbearance, state banks are often able to operate with some protection, even when
98
foreign investment is materializing in the banking sector. In the end, from an institutional
perspective, preference shown for state banks undercuts the ability of bank supervisors to enforce
their mandates in support of banking, financial sector, and monetary stability. This is a problem
that is widespread in transition countries.
Ultimately, if state banks are protected and losses mount, there is a macroeconomic cost, as has
been experienced in most transition economies. As the sole or major shareholders, the state has a
financial obligation to recapitalize state banks as going concerns. Failure leads to a loss of
confidence, so recapitalization is fairly continuous, as is liquidity support. Ultimately, the
resources for this support are monetary or fiscal. More recently, as central banks have been fairly
disciplined and focused on pricing stability, most of the leakage has come from the fiscal side.
These practices are political by definition, and often lacking in transparency. Financial support
for state banks is often extra-budgetary, or where cash resources are constrained, through arrears
(on taxes, social funds, electricity payments, and other obligations). Given the precarious fiscal
and macroeconomic state of the weakest transition countries, this has generally represented a
costly effort based on the use of scarce resources. As noted above, even where the explicit costs
are not so high, the implicit costs can cause major economic damage. This can be in the form of
forbearance and protection, thereby distorting the competitive environment. This can also be in
the form of opportunity costs, such as higher net spreads that serve as a brake on lending flows
and economic growth. Likewise, as noted above, these problems are not restricted to transition
country banks.
REGIONAL FUNDING AND INTERMEDIATION TRENDS
In general, deposit trends, access to syndicated borrowings, and general levels of capital suggest
that many of the CEE and Baltic states have managed to put in place structures that have helped
to restore public, creditor and investor confidence in banks. This shows up in terms of deposit
increases, broad money to GDP trends, and increasing capital. In general, CEE countries have
been responsible for the greatest improvement in deposit mobilization and capital formation. The
Baltic states’ banks have shown positive trends. In contrast, the CIS countries have shown more
limited deposit mobilization (given the number of countries, people, banks, etc.), and significant
decapitalization of their banks since 1995. The following table highlights some of these trends by
country and region.
99
Table 6.4 Basic Funding Indicators by Country: 2000
Albania
Armenia
Azerbaijan
Belarus
Bosnia
Bulgaria
Croatia
Czech Republic
Estonia
FYR Macedonia
Georgia
Hungary
Kazakhstan
Kyrgyz
Latvia
Lithuania
Moldova
Poland
Romania
Russia
Slovak Republic
Slovenia
Tajikistan
Turkmenistan
Ukraine
Uzbekistan
Yugoslavia
TOTAL
CEE total
Baltic total
CIS total
Deposits +/-:
2000 Broad
2000 vs. 1995 Money/GDP (%)
909
60.1
130
14.7
387
17.5
-63
17.7
247
27.6
-4,420
34.8
4,111
46.1
-1,517
75.7
978
39.3
163
21.0
108
10.3
1,623
46.8
981
15.4
-7
11.9
815
30.4
1,033
23.3
36
22.4
28,506
42.7
581
23.2
-1,871
22.1
561
67.8
2,309
49.5
N/A
8.8
298
14.9
1,007
17.9
2,384
11.9
N/A
20.3
39,289
33,073
2,826
3,390
+/- Broad
Money/GDP:
2000 vs. 1995
(%)
1.3
7.0
5.2
2.7
12.8
-30.1
21.2
-2.9
12.6
8.8
2.8
4.9
4.0
-5.3
7.0
0.0
3.2
8.8
-1.9
4.2
3.1
13.0
-12.0
-3.8
5.2
-6.3
N/A
Capital+/-:
2000 vs. 1995
174
-28
26
184
3
263
-570
373
319
-468
28
611
537
-53
184
299
28
1,500
-627
-3,836
1,992
-188
0
21
368
851
N/A
1,991
3,063
802
-1,873
Notes: Turkmenistan broad money figures for 1999
Sources: IMF; World Bank
Reviewing the figures, Bulgaria, the Czech Republic and Russia have all experienced net
outflows of deposits in their banks since 1995. In all three countries, a major shock or
development has occurred.153 However, this has also been the case in several other countries,
even though their deposit figures were positive in 2000 compared with 1995. In this regard, there
153
The Czech Republic has battled back against structural problems in the economy. Bulgaria faced economic
collapse in 1996-97. Russia faced a collapse of the currency in 1998.
100
appears to be little consistency. However, overall, CEE countries have increased their deposits
significantly since 1995, about 10 times the increment generated in the CIS countries.
Meanwhile, broad money figures continue to show that CEE and Baltic state countries have
higher intermediation levels than CIS. Overall broad money was greater than 30 percent of GDP
in eight of 12 CEE countries and two of three Baltic states. However, in the CIS, there were no
countries in this range, and only Russia and Moldova had above 20 percent ratios among the 12
CIS countries. Thus, in terms of a general funding base, the CIS countries remain especially
weak.
This is made all the more apparent by the net $1.9 billion decrease in bank capital in CIS
countries, compared with the nearly $3.9 billion increase in bank capital in CEE and Baltic
banks. In terms of the former, it should be noted that Russia has experienced a significant drain
on capital, whereas the rest of the CIS countries in the aggregate have shown improvement. If the
capital figures are accurate, resource-rich Uzbekistan and Kazakhstan have shown significant
capital improvement since 1995. Meanwhile, among all countries, the Slovak Republic showed a
major increase in capital during the period of nearly $2 billion, partly the result of a determined
effort to strengthen its two major banks (VUB and Slovenska Sporitelna) prior to privatization.154
Part of these trends also reflect bank operations in the regions. CEE and Baltic banks have
attracted greater foreign direct investment in their markets, which has also helped domestic
banks (directly when bought, indirectly through competition) to strengthen systems and diversify
their product offerings. These improvements have helped to create a more positive earnings
stream for CEE and Baltic banks. Their more recent diversification of earnings has been
reflected in their growing array of products and services for businesses and households. By
contrast, aside from some large banks, most banks in CIS countries tend to be small and
relatively inconsequential as intermediaries. (This has also been true in some of the Balkan
countries.)
As noted earlier, most banks in transition countries are small, with capital of only $22 million on
average per bank. This is particularly true in the CIS region, where the average bank had $11
million in capital. Baltic banks had about $25 million, and CEE banks had $61 million. Breaking
out the Balkan countries of CEE, average capital is also very small (under $20 million on
average) in Bosnia-Herzegovina, FYR Macedonia and Romania, while being closer to the CEE
average in Croatia ($45 million in 2000) and Slovenia ($60 million). Albania ($22 million) and
Bulgaria ($29 million) were more like the Baltic states. What is noteworthy is that most banks
are unable to access the international syndicated borrowing market if they stay at low levels of
capital. In some cases, they are also unable to access the domestic inter-bank market, and only
then at high rates. All of this combines to make it difficult to mobilize deposits, as it undercuts
the ability of the smaller banks to make the necessary investment in products and services that
would encourage depositors to place their funds with the banks.
In general, CEE and Baltic countries appear to have adopted a prudent enough framework for
banks to operate in a stable fashion. While NPLs are high in many of these countries, there is
better recognition of this as a problem than in earlier years. Moreover, as banking supervision
154
These two banks have been privatized.
101
capacity increases and private banks are required to report on prospective non-compliance and
associated risks, the system is often moving forward in a way that contains potentially damaging
risks from becoming dangerous to the system as a whole. This has been tested in several
countries in recent years, without panic. The case of Hungary’s Postbank in early 1997 was an
example of this, as the underlying condition of the bank led to deposit withdrawals. However, the
system as a whole did not experience a major net outflow. Rather, deposits were simply redeposited in stronger and better managed banks, essentially strengthening the system as a whole
at the expense of some vested interests.
However, not all countries are free and clear from these destabilizing effects. Weak regulation
and supervision in Romania culminated in a challenge to banks in 2000 when rumors circulated
about the financial condition of major institutions. The National Bank signaled its willingness to
provide needed liquidity support, and Romania’s major banks were able to handle increasing
withdrawals. However, such rumors might not have had as strong an impact had a better
supervisory regime been established earlier. This is rooted in the larger issue of efforts
throughout the 1990s in Romania to defer needed reforms. This has translated in a more fragile
economy, less public confidence in the banks, more difficult access to international capital
markets (and at higher cost when accessible), and lower levels of capital.
The transition from the monobank system to a stable, well-funded two-tier banking system and
diversified financial sector has been far more difficult in the CIS than in the other transition
countries. In the CIS, the trend has been towards large state banks in most of the key resourcerich countries, and very small private banks that have served as pocket banks for insiders and
controlling interests. The latter has undermined economic growth, compounding the after-effects
of hyperinflation and the loss of confidence in domestic currencies. While some of the state
banks have made efforts to professionalize and modernize, their existence has made it difficult to
create an open competitive environment for banking. Meanwhile, banks such as Sberbank in
Russia remain “strategic” and coveted due to the deposit share they have.155 Large CIS banks
such as Sberbank, Vneshtorgbank and Vneschekonombank in Russia, the International Bank of
Azerbaijan, Halyk Savings in Kazakhstan, Vneshekonombank in Turkmenistan, the National
Bank for Foreign Economic Activity in Uzbekistan and Oschadny in Ukraine remain essential
players in these countries. In some cases, this is because they are still vehicles of directed
lending. In other cases, they are the caretakers of hard currency accounts and responsible for
payment and settlement for the major enterprises of the economy. Meanwhile, much of the rest
of the economy has fled the banking system, running up arrears to other accounts. All of this
points to problems of funding in the real sector, governance and management in the economy at
large, and the greater difficulties of CIS countries in dealing with the significant challenges of
the transition.
155
Sberbank has about three quarters of the local currency deposit market and half of the foreign currency
deposit market.
102
CHAPTER SEVEN: WHAT NEEDS TO BE DONE AND HOW TO GET
THERE
GENERAL FINDINGS AND CONCLUSIONS
In most CIS countries and several non-CIS countries, governance remains weak, boards are not
represented by people with sufficiently specialized banking skills, management is entrenched,
accounting and financial information is incomplete or inaccurate, and state banks (and some
“private” banks) continue to be used as vehicles for non-commercial purposes. Most transition
countries still have a few state banks, on average about seven, and frequently savings banks and
agricultural banks where household savings in local currency remain. In many countries, state
banks continue to account for major portions of bank assets, loans, and deposits. However, due
to poorly performing portfolios, loan and asset values would shrink considerably if proper
provisioning and write-down practices were followed. Meanwhile, poor asset quality undermines
earnings performance, slows capital formation, props up high real intermediation costs, and
makes it difficult for these troubled banks to make the needed investment in systems and
modernization to be competitive. Their continued quasi-fiscal function in many countries
continues to pose a risk to general macroeconomic and financial sector stability, making it
difficult to develop a fully competitive market in which the public has confidence.
Delayed reforms in several countries have generally correlated with more sluggish economic
performance overall (except where a strategic commodity has been used as a source of cash to
insulate the economy from the negative consequences of slow reform). Even where laws are
adequate, institutional capacity has been slow to emerge. In many cases, issues of financial
discipline, loan default, collateral, veracity of financial information, and other foundations of
market-based banking have not been adequately addressed. The failure of poorly performing
banks has undermined public confidence in banks as a whole, particularly where there is no
deposit insurance and people have lost their savings. Under commercial conditions, this has
weakened incentives for lending. When commercial disputes occur, the judicial process has
proved itself to be debtor-friendly, further reducing incentives by banks to lend.
Meanwhile, as there has been growing recognition of the cost of directed lending and the use of
state banks for quasi-fiscal purposes, banks are increasingly under pressure to comply with
prudential regulations. Consequently, lending requires that enterprises and other prospective
borrowers meet stricter credit worthiness criteria to be able to obtain loans. This requires that
these borrowers have debt capacity, which is often based on higher levels of reported capital as
well as sound cash flow, a strong management team, modern operations, and a vibrant market.
To the extent that these basic requirements cannot be met, prospects for obtaining credit are often
difficult and costly. Even then, the tenor of the credit may not be sufficient, particularly if the
borrower has investment requirements for long-term development (as usually found in the
industrial, mining, power and transport sectors). Bankers will often shy away from such
decisions if the legal framework is inadequate for secured transactions, so often a problem in
transition countries.
103
While the trends in CEE and Baltic banks have been more favorable recently, there has been a
wholesale shift away from formal financial institutions in many CIS countries. While central
banks have played a disciplined role in bringing down high inflation rates and achieving
reasonable measures of exchange rate stability in this region (net of 1998-99 when exposure to
the GKO market hit many fragile CIS economies), there has been only modest progress in the
aggregate figures for credit and general intermediation. As noted earlier, many CIS countries
have operated increasingly on barter, arrears and netting arrangements through the real and stateowned sector than through the banks. In places like Ukraine where net enterprise arrears
(payables) are high, “veksels” (e.g., promissory notes) have been somewhat monetized through
the system for years. Other countries like Moldova have significant financial flows running on
this basis, bypassing and marginalizing the banking system as a whole.
These enterprises are broadly cash-constrained and continue to maximize tax-avoidance
opportunities at the expense of long-term enterprise performance. This reflects the survival
mentality of many troubled enterprises and regions. The poor condition of these enterprises has
reduced tax payments to the budget, including for social insurance, exacerbating the poor state of
public finances. All of this has accumulated over time in a loss of confidence in banks and other
public institutions, making it difficult for many if not most transition countries to achieve
sustainable and continuous growth. In this regard, many CIS countries have been hindered in
their efforts, largely due to poor structures, incentives, and governance. However, the problem is
not just restricted to CIS countries. The same fate has hindered growth in Romania, triggered
collapse in Bulgaria, and hamstrung efforts in many other cases in southeastern Europe. Even
where cross-border conflicts have not surfaced, internal problems of weak laws, inadequate
regulation and supervision, connected lending and political patronage have eventually
culminated in problems that have adversely affected banking trends and general economic
development.
Where banks are still used for non-commercial purposes, they are often state-owned. As noted
above, these banks generally account for a large share of balance sheet values of banking
systems. Their non-commercial approaches often relate back to old-style management and
governance, the use of directed lending for political purposes, the traditional orientation of the
bank catering to state farms or state enterprises, and the social orientation of the bank’s culture.
More often than not, this has led to a severe financial crisis in the banking system, high levels of
corruption, and a major cost to the budget (or central bank resources). Where state banks are
more modern than this, they are still constrained in their ability to achieve increased productivity,
efficiency and competitiveness due to excessive head count, labor protection, weak skills,
manual orientation, lagging technologies and information systems, old organizational patterns,
and a lack of service culture.
In the end, troubled banks need to be either restructured and recapitalized, or liquidated. The
latter is important as a means of consolidating systems and creating open conditions for market
competition. Absent this, banks will not assume risk, and intermediation will be limited and
distorted. Estonia is a good example of a country that pursued this approach. Along with the
introduction of other reforms, that country’s banking system is now more stable and poised for
growth than it would have been had it tried to nurse along troubled banks.
104
Meanwhile, most remaining state banks have poor prospects for privatization. In fact, in many of
the most troubled countries where state banks continue to play a key role, privatization prospects
are often less promising than they have been at earlier times, or by contrast with countries that
have entered formal negotiations for entry into the European Union. The latter has served as a
major incentive for many countries to stay focused on politically sensitive reforms over a long
period that might otherwise not have occurred without such an incentive. That this option is not
available to CIS countries represents a major disadvantage to the reform process of half the
transition countries of our study.
Given poor privatization prospects as a starting point, probably the fastest way to modernize the
banking system is to engage in a purchase and assumption exercise, allowing the market to
determine what is salvageable among the state banks. This would send a signal that markets are
open and transparent, and that the state is getting out of activities better left to the market.
However, in some cases, restructuring is likely warranted due to the potential for strategic
privatization. Whether this should precede privatization, or be carried out as part of the postprivatization process (with the government accepting defined costs for a certain period to attract
strategic investors and allow them to restructure banks that would otherwise run up losses or
distort the environment) is a case-by-case question that is subject to specific conditions of
economies and the marketplace. For example, the timing for privatization in resource-rich
countries would likely be better when commodity prices are high. By and large, the sooner these
countries can bring in investment grade ownership, the sooner the benefits should accrue to the
economy and marketplace.
Restructuring and privatization efforts need to be bolstered by effective supervision in support of
consistent stability in the financial sector. This also depends on accurate, timely and complete
information subject to sound standards of preparation and audit, for both internal (managerial)
purposes as well as external (regulatory compliance, investor and creditor information) purposes.
A stable macroeconomic and legal framework reinforced by clean government and stable politics
would create most of the conditions needed for well-managed banks to compete effectively in the
marketplace. The alternative is continued patronage, waste and corruption. The balance of the
chapter looks at some of these preconditions for a competitive financial sector, with an effort to
customize some of the recommendations based on regional and country-specific characteristics.
STATE BANK PRIVATIZATION AND RESOLUTION
Prospects for State Bank Privatization
In light of the weaknesses noted above, most state banks are generally uncompetitive, insolvent,
loss making, and lacking in franchise value. In some cases, such as some of the specialized banks
engaged in export-import financing, they have adequate systems and professional personnel who
have been exposed to international norms of banking. In some CEE countries, the former state
banks that were the easiest to privatize and that generated reasonable privatization proceeds were
corporate banks with earlier traditions of international exposure. However, in other cases, these
were often among the most troubled institutions. Thus, there is no consistent pattern.
Savings banks are often treated differently due to their prominent role in mobilizing household
deposits. In many countries, they are the only banks with a retail network. In countries that have
105
poor infrastructure, such a retail network could potentially have value. However, more often than
not, countries with poor infrastructure have poor economies. Thus, sorting through the problems
of a state bank with high personnel levels, poor systems, and traditions of “social” banking are
often not worth the price of privatizing, even if the price is zero. Meanwhile, in countries where
infrastructure is adequate or prospects are improving, most modern banks tend to go for “brick
and click” operations rather than traditional “brick and mortar.” The difficulties many banks
have had in cross-selling (e.g., banking and insurance) have undercut the earlier perceived
franchise value of extensive retail branch networks in most transition countries.
In the end, troubled banks either need to be restructured and recapitalized, or they need to be
liquidated. The latter is important as a means of consolidating systems and creating open
conditions for market competition. Absent this, banks will not assume risk, intermediation will
be limited, and rates will be high. The costs of high net spreads serve as a punitive measure for
both depositors and borrowers, while being a defensive necessity for banks against risk. In light
of this, most state banks have poor prospects for privatization at this point. There are exceptions,
particularly in countries where strategic resources exist, and purchasing power is increasing
(particularly in the more highly populated markets). However, their definitive privatization or
closure combined with a stable macroeconomic and legal framework (with adequate incentives
for creditors) is a precondition for establishing a competitive environment for banking. Until
then, it is unlikely that adequate capital will be in place for meaningful levels of intermediation.
Absent capital and a conducive environment, it will take even more time to restore confidence.
If this effort is done via state banks, this again represents a very costly endeavor based on the use
of scarce resources. This also runs the risk of state banks reverting back to traditional practices
due to the perception of “market failure.” This would invite restored financing of old
conglomerates and financial-industrial groups around job-creating, patronage and noncommercial criteria. This would then lead to a return to banks that could conceivably run up
NPLs to levels that far exceed capital, adding to the costs of intermediation and raising future
risks to system soundness and stability. All of this has occurred in the past, and some of these
practices continue to exist in several countries. The high cost of these practices points to why
transition economies need to move on to the final chapter of privatization in the banking sector
based on principles of sound governance and management, accurate and timely disclosure of
meaningful information, effective banking supervision, and developed legal systems reinforced
by stable macroeconomic policies. However, because the banks and countries are often among
the least attractive to investors and the most impaired as institutions, closing out this chapter
represents a difficult challenge.
Preconditions for State Bank Privatization
State bank privatization (as with any other privatization) benefits from stable macroeconomic
conditions, a reliable legal framework, credible financial information that is adequately
disclosed, signals from government of firm commitment to competitive banking environments,
financial discipline and competitiveness in the real sector, and adequate systems and personnel to
build on acquired franchise value. Not all of these are preconditions for the privatization of state
banks. In particular, outside investors generally want a free hand to reorganize, restructure,
(re)train, and introduce their own operating systems based on lessons and experience elsewhere.
Thus, systems and personnel in an existing institution are not considered indispensable on the
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condition they can be replaced. Likewise, foreign investors have entered markets where the real
economy is uncompetitive and distorted. However, in general, where these conditions prevail,
there has been far less foreign investment in financial services than would otherwise have been
achieved, and an exodus of such investment has attested to negative views of economic and
market prospects. More often than not, countries that have weak legal systems have performed
poorly. At a minimum for lenders and investors, legal framework weaknesses reduce the
willingness of these institutions to take risk. At a minimum, this keeps them focused on “cherrypicking” while overall intermediation statistics remain low.
Reversing these weaknesses and building on whatever existing strengths have been achieved
seem to be the minimum needed to bring the problem of state banks to a close. Maintaining a
stable macroeconomic framework is one of the key preconditions, and this is an area where most
transition countries have made major progress. As noted in the text, even countries that have
shown weak economic performance have often shown improvements from even weaker
positions early in the transition period. Most countries have had to battle hyperinflation at some
point. Today, inflation rates rarely exceed 10 percent in CEE and Baltic countries,156 and about
half of CIS countries have single-digit inflation rates.157 While the average of 15.6 percent for
transition countries is still high compared with many strong economies around the globe, it is a
vast improvement from triple digits as recently as 1995.158 Likewise, fiscal deficits are now
generally less than 4-5 percent in all transition countries. Again, this is high compared with
strong economies, yet a major improvement relative to earlier fiscal balances, particularly in the
CIS and some Balkan countries.159 At a minimum, the concept of macroeconomic stability is a
precondition for successful resolution of state bank issues. Weakness only reduces their
prospects for privatization, and increases the prospects for losses at these banks.
A second precondition is a sound legal framework. Laws are often in place, but court capacity,
precedent, experience, commercial training, and alternative dispute resolution mechanisms are
often lacking. Specifically for financial firms, the unpredictability of the judicial process reduces
the incentive to assume risk. While there are numerous out-of-court options, there is a general
view that a sound legal framework provides a more conducive environment for risk assumption.
This provides an incentive to borrowers to be disciplined, and for shareholders to more properly
monitor their investments. It also provides a framework for disputes to be settled out of court in
an orderly and professional manner. Courts can then be used as a final arbiter should out-of-court
156
Exceptions are FRY Yugoslavia and Romania. Both of these countries are currently engaged in programs
that will get these rates under control and eventually into single digits.
157
Armenia, Azerbaijan, Georgia, Kazakhstan and the Kyrgyz Republic all had inflations rates of less than 9
percent in 2001. Moldova, Turkmenistan and Ukraine were in the 11-13 percent range. Only Belarus, Russia,
Tajikistan and Uzbekistan had rates above 20 percent, with Belarus having the highest at 60 percent.
158
According to the EBRD, the average for all transition countries was 176 percent in 1995. The peak was in
1994 at 1,262 percent. The results are somewhat skewed by the poor performance of the CIS, Romania and
Yugoslavia. Most other CEE and Baltic states have had inflation rates in single digits since 1997-98.
159
On this front, CIS countries have shown steady progress over the years since fiscal deficits peaked in 199293. CEE countries have shown increases in recent years, while the Baltic states have maintained strict fiscal
discipline and low deficits.
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methods not succeed. Courts can also be used for minimum thresholds of disputes, while smaller
cases are automatically sent to specialized arenas. All of this is in contrast to the “informal”
methods frequently employed in countries where the legal framework and judicial systems are
less developed, and where decision-making is more arbitrary, less transparent, and counterproductive in broadening market participation.
A third precondition is sound financial information. This cannot be taken for granted anywhere,
and is particularly problematic in markets where information disclosure is not a tradition.
Moreover, as the market test for many asset values is not in place in less developed economies
(e.g., real estate values, valuing collateral), valuation is a challenge along with the normal issues
of loan classification, soundness of government finances (as underwriter of securities held by
state banks), and general audit standards. It is not uncommon for many investors to uncover
additional bad loans in acquired banks after privatization deals have been closed. This may be
due to the acquiring bank’s own internal deficiencies, or market developments that reduce the
quality of some assets after the transaction that were not identified as risks beforehand. However,
in other cases, it is also due to poor internal records, lack of consolidated accounting, etc. All of
this adds to the risk of investing in that market, ultimately reducing investor interest, reducing
the amount investors are willing to pay for a state bank, and adding to the cost that is incurred by
the state to make the privatization transaction happen.
A fourth precondition is independent supervision based on a sound prudential framework. While
there is always an interim economic and financial cost to dealing with structural weaknesses and
losses, not addressing these problems only perpetuates the myth that results are better than they
are. Overstatement of the performance of loans and the quality of assets (through rollovers and
capitalization of unpaid interest) only serves to perpetuate the notion that many banks have high
earnings, strong capital, and robust operations. In the end, as they run short on cash, they have to
approach the government for refinancing. Eventually, such liquidity shortfalls ultimately point
back to these banks’ insolvency and the need for corrective action. This, in turn, is rooted in the
excessively high cost structures and general lack of competitiveness of their real sector
borrowers. Tightening up on bank prudential norms and providing the supervisory authorities
with a mandate to enforce is a way for banks to become more disciplined and properly managed.
Ultimately, this should be transferred in the process to the real sector as a condition for obtaining
loans. As an extension of this precondition, this includes a supervisory mandate to enforce
sanctions as needed on state banks to ensure their compliance. In many (if not most) countries,
the supervisory mandate is extended to most private banks, but not equally applied to state
banks. This distorts the market, and provides undue forbearance that is costly in the long run. To
the extent that some private banks are also able to escape the supervisory mandate is an added
distortion.
A fifth precondition is for governments to signal and seriously enforce their commitment to an
open and competitive banking environment. By extension, this should apply to the economy in
general as an effort to encourage responsible direct investment. In most cases, this is an absolute
precondition to maximize investor interest. It is also necessary (along with the other conditions
noted above) to encourage intermediation. Where distortions continue to exist, many of the
banks that are most able to lend choose not to do so to avoid the risk associated with the uneven
environment. The withdrawal of state institutions from the market provides opportunity for
private banks. It has been demonstrated that net intermediation spreads are lower in markets that
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are the most competitive and backed by a stable macroeconomic framework. Continuing to float
state banks in the market only delays movement towards the level of competitiveness needed to
increase the supply of products and services, and to bring pricing to levels that are attractive to
depositors, borrowers, and shareholders. There are many small and weak economies that would
see little initial benefit to a wholly privatized banking system, as has already been the case in
some of the CIS countries (e.g., Georgia) or in the Balkans (e.g., FYR Macedonia, where there is
only one state bank that is relatively inactive). However, it is more than arguable that achieving a
competitive banking environment and economy is a building process that takes time. Moreover,
there are many other examples of where movement towards privatization has generated benefits
that would otherwise not have occurred (e.g., Bulgaria today as opposed to 1996-97).
A sixth precondition is telecommunications capacity, including adequate facilities for electronic
commerce, ATMs, and an infrastructure of support to ensure operations run without interruption.
As countries move increasingly to closer integration of systems (e.g., banks and central banks)
and real time gross settlement, this prospect improves. This is important for low cost entry into
consumer and retail banking, as well as for countries with large areas and dispersed resources
away from major population centers (e.g., Russia, Kazakhstan).
STATE BANK PRIVATIZATION AND RESOLUTION RECOMMENDATIONS
General Approach
Transition countries should, as a general matter, approach their remaining state banks as
resolution cases. While there are a few exceptions, most carry relatively high levels of bad loans,
and investments in government securities as a high proportion of earning assets and reflecting
earlier bad loans. In cases where this helps to increase earnings enough to recapitalize, it is due
to relatively high yields on bonds that are costly to the budget. To the extent that earnings from
these securities are not sufficient to recapitalize, they call into question the ability of these banks
to generate sufficient earnings from operations. This, in turn, raises questions of what behavior
they will assume to generate such earnings. One option is to seek political favors, which is
already a significant problem in most transition countries (and throughout much of the world)
and usually culminates in major losses that are costly to the economy (and often depositors). A
second option is to engage in adverse selection in the hopes of generating “extraordinary” or
“abnormal” profits, which also usually culminates in a major charge to these institutions, as well
as often to government, depositors, and sometimes, shareholders. In either case, these are
undesirable scenarios that can more broadly undermine confidence in banks and weaken efforts
to maintain and sustain stable financial markets.
To avoid these risks, it is recommended that governments design strategies to effectively
eliminate state banking within a prescribed time period. This can be done fairly systematically, in
a manner that reinforces some of the efforts already under way to create a stable environment,
and as a strategic framework for accelerated institutional capacity building where institutions
continue to lag what is needed for effective market performance. Many countries have already
begun this effort by introducing BIS-recommended prudential norms, and requiring banks to
design their own corrective actions to be in compliance with liquidity, solvency and other
requirements. In cases where new systems need to be developed (e.g., internal audit, MIS, new
charts of accounts, electronic compliance with UBPRs), there has been an understanding by the
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authorities that time, training and resources are needed for these systems to be introduced and
effectively implemented. Often, this has involved not only development within individual banks,
but harmonizing these systems with those of the regulatory authorities. Thus, in terms of drawing
up programs of corrective action for non-compliant banks, this is not a new development.
However, at this juncture, given the limited after-tax earnings (or losses) of most state banks
relative to their assets, more needs to be done than to simply comply with regulatory norms. New
injections of capital, better management systems, closer links to regional and global markets,
innovative systems, and modernized personnel based on international professional standards are
all needed to achieve commercial viability.
There are a few broad options available. These include restructuring or rehabilitation prior to or
after privatization, consolidation of banks prior to and after privatization, liquidation or
reorientation of savings banks within well defined mandates and risk parameters, and incentives
for the establishment of non-bank lenders. These are discussed below.
Restructuring or Rehabilitation Prior To or After Privatization
Many countries have already engaged in significant restructuring and rehabilitation efforts,
particularly in CEE countries. While some have kept explicit costs down (e.g., Poland), many
others have experienced high costs as a percentage of GDP (e.g., Bulgaria, Croatia, FYR
Macedonia, Kazakhstan, Czech Republic, Hungary). As results in these countries have varied,
there is no hard and fast rule about whether to proceed with this approach. Likewise, countries
like Georgia and Moldova have kept their restructuring costs low, yet have little banking
intermediation to show for their efforts (largely due to larger issues involving political and
macroeconomic instability, and weaknesses in the real sector). Other countries with relatively
weak economies that have fallen in between have also faced recurrent problems, such as in the
Kyrgyz Republic, where restructuring costs approximated 5 percent of 1998 GDP.
Should countries opt for this approach, it should be structured to include a particular strategic
objective in mind, and to establish explicit performance indicators based on a series of
operational reforms, managerial changes, and financial requirements. Given the small capital of
many of these banks once properly adjusted for risk, one approach would be to seek a minimum
threshold of absolute capital combined with specific capital adequacy targets that point to future
soundness. While these figures would vary bank-by-bank, average capital figures in markets
where banks appear to be functioning relatively well (as measured by after-tax earnings, asset
quality, revenue growth, sustainable net interest margins, competitive cost-to-income ratios,
ROA, ROE, etc.) suggest that capital should strive to be at least in the $50-$100 million range,
and preferably higher. This is based on most banks not being able to generate after-tax earnings
of much more than 15-20 percent of average equity. Among the state banks for which figures
were available, only 22 state banks exceeded 15 percent ROE in 2000, and many of these were
small banks that generated only a few million dollars. The importance of these measures is that
even with high ROE and ROA, very low aggregate earnings prevent the opportunity for such a
bank to acquire needed systems and technologies to provide adequate risk management for
modern banking, and adequate support and variety in terms of products and services for the
public.
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Thus, in approaching a state bank, the question is whether the investment put into restructuring
and rehabilitation is going to generate an adequate return relative to other uses of those same
resources. Irrespective of size, banks might be more efficiently privatized by having the
Government insist on certain activities being undertaken to ensure the private sector has access
to financing, with the Government benefiting from the fiscal revenue and employment
generation that results from such intermediation,160 rather than going through the timeconsuming process of restructuring and rehabilitation. If the bank is large, this approach would
likely involve larger sums, and a longer time horizon for new owners and management to
achieve such economic objectives. If the bank is small, it might not be worth the effort or time to
restructure and rehabilitate. With most state banks having less than $300 million in assets and
less than $50 million in capital, it appears that making concessions on sales prices and
developing a five-to-10-year time horizon for desirable financial and economic objectives from
outside investment would more fully benefit banking sector modernization than working through
a time-consuming rehabilitation and restructuring approach prior to privatization.
This would appear to apply to most countries, with specific bank exceptions at this point being
PKO BP of Poland (already undergoing restructuring with the intention to eventually privatize),
BCR of Romania (the country’s largest bank that is already slated for privatization), Sberbank
and Vneshtorgbank of Russia, and Nova Ljubljanska and Nova Kreditna Maribor of Slovenia.
Otherwise, banks that are not supervisory concerns and are not large should ordinarily be sold off
quickly, with the long-term financial and economic objectives serving as the main focus of
negotiations for sale.
The only other possible exception should be savings banks, but only where a significant portion
of household deposits is held in these banks. The analysis of the deposit issue should, however,
take into account foreign currency deposits, not just local currency deposits. In some cases,
savings banks have a substantial portion of local currency household deposits, but most of the
banking system’s assets (and deposits) are held in foreign currency, while substantial sums are
also held outside the banking system. In such a scenario, the privatization (or holding) strategy
should not be driven by local currency household deposits as a reason to reject privatization.
Economies that have become increasingly dollarized and show much broader dispersion of bank
market shares in hard currency deposits should accelerate measures to reduce the comparatively
high levels of concentration of local currency deposits in savings banks. The latter gives them
undue influence in inter-bank markets, makes it more difficult for more modern banks to access
local funding and compete, perpetuates political patronage through the banking system, and
rewards what is often complacent and sluggish management in a period when such institutions
need an infusion of capital, know-how, and modern management systems. Examples of savings
banks that should accelerate internal restructuring and be privatized promptly are DSK in
Bulgaria, CEC in Romania, Postbank in Hungary, the Latvian Savings Bank, Sberbank in
Tajikistan (if it can find a buyer), the Uzbek Housing Savings Bank in Uzbekistan, and
Oschadny in Ukraine.
160
This was the negotiating position taken by the Czech government when privatizing Ceska Sporitelna,
requiring the purchasing bank to commit to a specified level of housing finance and venture capital as a condition
for the guarantee provided by the Government for half of Ceska Sporitelna’s loan portfolio. Other governments have
taken similar positions when privatizing their banks.
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Consolidation Prior To and After Privatization
As an extension of the post-privatization approach described above, lack of investor interest for
banks even under the “deferred benefit” scenario might trigger the need for closure of these
banks, or the unsalvageable portions of banks that have been privatized. This should be
recognized as a contingency for which to plan and should be considered a normal part of the
negotiating process, as investors may not want the full “franchise” and associated costs of
spinning off or restructuring unwanted parts. This is not just a financial issue, but also a
managerial and operational issue that drains time and energy.
One alternative, in the appropriate circumstances, would be a “purchase and assumption”
approach which hives off unwanted parts of one franchise to another bank that might be able to
give them some value. For example, a small bank that might want to develop a branch network
might value the very same branches that a potential owner of another bank does not want as part
of the privatization process. While the ideal approach would be through the market in a normal
acquisition, given the limited market in many transition countries, this might be done through the
regulatory authorities. They should be in a position to know whether the potential acquiring or
absorbing bank meets the financial and related conditions for such an acquisition. Should the
units being hived off be of questionable existing value, the regulators would be in a position to
know whether the acquiring bank had the capacity to turn them around. Should such an approach
present risks to deposit safety or systemic stability, the same assets could be offered to financial
institutions that are not deposit taking, or are not covered under the deposit insurance fund. In
any case, post-privatization consolidation should be considered at a minimum as a contingency
by the countries with remaining state banks. Should there be no interest in the banks, or in the
unsalvageable parts of the banks, this would then lead to closure.
It is important to note that several countries have engaged in consolidation prior to privatization,
and it has often turned out to be a difficult and costly exercise. In the Czech Republic, an effort
was made to help Ceska Sporitelna to diversify from a fairly narrow savings bank to a more
diversified commercial bank by absorbing smaller regional banks. The end result was negative
for Ceska Sporitelna, which was only privatized in 2000. Such a privatization could have
occurred five years before had the consolidation strategy not been pursued. In Poland, Pekao SA
(now owned by Unicredito of Italy) had franchise value in the mid-1990s. However, the
Government of Poland opted to consolidate three regional banks with Pekao SA. The exercise
turned out to be costly time-wise and complex due to the regional specifics of the three smaller
banks. In the end, there are doubts about whether such a consolidation added value, and if it
enhanced the level of banking services in the Polish economy. This is currently a challenge in
Azerbaijan, as United Universal is in the process of amalgamating the traditional savings,
industrial and agricultural banks after balance sheet restructuring and the carve-out of bad loans
from the earlier banks to a collection agency.
In summary, consolidation of banks prior to privatization may be useful in reducing the
transaction costs of negotiating privatization transactions, particularly when investment banks
are used as the major agent for those transactions. However, in general, they are complex,
difficult to carry out successfully, and often negative or sub-optimal in their results. It is more
likely that most of the remaining state banks could be consolidated more efficiently by simply
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offering them for sale to banks, domestic and foreign. This would achieve consolidation through
market mechanisms.
To the extent that market mechanisms are not sufficiently available to consolidate the banking
system, the regulatory approach is an option. As with the restructuring and rehabilitation
approach, a separate administration could be responsible for working with specialists to establish
a consolidation plan that would be the counterpart to the corrective action plan described above.
This would include a strategic objective with performance indicators. Such an approach would
require the two or more institutions to establish an action plan and time line for the achievement
of objectives, with financial results serving as the key barometer for success. This could include
performance incentives, although reasonable indicators would need to be set early on. From the
state’s point of view, the benefit would presumably come from cost savings, and enhanced
intermediation over time. Should consolidation involve at least partial privatization from the
outside, this would include the added benefit of enhanced solvency in the system. However, in
general, consolidation would likely be far less complex if individual state banks were acquired
by other banks already well established in the marketplace, and with the capital and managerial
capacity to integrate what is salvageable from these banks as expeditiously as possible. Again,
with cost savings as a benefit to the government, it should be possible to structure financial and
economic targets for the consolidation on a long-term basis.
BOX 7.1 CESKA SPORITELNA AND BANKING SECTOR CONSOLIDATION IN THE CZECH
REPUBLIC
In 2000, the Czech government sold Ceska Sporitelna, the state savings bank and the country’s second largest bank,
to Erste Bank of Austria. The sale brought to a close one of the government’s most lengthy and difficult bank
privatizations. The sale of Ceska Sporitelna came at great expense to the government as it followed several years of
consolidation and restructuring that culminated in a massive government bailout during the final year before the
sale. The government strategy proved far more costly than originally expected and, most likely, than if it had
pursued privatization more vigorously at an earlier stage.
Ceska Sporitelna was the state savings bank during the socialist era and remains the largest retail bank in the Czech
Republic. As of 2000, it had $12 billion in assets, a 34 percent market share in retail savings, and a network of 934
branches. As part of the Czech government’s financial sector restructuring during the mid-1990s, Ceska Sporitelna
was included in the first wave of Czech privatization programs.
Recognizing that the commercial banks created from the monobank system inherited significant stocks of nonperforming loans from the central planning era, the government developed a two-staged program to financially
restructure and then privatize the new banks. A total of 37 percent of the Ceska Sporitelna’s shares were offered for
vouchers and 20 percent was sold to towns and municipalities, while 40 percent was retained by the state. The
government pursued this policy as well for its other three major state-owned banks, including Komercni, Investicni,
and Obchodni. By the end 1995, these four banks in total accounted for 62 percent of banking system assets, and
were 47-63 percent divested by vouchers, with the state-owned National Property Fund retaining the largest block.
While not fully privatized, these banks were effectively “corporatized” with the expectation that full privatization
would occur after additional restructuring and as accession to the EU neared.
Ceska Sporitelna languished in its quasi-privatized status until mid-1999, when the government began to speed up
its planned sale of a majority stake in the bank. In the meantime, the bank’s prospects had been hurt by poor lending
decisions that resulted in an increase in non-performing loans, and by the operational complications imposed on it
by having to absorb several smaller banks as part of an exercise to consolidate the banking sector while providing
the bank with lending “expertise.” By mid-1999, the bank was expected to lose $389 million—the equivalent of
more than half of the bank’s capital. According to reports at the time, the bank needed to cover the loss by writing
off part of its capital, which would then result in its capital adequacy ratio falling below the legal minimum set by
113
the Czech National Bank. This forced the state to intervene to recapitalize the bank, and increased the incentive for
the government to privatize the bank.
Although several foreign banks expressed an interest in Ceska Sporitelna, the government felt that some of their
offers insufficiently valued the bank’s franchise. Rather than launching a formal tender, the government entered
exclusive negotiations with Erste. In the end, although Erste raised its bid, the bank paid only approximately 1.55
times book value for the Ceska Sporitelna. The state also was forced to make significant concessions. In particular, it
gave Erste Bank five-year guarantees on about half of Ceska Sporitelna’s loans. Prior to the sale, approximately $1.1
billion of non-performing loans were transferred to the state, which also increased the bank’s share capital by $201
million to bolster attractiveness to foreign buyers.
Liquidation
The liquidation of banks has been mentioned above through purchase and assumption techniques
that could be woven into a post-privatization restructuring or consolidation approach. The reason
to mention it separately is because many governments have simply resisted this option. The
difficulty has often come with savings banks or agricultural banks, with their branch networks
and traditional catering to households and under-served rural regions.
In general, it has been difficult to liquidate these banks in the past, irrespective of their financial
condition for political reasons, and because there has been little alternative for people in rural
areas. Savings banks have also catered to many older people who have small accounts, and are
not comfortable changing banks or using electronic methods of banking.
While these are understandable reasons for deferring closure, the reality is that these banks can
often be liquidated fairly easily, with few of the feared social consequences emerging. First,
there are usually alternative institutions, such as savings houses, credit unions and micro-finance
institutions that are fully capable of serving households and rural communities. Their
development has often been stunted by politically-inspired protection provided to savings and
agricultural banks. Moreover, under the cover of protection of small households and rural
communities, these banks have typically been used for patronage purposes. In the end, many of
the banks have run up losses because of the political patronage that has come from directed
lending to large blocks of the population (e.g., through agricultural lending, loans for housing
through savings banks).
State-owned savings banks showed losses or zero earnings in Armenia, Belarus, Kazakhstan,
Tajikistan, and Ukraine in 2000. Meanwhile, after-tax earnings at state savings banks exceeded
$10 million in only Albania, Poland, Romania and Russia. Likewise, state-owned agricultural
banks showed losses or zero earnings in Bulgaria and Romania (now private), while showing
after-tax earnings in excess of $10 million only in Poland. In general, the meager earnings of
state banks raise questions about long-term sustainability. The large number of loss makers raises
the question of potential costs to the budget, and the added costs to the system of carrying lossmakers. In the long run, if a bank cannot be privatized or absorbed by a sound and stable bank, it
should be a candidate for liquidation. If it is determined that the bank shows no potential for
commercial viability, liquidation should occur promptly. Branches can be spun off to other
interested parties, including non-bank financial institutions such as credit unions and microfinance groups, that focus on rural communities, households, and other market segments often
114
neglected by mainstream banks. These banks can also be spun off to specialized finance
companies, such as commercial finance and leasing firms. Under such circumstances, the sale
would simply involve a revocation of the right of such an institution to market itself as a “bank”,
explicit and well publicized removal of such an institution from deposit insurance, and other
conditions that would transform the troubled bank into a non-bank financial institution. In this
sense, consolidation in the banking sector would proceed while the economy benefits from an
expansion of non-bank financial services. If through corrective action a bank can move from
being a supervisory concern to one that meets certain needs in the market, that approach should
be taken on the condition that the forbearance costs are reduced rapidly so as to eliminate
distortions to a competitive marketplace.
Narrow Banking Licenses for Savings Banks
Given the weak financial condition of most transition economy savings banks, yet the
unwillingness of many governments to part with these banks, one alternative is to re-define the
license and range of activities permissible for savings banks. DSK of Bulgaria is an example of a
traditional local currency savings bank that has pursued basic reform within well-defined risk
parameters, with a gradual increase over time in its relatively low credit limits. The Savings
Bank of Albania, currently in the process of being privatized, is another example of a savings
bank that was originally limited to a narrow range of activities, took on a more diverse role,
effectively failed, and now has been sufficiently recapitalized and reorganized to be offered for
sale to strategic investors.161 Other savings banks are likely to follow suit in the coming years.
However, there are risks to the delay inherent in this approach. For example,, as appears to be
occurring in Ukraine, these banks can be misused for high risk connected lending. This has long
been the main problem with troubled banks in transition countries. While savings banks have
generally not been closely linked to banking sector crises in transition countries, there is always
the potential for misuse, particularly as other state banks disappear as patronage vehicles. If these
banks cannot be privatized, there should be an effort to provide some limitations on the kinds of
lending and investment activities they can pursue. CEC (Romania) had exposures to an
investment fund that collapsed in 2000, jeopardizing its financial position. Several years ago (as
noted), Ceska Sporitelna was used as an anchor for the consolidation of several smaller banks.
An earlier government also used Slovenska Sporitlena (Slovak Republic) to serve as a channel
for directed lending to preferred SOEs. In short, limits should be placed on the risk-oriented
activities of savings banks if they hold a major share of the deposit market (e.g., more than 25
percent of the local and/or foreign currency deposit market).
There are strengths and weaknesses of such an approach. By placing strict limits on what savings
banks can do, there is a good chance of keeping them solvent. On the other hand, their high costs
and low level of service translate into limited earnings, or losses. Meanwhile, because of
limitations on what they can do on the asset side (or otherwise) to generate income, this almost
certainly ensures that the banks will never be able to grow or modernize unless they retain
significant shares of the deposit market, as is the situation in Russia with Sberbank. But this is
161
As of 1Q 2002, there was no guarantee of success. However, the preliminary stages of the process had been
carried out, and there was optimism at the time that Savings Bank would be effectively privatized by end 2002.
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also risky for systemic stability. Banks generally lack an inexpensive source of funding if they do
not have a viable deposit base. This reduces their resource base for lending, and drives up
lending rates. It also makes the inter-bank market highly dependent on a particular bank for
liquidity, and it can create a circuitous dynamic leading to collapse if the savings bank is closely
intertwined with government finances. If the government is dependent on the savings bank for
funding and experiences a major downturn in its own finances, this could lead to a major erosion
of the savings bank’s liquidity position, driving up rates in the inter-bank market or causing
panic should there be excess concentration. In general, countries should make an effort to break
up excessive concentration in the deposit market for greater funding balance. Beyond that, the
savings banks themselves should be privatized, merged or consolidated in some form.
Non-Bank Lenders and Equity, Turnaround, and Workout Institutions
One of the reasons why troubled economies have been slow to finalize privatization of banks,
particularly in “strategic” sectors or roles, is because of the underdevelopment of other financial
services firms. In general, capital markets are underdeveloped, insurance penetration is limited,
and second and third pillar pension funds are new or have not yet been introduced. All of this has
translated into limited institutional investment, and limited market development. This is
important not only in terms of financial flows and investment, but also because of the foregone
benefits that could potentially occur as a result of enhanced governance.
From the lending side, there has also been a shortage of non-bank creditors active in many
markets. The benefit of non-bank creditors is that they can provide loans without putting
depositors at risk. This is typically found in specialized commercial finance, leasing and
factoring companies. Often, banks themselves are involved in these businesses. In general, it
would be helpful in many transition countries if legal, tax, accounting and related issues could be
resolved to encourage entry of these institutions into the marketplace. In particular, favorable tax
and accounting rules for equipment leasing could serve as a spur for manufacturing and capitalintensive businesses that might otherwise have problems getting loans from banks. Likewise, an
improved environment for secured transactions would create incentives for such lending from
banks to the risk-takers.
In addition, problems affecting the banking sectors of many transition countries are more often
rooted in real sector weaknesses. In some cases, it is poor management, weak financial
management, lack of market research or information, outmoded technology, etc. In other cases, it
is because of inadequate organization of information, under-utilization of the company’s
competitive strengths, etc. The entry of turnaround funds into the market would help to create the
potential for streamlined operations and better financial results. Above all, with the introduction
of management teams that have performance-based contracts, there is a better chance that these
companies can be salvaged in part as going concerns, or that they can be merged to be
competitive. While this is another case-by-case situation, most transition countries have resisted
serious turnaround operations that could then securitize debt or equity packages within a period
of years for their own payout. While such an approach presumes deep discounts for companies to
be turned around, such a discount would need to be weighed against the ongoing costs of
keeping the enterprises afloat via subsidies, transfers, and arrears. In general, and in the CIS
countries in particular, this approach has been costly to the economy as a whole. From a financial
sector perspective, the prospect of companies being turned around provides more of a potential
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market for banks, as well as for broader market development through venture funds and eventual
securitization.
In terms of general scale of enterprise, most transition countries have SMEs and microenterprises. In addition, as noted above, because many of the remaining state banks are savings
and agricultural banks that cater to households, alternative savings and credit institutions might
be more useful to the economy than banks that are dependent on costly branch networks. Credit
unions and savings houses can certainly play this role, subject to sound prudential norms,
adequate supervisory capacity to examine operations to ensure the willingness and ability of
these institutions to comply with prudential norms, and careful consideration of permissible
activities under the license. This would imply low thresholds of lending exposure, limitations on
open foreign currency positions, etc. Likewise, there are several examples of micro-finance
groups building their loan portfolios based on sound quality and performance standards. In many
cases, these groups can lend in the $10,000-$20,000 range, and sometimes higher. While this is
not sufficient for medium-sized or larger enterprises, it does help to finance small businesses and
little household operations. In general, these kinds of institutions are often far more appropriate
for the vast majority of households. However, there has been periodic resistance to their
formation due to the added cost to banking supervision at a time when effective supervision is
just getting rooted in transition countries. This is an understandable view on the part of
supervisors. However, with proper guidelines and staffing, such non-bank institutions should be
encouraged to operate in the interest of increasing intermediation services throughout the
economy.
As an extension of this last option, there should be incentives in place for credit histories to be
fully documented so that as businesses grow and increase their debt capacity, they are able to
present their documentation to banks attesting to credit worthiness. Such incentives would be in
the form of commercial credit information services having access to information, and being able
to disseminate such information as requested. However, at the moment, this is not an available
service in most transition countries. Over time, businesses should be more willing to disclose
information when their performance has been positive and such disclosure would improve
prospects for obtaining loans. As banking systems become more competitive and expand into
retail and consumer banking, these kinds of services will be increasingly in demand.
WHAT SHOULD DONORS DO?
General Framework
There are a number of initiatives that donors can undertake to accelerate the commercialization
of the transition countries’ banking systems. As a general notion, policy and institutional support
for financial sector stability is key. This is macroeconomic and monetary as well as structural. A
part of this effort includes clean-up of NPLs on banks’ balance sheet prior to or simultaneous
with any major movement forward on banking reform. However, a focus on speed should be
paramount to avoid the potential risk of higher costs to the economy mounting through state
banks or pocket banks that can serve a similar purpose. At this juncture, governments should be
less concerned about generating revenues from bank sales, and more concerned about having a
well-designed series of post-privatization benefits that would be expected to accrue to the
institution and the economy.
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Effective and independent supervision is also a key link in the chain between the design and
implementation of monetary (and, by extension, macroeconomic) policy and a stable
environment for market players. Given general movement (in a phased manner) towards riskbased precepts of regulation and supervision, high standards of governance and management are
required for stable financial intermediation. For boards to play their proper role, they need to be
qualified, and have access to timely and accurate information. The role of an autonomous
internal audit function with access to fully functioning information systems is essential for such
information to flow accordingly. Meanwhile, professional standards of disclosure are required
when risks emerge that could have a material impact on the solvency of the institution, or the
general stability of the financial markets. Adequate legal and supervisory mandates need to be in
place to ensure that board members, managers and others are held accountable. Criminal
penalties need to be invoked should major violations occur.
As for the ingredients for specific country strategies for bank privatization, these should include
establishment of more comprehensive and useful data bases for management and strategic
planning purposes, performance-based incentives and the adoption of modern human resource
management tools, improvements in governance, technical assistance and training needs to build
human capital, and better communication and interaction between market players and regulatory
officials. This last suggestion includes the utilization of supervisory tools to assist management
with improved financial monitoring, better operating systems and increased coordination in the
identification of risks to avert the need for more formalized corrective actions. These could all be
framed within the context of larger global efforts to comply with standards that reinforce
financial sector stability, cross-border cooperation, and transparency for market-based decisionmaking.
With regard to actual privatization-related assistance, a general program could be drawn up to
assist different countries and banks at different stages of development, or with differing
prospects for strategic investment from firms that conform to international norms and best
practices. General recommendations are broken out into two broad sections, involving preprivatization and post-privatization assistance.
Pre-Privatization Assistance
Pre-privatization assistance would apply to countries and state banks where attracting
investment-grade investors is not a likely prospect. For example, the Kyrgyz Republic has
successfully pursued significant banking sector reform, yet has experienced only limited direct
investment in the real economy (mainly in the gold sector, which is declining) and has been
unsuccessful at attracting major international banks. With a small population and relatively
remote location, it has been difficult for the Kyrgyz Republic to achieve its investment
objectives. On the other hand, there are many countries with potentially more favorable
prospects that could benefit from pre-privatization assistance. These countries include most of
the CIS where state banks remain, as well as some of the Balkan countries. In many cases,
elements of pre-privatization assistance could be useful to most transition countries, even where
there are no longer any state banks (e.g., Armenia, Georgia), where there will soon be no state
banks (e.g., Albania, Moldova), or where the reform process is well under way. In these cases,
improved management information and public sector performance monitoring would benefit
these countries even if state banks are limited or non-existent in number and influence.
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Pre-privatization assistance could effectively involve a unified (or customized) program that is
based on the following fundamental building blocks: (i) development of effective management
information systems for enhanced performance at state banks (and, by extension and with
customization, enterprises); (ii) strengthened standards of governance and accountability as part
of a merit-based human resource management strategy; (iii) building more effective capacity of
governments to oversee the performance of state-owned banks, leading up to their privatization
(and to provide them with more informed negotiating positions); and (iv) providing assistance to
governments for them to more ably manage investment banks, professional management firms
and other agents active in the pre-privatization and privatization process. These are discussed
below.
Management Information Systems. Many transition countries’ banking sectors are still
undermined by weak and incomplete financial data, the absence of sound accounting and audit
standards and capacity, and the inability to use existing information for meaningful strategic
planning, management and operational purposes. There have been improvements in recent years
as new reporting requirements have been introduced for banks, prudential norms have been
toughened, and banking supervision has become more effective. However, weaknesses still
permeate many systems. These weaknesses result in owners failing to have the information
needed to provide proper oversight of management, which impairs their ability to hold
management accountable for poor performance and losses. One way to remedy this weakness
would be to establish a performance tracking mechanism and database for state-owned banks
based on commercial considerations. This would also reconcile with regulatory requirements,
and with international accounting standards.162
The database would contain appropriate financial accounting (e.g., balance sheets, income
statements, flow-of-funds), sensitivity analyses and scenarios to anticipate endogenous and
exogenous risks, and e-based peer information by activity, sector, and size. Much of this may
already exist in early warning systems, off-site supervision databases, etc. However, even if they
exist, they are sometimes not available in centralized form. Thus, their use for contingency
planning, performance monitoring and risk management is often undermined by fragmented
control and a lack of administrative and policy coordination. The database would seek to
construct timely financial statements in a manner that is as consistent with IAS as is feasible.
This would provide an accurate representation of the value, returns and profits or losses of the
individual bank to the overall state-owned portfolio, and the impact this has on government
finances.
In addition, a more comprehensive flow-of-funds database for state banks detailing lending
flows, arrears and cross-ownership positions would be of great use to policy makers. Information
on arrears and netting arrangements is inconsistent in quality across countries, yet constitutes a
major economic and structural challenge in most transition economies. Such a database would
provide the government with a tool that would be helpful for budgetary purposes, as well as for
the tracking of state banks’ portfolio risks.
162
This approach would be equally applicable to state-owned enterprises and utilities, for similar reasons.
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Once an inventory has been constructed, governments could put contractual arrangements into
place that are more commercial in their orientation.163 This has been done in several countries
already as part of the pre-privatization restructuring effort. Contractual agreements would serve
as a catalyst to reduce chronic losses of state banks (and enterprises), and to unwind some of the
arrears of SOEs to banks. “Stock” and “flow” measures would be essential parts of this database,
as well as key components to restructuring plans and contractual agreements on which
compensation and promotions would be partially awarded.
More broadly, development of this database would provide clear and quantifiable information to
assess management, financial and operational performance based on commercial indicators. In
its most comprehensive format, the database would include macroeconomic indicators honing in
on reductions in fiscal and quasi-fiscal losses, as well as microeconomic or firm-specific
indicators. Bank data would draw on existing data reported to the monetary and supervisory
authorities and focus on liquidity and capital ratios, earnings sustainability measures, asset
quality indicators, cost and income measures, productivity measures (e.g., revenue/head count,
profitability/employee), and systemic risk issues. In the last case, a key issue would be the
financial condition of savings banks, their role in the inter-bank market and government
financing, the implications of reduced deposit market share, the costs-benefits of privatization,
and any specific contingencies that would need to be in place to enhance the competitive
environment once privatized. Likewise, for remaining agricultural banks, the database would
also need to take into account primary sector indicators and risks, and the role of these banks in
agriculture sector development.
The database would primarily serve senior government officials who are managers of the state
banks and enterprises. This should ultimately lead to improved financial and management
information for more efficient resource allocation, better overall operating performance, and
enhanced prospects for commercial viability and privatization.
Strengthened Governance and Merit-based Human Resource Management. Traditionally in
the state sector, human resource management practices have operated on the basis of political
patronage rather than commercial capacity, professional skills, or objective standards of merit
and performance. This practice has often detracted from state bank performance, and has
intensified losses at the firm level as well as at the government (budgetary and extra-budgetary)
level.
One method for correcting this problem is to establish a performance evaluation mechanism for
banks based on new standards of transparency and accountability at management and board
levels. This would be based on more clearly defined standards of hiring and dismissal, and
reporting on performance based on commercial criteria. The purpose of this mechanism would
be to develop a culture of management accountability, to reward good performance, and to
change management teams and structures when performance at firms can be markedly improved.
This might require a change in many countries’ overly protective labor codes, but this is long
overdue.
163
For guidance on bank governance contracts for enhanced performance, see R. Roulier, “Bank Governance
Contracts: Establishing Goals and Accountability in Bank Restructuring,” World Bank Discussion Paper 308, 1995.
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Overall human resource management would be enhanced by developing guidelines for
professional standards of management and governance for state banks. Broad guidelines and
standards would provide a framework for individual banks to establish suitable job descriptions
for senior managers and board members, to introduce objective standards for hiring, and to
implement performance-based standards for dismissal and compensation. These principles would
be integral parts of overall strategic plans developed by management and approved by bank
boards, with specific targets and objectives mapped out to serve as a basis for performance
evaluation. Individualized job descriptions and performance evaluations could be introduced, at a
minimum, for senior managers, department heads, and others responsible for resource
management and implementation of strategic plans. The focus of board members in reviewing
management performance would be how well they have performed in reducing losses or
increasing gains to shareholders (in this case, the state), and how well their individual or group
performs when compared with targets set in job descriptions and contractual agreements.
To the extent that boards, management and employees are able to outperform peer competitors
without any additional preferences or forbearance from the state, this performance would also be
subject to recognition and reward. However, given the objective of privatization, there would be
clear limits on the financial rewards offered, as one of the key objectives would be to retain
maximum earnings to boost capital, not to pay these out in benefits and dividends prior to
privatization. Capitalization of these benefits into shares would be an option, recognizing that
excessive compensation would dilute ownership and undermine privatization prospects when the
bank is up for sale.164
Implementation of improved human resource management would be predicated on practices of
transparency and accountability, and strengthened governance standards and requirements. All
senior management positions could be advertised, with objective criteria established for
selection. Efforts should be made to contain patronage as a basis for hiring and retention, shifting
the focus to commercial results. Best international practices should be applied to promote
professionalization of management ranks, fairness and objectivity in the hiring process.
Likewise, dismissal criteria should be based on unacceptable performance relative to goals and
objectives based on realistic strategic plans. These plans, managers hired, and oversight criteria
applied would all be focused on achieving commercial viability as a forerunner to privatization.
At a minimum, the focus would be on material reductions in losses at the bank level to contain
fiscal and quasi-fiscal losses at the government finance level.
To reinforce the importance of transparency and accountability, regular disclosure of
performance in the form of quarterly financial statements, annual assessments of management
performance relative to targets, and accomplishments and failures of banks in meeting their
contractually agreed targets would be recommended. These reports would be public, given that
the banks are state-owned, and their financing is based on public resources.
164
Such rewards would need to be sufficiently large to provide meaningful incentives for improved
performance, yet sufficiently small as to contain leverage or dilution. Leverage would come from the issuance of
debt instruments to finance compensation. Dilution would come from the issuance of preference or common shares
to employees.
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Government Oversight Capacity for State Bank Performance: Just as many transition
country human resource management practices have traditionally been decided on the basis of
political patronage at the bank level, standards set by government have encouraged and
reinforced these practices. Thus, poor financial performance at the state bank level has often
resulted from state-oriented patronage rather than commercial viability as the primary goal. This
has been most explicitly manifested in directed lending practices, which have ultimately
culminated in portfolio erosion and loss of capital. (These practices have also been problematic
for many small private banks that lack sound governance and management.)
Developing capacity for government oversight of financial sector performance would be critical
to general economic management, as well as to ongoing financial sector development and
stability. It is recommended that this be done in a comprehensive manner in the form of a
Management Performance Enhancement Commission at the most senior levels of government.
This would clearly involve more than state banks, and would effectively constitute an effort to
revamp the entire public administration framework towards professionalization, compression,
and rationalization. The role of state bank performance would be essential not only for
privatization purposes, but also as a source of financial discipline on SOEs. While this might
create some tension, this would at least create a clear framework for the explicit identification of
losses, the budgetary impact, and a program of adjustment to operate within agreed parameters.
Meanwhile, more positively, the reduction of losses and potential for profitability in the state
banks as a result of such efforts would automatically improve the prospects for banking
privatization due to better performance at both micro and macro levels.
In effect, the starting point would be the professionalization of management and governance
standards in the banking sector to establish well capitalized and liquid banks with improving
prospects for financial sustainability, effective intermediation, and sound risk management
practices. The commission would be responsible for establishing indicators and systems required
to properly oversee management performance of state banks, to ascertain the impact of
performance on government finances and progress in restructuring, and to formulate
compensation packages and awards. The commission would also be empowered (with assistance
as needed) to develop guidelines and procedures for disclosure of bank results and management
performance, including timing requirements, media channels, and information requirements.
It is assumed that the commission would work with banking supervision to specify information
that would help the regulatory authorities assess management capacity within the context of
financial sector stability and the 25 Core Principles (Basle Committee on Banking Supervision).
This would also apply to other financial sector regulatory standards (e.g., IAIS for insurance,
IOSCO for capital markets) to the extent that state banks are permitted to operate in these fields.
Hence, as found in market economies and at the core of many transition countries’ existing legal
and prudential frameworks for banking, this effort would be designed to reinforce financial
sector stability, and to reduce or eliminate the “connectedness” of ownership structures and
exposure patterns that are often still found between banks and SOEs in many transition countries.
Notwithstanding some of the efforts of recent years to prevent such damaging practices, these
problems continue to weaken economic performance in many transition countries. The value
added of the Management Performance Enhancement Commission would be in the form of
applying effective governance and strict scrutiny of management plans and performance.
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The goal would be to train analysts to be able to monitor the performance of state banks and
make recommendations to decision-makers. These analysts would also be trained to implement
performance contracts with managers of state banks. To accomplish these goals, the
Management Performance Enhancement Commission would complement banking supervision
by overseeing performance in the largest state banks based on clearly specified commercial
criteria that would also be completely consistent with prudential regulations.
As noted above in the management information component, the financial sector database would
be designed to provide clear and quantifiable information to assess state bank management,
financial and operational performance based on commercial incentives. This would include
macroeconomic indicators honing in on reductions in fiscal and quasi-fiscal losses (or potential
revenue increases), as well as bank-specific indicators and prospects for privatization. The
database would be complementary to existing data with banking supervision, would serve senior
government officials who are managers of the state banks, and would help the commission hold
bank managers to better performance standards.
The establishment of the database should be combined with needed training and technical
assistance to increase administrative capacity and efficiency. The focus would be to build
institutional capacity to ensure bank management was performing according to contractually
agreed targets and requirements. As with state enterprises under scrutiny, this component would
help to develop the government’s technical capacity to manage large state banks and to facilitate
restructuring. These efforts would also help to reinforce efforts by banking supervision to
monitor and enforce prudential regulations as they apply to “fit and proper” standards of
management in the operation of the major state banks.
Parallel to efforts in the enterprise sector, extensive training would be provided to develop the
appropriate skills needed for government officials to analyze the financial statements of large
state banks, to approve and monitor the implementation of restructuring and commercialization
plans for these banks, to develop performance contracts based on appropriate criteria, and to
ensure that state banks contribute to economic stability and underlying safety and soundness in
the banking and financial sectors. Thus, technical assistance and training would be provided for
operational requirements, such as the development of contractual necessities for qualified experts
(domestic and international), as well as for broader governance and oversight responsibilities. A
central reporting unit focused on banks would be trained and established to analyze the financial
statements and make recommendations to decision-makers. This group would coordinate with
banking supervision as part of a broader effort to stabilize the banking system.
The commission’s mandate to monitor state bank performance would need to be clear, as would
its ability to make decisions on performance-based compensation awards, and the hiring and
dismissal of managers. The commission’s mandate would also be subject to public scrutiny,
particularly as public confidence in the banking system is a necessary condition for sustainable
economic development.
Monitoring Contractor Performance. Recognizing that some of the expertise required for
restructuring, privatization and ongoing performance evaluation would be outsourced, it would
be helpful for governments to be able to more actively and professionally administer these
arrangements and monitor performance. In many cases, governments have been too passive on
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the assumption that investment bankers, management advisory services, and other contractors
were first-rate professionals who would get the job done efficiently, within budget, and
according to schedule. In some cases, the situation was too complex for such objectives to be
met. In other cases, incompetence or unsuitability of specific contractors undermined
performance. At the other end of the spectrum, governments have sometimes meddled and
interfered, making it impossible for paid professionals to do the jobs they were contracted to do.
Given these ongoing challenges, efforts should be made to create and enhance the capacity of
government to implement privatizations of state banks with help from investment banks and
professional management companies (i.e., turnkey operations). This would require that funds be
available for transaction-related preparation requiring the expertise of investment banks and
others for due diligence, preparation of the prospectus, marketing efforts to attract interest/,
handling inquiries, etc. For this to proceed properly, the Management Performance Enhancement
Commission would be responsible for developing appropriate TORs and SOWs, as well as
handling, managing and overseeing contracting and performance. These efforts should provide
incentives for meaningful privatization accomplishments based on strategic investment, with the
objective that technical assistance, training and other assistance would lead to tangible and
measurable results at the end of a specific implementation period. In the end, the commission
would be responsible for (i) identifying the most feasible methods of privatization based on
advice supplied by international investment banks or professional management firms, including
mergers and consolidation options; and (ii) establishing financial and economic parameters to
justify the optimal transaction approach focused on long-term economic development objectives
(e.g., macroeconomic stability, increased competition, direct investment flows, market links,
increased productivity and efficiency). These would ultimately guide the government’s
privatization strategy and specific negotiating position on remaining state banks.
Post-Privatization Assistance
While CIS and Balkan countries are often faced with the challenges of restoring confidence in
banks, strengthening governance standards and public administration, and resolving
macroeconomic and structural fundamentals to increase investment flows, several CEE and all
three Baltic states are faced with the challenges of economic integration with Europe. In several
countries that are considered more advanced in the reform process, state banks remain. These are
often comparatively small at this point (by domestic and European measures), although some
exceptions remain. For example, both PKO BP and BGZ in Poland are fairly sizeable banks 165
that have taken more than a decade to restructure. In Slovenia, its largest banks remain stateowned.166 Hungary and the Czech Republic likewise have a handful of state banks. Among the
first wave of EU accession candidates from the transition countries, only Estonia has eliminated
state banks. Thus, as a catalyst to definitively close out state banking in these and other
countries, a series of post-privatization measures might be useful to consider. These would be
particularly helpful to second wave EU candidate countries (i.e., Bulgaria, Latvia, Lithuania,
Slovak Republic, Romania), as well as other countries (e.g.., Croatia) that are now performing
165
Combined, these banks had more than $21 billion in assets at end 2000.
166
Nova Ljubljanska, Nova Kreditna Maribor and SKB combined had about $8 billion in assets at end 2000.
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well, but have not received invitations for accession negotiations. This post-privatization
assistance might also provide some guidance on future activities in markets where “preprivatization” assistance might currently be useful. There is also the possibility of blending
components in places like Russia, where there would already appear to be a ready market.
More specifically, the fundamental components of post-privatization assistance would involve
fuller development of professional advisory services for banks (and mid-market firms) as well as
efforts to promote increased listings on local and regional exchanges. These forms of assistance
would be most appropriate in the more advanced transition country markets. However, they
would also be useful as a framework for large state banks in CIS and other countries that could
potentially envision privatization in the coming years (e.g., Azerbaijan, Belarus, Russia,
Kazakhstan, Ukraine, Uzbekistan).167
Professional Advisory Services. EU “first-tier” candidate countries (and some others) have
made substantial progress in recent years in restructuring and privatizing the enterprise and
banking sectors. In the real sector, legal and regulatory frameworks have been progressively
harmonized with EU directives and international standards. Corporate governance standards
have improved. Trade and direct investment have increased in total and proportion with EU
markets. Access to financing has increased. Meanwhile, for banking sectors, most major
institutions have been recapitalized and privatized, intermediation rates have increased, and
systemic financial risk has diminished as new systems and management have been put into place,
prudential regulatory frameworks have matured, and more timely and accurate financial
information have been made available to the public and to supervisory authorities.
Notwithstanding these favorable developments, a large and potentially significant number of
mid-sized banks that have been privatized have often come up short in achieving needed
managerial, operational and financial conditions for the next threshold of growth. In the banking
sector, this has often been due to their lack of strategic investment, which has kept capital levels
low and prevented the development of a broader array of fee-generating services to offset risks
associated with traditional lending and investment patterns.
There are several examples of insufficient development of professional services for mediumscale firms and banks. In the accounting and auditing realm, the Big Five 168 provide services to
the largest firms able to pay their fees, while local accounting firms primarily trained in domestic
tax accounting attend to the needs of smaller enterprises (and sometimes banks) at far lower
rates. There has been limited development of a middle-market for accounting, audit and, by
extension, needed business advisory and consulting services that are trained in international
167
Some of these countries’ state banks have received restructuring assistance. One example is Oschadny in
Ukraine, which has benefited from considerable technical assistance funded by the EU. This is consistent with the
first component—professional advisory services. However, there has been no movement towards listing of shares.
Latvia’s Unibanka likewise received assistance prior to its privatization. In other cases, they have received
investment from external sources.
168
At the time of writing this document, Arthur Andersen was still considered part of the “Big 5”, despite
significant fracturing in the post-Enron period. By the time the process winds down, the accounting profession may
be more commonly referred to as the “Big 4”.
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standards. A cursory review of the professional services market in EU leading candidate
countries shows limited investment on the part of “second-tier” accounting and audit firms from
Western markets, and limited capacity of local firms versed in IAS, ISA and other international
standards. The same has been true with law firms, as local firms are rarely versed in the skills
and contacts for modern corporate practices, while internationally renowned firms are generally
too expensive for many of the medium-sized firms and banks.
A dearth of business management and advisory firms specialized in banking and financial
services and able to prepare needed business or financial plans and market or feasibility studies
has also undercut growth. While some of these firms exist, they often lack the databases,
international contacts and experience in best practices and standards to provide mid-sized banks
with the plans needed for growth.
Some of this gap could be closed by providing technical assistance seed funds for mid-market
service providers in conjunction with criteria set by securities commissions for listing
requirements on primary stock exchanges. At a minimum, this would include a focus on the
preparation of (i) financial statements that conform to IAS and comply with securities market
requirements; (ii) business plans for banks based on merger or acquisition strategies in local
markets, and consolidation potential with larger banks whose operations are usually
headquartered in G-24169 countries; (iii) performance-based contracts to improve returns and
justify compensation patterns; (iv) restructuring plans to meet financial goals, management
performance targets, and operational efficiency measures to qualify for institutional investment
through publicly-traded exchanges; (v) market studies for increased knowledge of competitive
risks and peer comparisons; (vi) feasibility studies to clarify investment strategies; and (vii)
corporate (re)organization and tax strategies.
Bank Listings on Local and Regional Exchanges: For existing state banks, and for privatized
or private banks that remain small and are unlikely to play a useful intermediary role in the
coming years, a strategic plan focused on public listing as an objective would serve to trigger the
kinds of internal changes needed to continue as a going concern. Thus, assistance could focus on
working closely with securities commissions and institutional investors for increased listings on
exchanges. Specific technical assistance would rely on services specified above and provided by
specialized advisory services to banks as “input” for bank listings, with increased capitalization
of banks under sound ownership serving as the output goal.
Specific requirements to make this happen would be assistance for (i) due diligence of banks
when ready to be offered for sale, merger or consolidation; (ii) prospectus development; (iii)
valuation of IPO and shares; and (iv) the preparation of legal documents for distribution prior to
offering. For newly privatized banks, access to additional financing could help banks achieve
adequate levels of capital to increase liquidity channels, allow for investment in new product
offerings and services, enhance risk management capacity and systems, and build up reserves for
unanticipated losses that might otherwise lead to insolvency, forbearance, or the need for
corrective action.
169
This is a reference to the 24 OECD members from a few years back. Today, the OECD has 30 members.
126
Assistance in this regard would also be expected to improve standards of corporate governance.
Stimulating movement towards listings on publicly traded markets should also encourage
movement towards professional standards of governance, and active oversight of management
performance based on approved strategic plans. This would help to counter the often diluted and
non-strategic shareholdings of recently privatized firms that tend to be weak in their oversight of
management performance. Compensation awards for professional management and strategic
investment (including venture firms) would also more likely be based on financial incentives
made possible with IPOs on major exchanges than for banks that do not have prospects for
public trading.
Key implementation partners would be securities commissions and exchanges, mutual funds and
pension funds, insurance companies, accounting firms, and law firms. This assistance would also
serve as an outreach vehicle for securities commissions and markets to increase listings
consistent with criteria shaped by growth and stability objectives. The latter would comply with
guidance from BIS, IOSCO and the Joint Forum for Financial Stability. Meanwhile, the former
would comply with EU directives on securities markets and “collective undertakings.” In the
process, increased listings would also benefit the banking system by reducing dependence on
commercial bank credit for financing. For countries that are not candidates for EU accession,
international best practice and standards of the above mentioned groups would be considered
more than satisfactory as guidelines, while making it possible to conform to EU requirements if
and as needed.
127
ANNEX 1: Financial Profile of State Banks: 2000 (million US dollars)
Albania
Armenia
Azerbaijan
Belarus
Names of Public Banks
Savings Bank
Armenian Savings Bank
International Bank of Azerbaijan
United Universal Bank
Belpromstroibank
Belagroprombank
Belbusinessbank
Belgazprombank
Belarusbank Savings Bank
Belvnesheconombank
Assets
1,230
9
615
38
299
283
150
35
779
201
Loans
10
3
184
0
149
220
79
5
579
73
BosniaHerzegovina
Deposits
1,176
9
474
11
239
153
117
21
622
179
Capital
33
0
19
5
44
113
11
11
108
19
Net
Income
26
0
9
1
5
5
2
0
-2
0
Actual No.
Employees
N/A
N/A
N/A
2,590
5,192
7,267
N/A
419
N/A
2,126
Federation Investment Bank
62
25
N/A
59
N/A
N/A
Banjalucka Banka
42
19
27
10
N/A
N/A
Privredna Banka (PBS) Sarajevo
34
9
24
5
N/A
N/A
Central Profit
162
47
115
29
1
N/A
Gospodarska Mostar
24
8
19
3
0
82
Data unavailable for PBS Srpska Sarajevo, PBS Doboj, PBS Prijedor, PBS Gradiska, PBS Brcko, UNA
Bihac, Sipad, Postanska, Ljubljanska, Semberska, Postanska sed., Kristal, Rosvojna and Agroprom
Bulgaria
DSK Bank
588
271
492
79
8
5,697
Commercial Bank Biochim
248
72
223
23
5
N/A
Central Cooperative
95
86
67
13
0
N/A
Croatia
Dubrovacka Banka
401
153
231
14
-12
567
Croatia Banka
159
82
102
15
-11
N/A
Splitska Banka
997
462
884
67
6
1,070
Croatian Bank for Reconstruction &
Development
693
298
223
397
11
N/A
Hrvatska Postanska Bank
222
114
164
28
-21
172
Riadria Banka
172
65
128
26
-5
N/A
Czech Republic Komercni Banka
11,000 3,000
9,000
1,000
12
N/A
Ceska Exportni Banka
631
17
153
51
2
N/A
Ceskomoravka Zarucni a Rozvojavo
Banka
1,126 681
762
93
2
N/A
Estonia
No state banks left
Georgia
No state banks left
Hungary
Postbank and Savings Bank Corp
1,193 400
986
148
3
N/A
Hungarian Development Bank
738
199
328
356
-20
N/A
Kazakhstan
Halyk Savings Bank
707
342
616
48
-2
N/A
Eximbank
71
43
32
28
-4
N/A
Kyrgyz
Republic
Kairat Bank
7
0
5
1
1
N/A
Savings and Settlement Company 5
0
3
1
0
N/A
Energo Bank
6
2
5
1
0
N/A
Latvia
Mortgage and Land Bank of Latvia 123
87
59
13
1
N/A
Latvian Savings Bank
246
62
222
8
1
1,234
Lithuania
Lithuanian Savnigs Bank
830
238
711
55
-8
3,586
Agricultural Bank of Lithuania
417
201
322
32
2
1,769
FYR
Macedonian Development Bank
N/A
14
N/A
14
0
N/A
128
ANNEX 1: Financial Profile of State Banks: 2000 (million US dollars)
Macedonia
Moldova
Poland
Romania
Russian
Federation
Names of Public Banks
Assets Loans
Deposits
Capital
Net
Income
Actual No.
Employees
Banca de Economii
Powszechna Kasa Oszczednosci BP
Bank Gospodarki Zywnosciowej
Banca Comerciala Romana
Savings Bank (CEC)
EXIM Bank
Banca Agricola
35
16,627
4,408
2,769
880
203
448
13
6,872
2,033
754
56
29
313
25
15,129
3,776
1,874
750
35
471
4
594
214
539
110
28
26
3
153
24
117
26
-2
-85
N/A
N/A
N/A
N/A
12,832
N/A
5,837
Sberbank
Vneshtorgbank
Vneschekonombank
Russian Development Bank
Rosselkhozbank
Moscow Municipal Bank
Bahkir Republic Investment Bank
20,000
4,414
2,599
168
N/A
1,525
610
9,000
962
272
N/A
N/A
848
330
18,000
2,704
2,415
37
N/A
1,348
485
1,000
1,599
119
131
N/A
85
112
403
170
1
1
N/A
1
1
197,122
3,669
1,465
105
N/A
N/A
N/A
Slovak
Republic
Vseobecna Uverova Banka
3,887 1,873
2,722
278
67
Investicna a Rozvojva Banka
509
365
472
23
8
First Building Savings Bank-Prva
Stavebna Sporitelna
834
463
643
51
16
Slovak Guarantee and Development
Bank
140
2
21
103
6
Banka Slovakia
81
19
64
15
0
Slovenia
Nova Ljubljanska Banka
5,051 2,633
4,289
429
52
Nova Kreditna Banka Maribor
1,563 674
1,344
158
28
Posta Banka Slovenija
259
108
223
11
0
SKB Banka DD
1,353 742
1,142
121
2
Slovene Export Corporation
182
2
31
73
1
Slovenska Investijska Banka
133
82
101
10
0
Tajikistan
Savings Bank (Sberbank)
9
3
8
0
0
Turkmenistan Vneshekonombank
2,075 1,803
434
21
3
Data unavailable for Sberbank, Turkmenistanbank, Turkmenbashibank, and Daykhanbank
Uzbek State Joint Stock Housing
Uzbekistan
Savings Bank
142
68
101
36
2
Asaka Bank
247
149
108
138
2
Uzbek Joint Stock-Commercial
Industrial Construction Bank
435
245
338
55
2
National Bank for Foreign Economy
Activity of Republic of Uzbekistan 3,913 2,227
2,071
662
2
Ukraine
Savings Bank
390
98
333
28
-22
Export-Import Bank
400
224
245
32
10
Yugoslavia
Jugobanka Bor
241
133
103
7
0
Beobanka Belgrade
489
137
668
-263
-500
Invest Banka
1,541 919
416
68
-181
Jugobanka Beograd
1,826 1,392
171
95
N/A
Beogradska Banka
2,018 1,804
322
209
N/A
Vojvodjanska Banka
560
324
176
93
0
Sources: IMF; Bank Scope; Bulgarian National Bank; authors’ calculations
129
N/A
1,073
449
93
N/A
4,271
N/A
209
N/A
N/A
N/A
N/A
341
N/A
N/A
N/A
N/A
N/A
2,239
N/A
4,124
N/A
N/A
N/A
3,215
ANNEX 2: Financial Ratios of State Banks: 1999-2000 (in percent)
Albania
Armenia
Azerbaijan
Belarus
Names of Public Banks
Savings Bank
Armenian Savings Bank
International Bank of
Azerbaijan
United Universal Bank
Belpromstroibank
Belagroprombank
Belbusinessbank
Belgazprombank
Belarusbank Savings Bank
Belvnesheconombank
Loan Loss Equity/T Net
Reserve/G otal
Interest
ross Loans Assets Margin
88.3
2.7
3.6
N/A
0.0
0.3
ROA
2.2
-0.0
ROE
N/A
-1.2
Net Loans/ Liquid
Total
Assets/ST
Assets
Funding
0.8
100.7
0.3
0.1
12.5
3.0
3.7
2.1
62.1
29.9
80.2
11.4
N/A
N/A
N/A
N/A
17.6
14.8
39.8
24.9
31.5
13.9
9.3
18.8
22.3
24.1
13.7
11.0
11.0
2.2
2.5
2.9
0.8
-0.5
0.1
18.5
6.0
14.4
2.4
-3.1
1.4
50.0
77.8
46.9
14.2
74.4
36.4
39.3
11.4
43.8
102.6
19.1
48.4
BosniaHerzegovina
Federation Investment Bank 45.3
94.5
4.5
2.5
2.6
39.6
N/A
Banjalucka Banka
22.0
24.1
2.0
0.5
7.1
44.2
38.7
Privredna Banka (PBS)
Sarajevo
45.8
14.8
9.9
0.5
2.9
25.7
45.7
Central Profit
5.7
17.6
5.8
0.1
0.3
29.2
66.4
Gospodarska Mostar
15.1
13.1
6.1
1.7
11.9
31.7
81.7
Data unavailable for PBS Srpska Sarajevo, PBS Doboj, PBS Prijedor, PBS Gradiska, PBS Brcko,
UNA Bihac, Sipad, Postanska, Ljubljanska, Semberska, Postanska sed., Kristal, Rosvojna and
Agroprom
Bulgaria
DSK Bank
5.5
13.4
8.4
1.4
10.2
46.2
26.3
Commercial Bank Biochim 32.7
9.2
7.5
2.2
29.1
29.0
68.9
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Central Cooperative
Croatia
Dubrovacka Banka
20.6
3.6
1.5
-2.8
-59.5
38.2
25.1
Croatia Banka
43.4
9.6
3.3
-6.0
-53.7
51.4
39.9
Splitska Banka
10.4
6.8
4.1
0.6
9.7
46.4
26.8
Croatian Bank for
Reconstruction &
Development
16.3
57.3
5.0
1.7
2.8
43.0
63.4
Hrvatska Postanska Bank 11.7
12.6
2.6
-9.2
-55.0
51.4
40.5
Riadria Banka
N/A
15.3
6.0
-3.1
-17.7
37.6
16.5
Czech Republic Komercni Banka
14.0
5.2
3.7
-0.1
-1.1
31.1
44.9
Ceska Exportni Banka
N/A
8.0
5.2
0.3
3.0
11.2
8.7
Ceskomoravka Zarucni a
Rozvojavo Banka
5.7
8.2
0.5
1.8
17.3
60.4
9.6
No state banks left
Estonia
No state banks left
Georgia
Postbank and Savings Bank
Hungary
Corp
5.4
12.4
5.1
0.3
2.2
33.5
43.2
Hungarian Development
Bank
5.2
48.3
1.8
-3.0
-7.7
26.9
0.0
Kazakhstan
Halyk Savings Bank
4.1
6.7
6.0
-0.3
-3.7
48.3
44.8
Eximbank
N/A
45.4
7.6
-6.9
-14.5
69.9
14.9
Kyrgyz Republic Kairat Bank
2.0
52.0
N/A
-11.5
-86.0
0.0
25.0
Savings and Settlement
Company
0.0
19.0
N/A
0.9
4.4
0.2
115.0
130
ANNEX 2: Financial Ratios of State Banks: 1999-2000 (in percent)
Loan Loss Equity/T Net
Reserve/G otal
Interest
ross Loans Assets Margin
11.1
12.0
1.6
Net Loans/ Liquid
Total
Assets/ST
Assets
Funding
36.0
64.0
Names of Public Banks
ROA ROE
Energo Bank
0.2
1.5
Mortgage and Land Bank of
Latvia
Latvia
2.6
10.9
7.6
1.1
8.9
70.7
12.5
Latvian Savings Bank
4.5
3.3
5.6
0.6
17.8
25.4
8.3
Lithuania
Lithuanian Savings Bank
2.1
6.7
5.2
-1.0
-13.6
28.6
28.7
Agricultural Bank of
Lithuania
2.8
7.7
5.3
0.5
5.9
48.2
22.6
Macedonian Bank for
FYR Macedonia Development Promotion
N/A
100.0 6.7
3.2
3.2
N/A
N/A
Moldova
Banca de Economii
5.5
12.2
N/A
11.5
132.8 36.2
49.7
Powszechna Kasa
Oszczednosci Bank Polski
Poland
SA
4.8
3.6
5.7
1.0
29.6
41.3
5.4
Bank Gospodarki
Zywnosciowej
n/a
4.8
5.2
0.6
12.0
46.1
6.9
Romania
Banca Comerciala Romana N/A
19.5
10.3
3.6
20.1
27.2
47.4
Savings Bank (CEC)
0.8
16.5
13.6
2.7
17.6
5.8
28.1
EXIM Bank
N/A
13.7
8.0
-0.9
-7.0
14.2
99.1
Banca Agricola
13.7
-12.4
-9.3
22.2
N/A
12.6
41.9
Russian
Federation
Sberbank
12.0
7.6
9.5
2.2
29.9
44.0
48.3
Vneshtorgbank
18.2
36.2
6.0
4.7
15.0
21.8
115.1
Vneschekonombank
10.2
4.6
6.3
0.4
8.8
10.5
87.2
Russian Development Bank N/A
78.2
17.8
0.5
0.7
N/A
450.0
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Rosselkhozbank
Moscow Municipal Bank
2.3
5.6
0.3
1.0
16.1
55.6
40.6
Bahkir Republic Investment
Bank
12.3
18.3
13.5
10.3
78.7
54.0
37.0
Slovak Republic Vseobecna Uverova Banka 13.9
8.6
2.9
2.2
27.2
58.0
32.9
Investicna a Rozvojva Banka N/A
4.4
0.9
1.6
43.5
71.7
18.7
First Building Savings BankPrva Stavebna Sporitelna
N/A
6.1
1.5
2.0
35.2
55.4
12.9
Slovak Guarantee and
Development Bank
N/A
73.7
8.6
5.0
6.6
1.3
522.9
Banka Slovakia
7.2
19.6
3.2
0.7
3.3
23.4
72.8
Slovenia
Nova Ljubljanska Banka
6.8
8.5
4.7
1.1
13.1
52.1
13.1
Nova Kreditna Banka
Maribor
N/A
10.1
6.8
1.9
19.4
43.1
14.0
Posta Banka Slovenija
N/A
4.4
4.6
0.1
2.0
41.5
18.1
SKB Banka DD
N/A
9.0
4.6
0.2
1.7
54.8
18.4
Slovene Export Corporation 36.7
40.3
2.2
0.4
0.9
1.0
479.4
Slovenska Investijska Banka N/A
7.6
2.1
0.3
4.0
61.4
14.4
Tajikistan
Sberbank
N/A
0.5
N/A
0.5
95.0
37.0
20.0
Turkmenistan
Vneshekonombank
2.3
1.0
0.6
0.2
15.5
86.9
48.8
Data unavailable for Sberbank, Turkmenistanbank, Turkmenbashibank, and Daykhanbank
Ukraine
Savings Bank
N/A
7.1
N/A
N/A
N/A
25.2
N/A
Export-Import Bank
27.3
8.1
7.9
2.6
34.6
55.9
N/A
Uzbekistan
Uzbek State Joint Stock
6.0
25.6
19.5
2.1
8.8
47.7
42.3
131
ANNEX 2: Financial Ratios of State Banks: 1999-2000 (in percent)
Loan Loss Equity/T Net
Reserve/G otal
Interest
ross Loans Assets Margin
Names of Public Banks
Housing Savings Bank
Asaka Bank
4.8
55.8
7.6
Uzbek Joint StockCommercial Industrial
Construction Bank
3.9
12.8
4.7
National Bank for Foreign
Economy Activity of
Republic of Uzbekistan
1.8
16.9
2.8
Yugoslavia
Jugobanka Bor
3.1
2.8
N/A
Beobanka Belgrade
49.2
-80.9
N/A
Invest Banka
15.2
-6.3
N/A
Jugobanka Beograd
1.6
3.9
N/A
Beogradska Banka
5.4
5.3
N/A
Vojvodjanska Banka
0.0
16.6
N/A
Sources: Bank Scope; Bulgarian National Bank; authors’ calculations
132
ROA
ROE
Net Loans/ Liquid
Total
Assets/ST
Assets
Funding
33.4
69.7
60.4
63.7
1.8
13.9
56.4
36.7
0.7
0.0
N/A
N/A
N/A
0.1
N/A
4.3
0.3
N/A
N/A
N/A
0.9
N/A
56.9
54.7
28.0
59.6
76.2
89.4
57.9
62.9
N/A
N/A
N/A
N/A
N/A
N/A
ANNEX 3: Macro-Financial Ratios of State Banks: 1999-2000 (in %)
Names of Public Banks
Assets/GDP Loans/GDP Deposits/GDP Capital/GDP
Albania
Savings Bank
33.2
0.3
31.8
0.9
Armenia
Armenian Savings Bank
0.5
0.2
0.5
0.0
International Bank of
Azerbaijan
Azerbaijan
11.7
3.5
9.0
0.4
United Universal Bank
0.7
0.0
0.2
0.1
Belarus
Belpromstroibank
1.0
0.5
0.8
0.1
Belagroprombank
0.9
0.7
0.5
0.4
Belbusinessbank
0.5
0.3
0.4
0.0
Belgazprombank
0.1
0.0
0.1
0.0
Belarusbank Savings
Bank
2.6
1.9
2.1
0.4
Belvnesheconombank
0.7
0.2
0.6
0.1
BosniaFederation Investment
Herzegovina
Bank
1.4
0.6
N/A
1.4
Banjalucka Banka
1.0
0.4
0.6
0.2
Privredna Banka (PBS)
Sarajevo
0.8
0.2
0.6
0.1
Central Profit
3.8
1.1
2.7
0.7
Gospodarska Mostar
0.6
0.2
0.4
0.1
Data unavailable for PBS Srpska Sarajevo, PBS Doboj, PBS Prijedor, PBS Gradiska, PBS
Brcko, UNA Bihac, Sipad, Postanska, Ljubljanska, Semberska, Postanska sed., Kristal,
Rosvojna and Agroprom
Bulgaria
DSK Bank
4.9
2.3
4.1
0.1
Commercial Bank
Biochim
2.1
0.6
1.9
0.0
Central Cooperative
0.8
0.4
0.6
0.1
Croatia
Dubrovacka Banka
1.8
0.7
1.0
0.1
Croatia Banka
0.7
0.4
0.5
0.1
Splitska Banka
4.4
2.1
3.9
0.3
Croatian Bank for
Reconstruction &
Development
3.1
1.3
1.0
1.8
Hrvatska Postanska Bank 1.0
0.5
0.7
0.1
Riadria Banka
0.8
0.3
0.6
0.1
Czech Republic Komercni Banka
22.0
6.0
18.0
2.0
Ceska Exportni Banka
1.3
0.0
0.3
0.1
Ceskomoravka Zarucni a
Rozvojavo Banka
2.3
1.4
1.5
0.2
Estonia
No state banks left
Georgia
No state banks left
Postbank and Savings
Hungary
Bank Corp
2.6
0.9
2.2
0.3
Hungarian Development
Bank
1.6
0.4
0.7
0.8
Kazakhstan
Halyk Savings Bank
3.9
1.9
3.4
0.3
Eximbank
0.4
N/A
N/A
N/A
Kyrgyz
Republic
Kairat Bank
0.5
0.0
0.4
0.1
Savings and Settlement
Company
0.4
0.0
0.2
0.1
Energo Bank
0.4
0.2
0.4
0.1
Mortgage and Land Bank
Latvia
of Latvia
1.7
1.2
0.8
0.2
133
ANNEX 3: Macro-Financial Ratios of State Banks: 1999-2000 (in %)
Names of Public Banks
Assets/GDP Loans/GDP Deposits/GDP Capital/GDP
Latvian Savings Bank
3.5
0.9
3.1
0.1
Lithuania
Lithuanian Savings Bank 7.4
2.1
6.3
0.5
Agricultural Bank of
Lithuania
3.7
1.8
2.9
0.3
FYR
Macedonian Bank for
Macedonia
Development Promotion
N/A
0.4
N/A
0.0
Moldova
Banca de Economii
2.7
1.0
1.9
0.3
Powszechna Kasa
Oszczednosci Bank
Poland
Polski SA
10.3
4.2
9.3
0.4
Bank Gospodarki
Zywnosciowej
2.7
1.3
2.3
0.1
Banca Comerciala
Romania
Romana
8.7
2.4
6.5
1.7
Savings Bank (CEC)
2.6
0.2
2.1
0.4
EXIM Bank
0.6
0.1
0.4
0.1
Banca Agricola
N/A
N/A
N/A
7.0
Russian
Federation
Sberbank
8.0
3.6
7.2
0.4
Vneshtorgbank
1.8
0.4
1.1
0.6
Vneschekonombank
1.0
0.1
1.0
0.0
Russian Development
Bank
0.1
N/A
0.0
0.1
Rosselkhozbank
N/A
N/A
N/A
N/A
Moscow Municipal Bank 0.6
0.3
0.5
0.0
Bahkir Republic
Investment Bank
0.2
0.1
0.2
0.0
Slovak
Vseobecna Uverova
Republic
Banka
20.5
9.9
14.3
1.5
Investicna a Rozvojva
Banka
2.7
1.9
2.5
0.1
First Building Savings
Bank-Prva Stavebna
Sporitelna
4.4
2.4
3.4
0.3
Slovak Guarantee and
Development Bank
0.7
0.0
0.1
0.5
Banka Slovakia
0.4
0.1
0.3
0.1
Slovenia
Nova Ljubljanska Banka
28.1
14.6
23.8
2.4
Nova Kreditna Banka
Maribor
8.7
3.7
7.5
0.9
Posta Banka Slovenija
1.4
0.6
1.2
0.1
SKB Banka DD
7.5
4.1
6.3
0.7
Slovene Export
Corporation
1.0
0.0
0.2
0.4
Slovenska Investijska
Banka
0.7
0.5
0.6
0.1
Tajikistan
Sberbank
0.9
0.3
0.8
0.0
Turkmenistan
Vneshekonombank
47.2
41.0
9.9
0.5
Data unavailable for Sberbank, Turkmenistanbank, Turkmenbashibank, and Daykhanbank
Ukraine
Savings Bank
1.2
0.3
1.0
1.2
Export-Import Bank
1.2
0.7
0.8
1.2
Uzbek State Joint Stock
Uzbekistan
Housing Savings Bank
1.1
0.5
0.7
0.3
134
ANNEX 3: Macro-Financial Ratios of State Banks: 1999-2000 (in %)
Names of Public Banks
Assets/GDP Loans/GDP
Asaka Bank
1.8
1.1
Uzbek Joint StockCommercial Industrial
Construction Bank
3.2
1.8
National Bank for
Foreign Economy
Activity of Republic of
Uzbekistan
29.0
16.5
Yugoslavia
Jugobanka Bor
2.7
1.5
Beobanka Belgrade
5.4
1.5
Invest Banka
17.1
10.2
Jugobanka Beograd
20.3
15.5
Beogradska Banka
22.4
20.0
Vojvodjanska Banka
6.2
3.6
Sources: IMF; Bank Scope; Bulgarian National Bank; authors’ calculations
135
Deposits/GDP
0.8
Capital/GDP
1.0
2.5
0.4
15.3
1.1
7.4
4.6
1.9
3.6
2.0
4.9
0.1
-2.9
0.8
1.1
2.3
1.0
ANNEX 4: Market Share Ratios of State Banks: 1999-2000 (in %)
Names of Public Banks
Asset Share
Loan Share
Deposit Share
Capital Share
Albania
Savings Bank
63.6
5.8
71.8
13.6
Armenia
Armenian Savings Bank
4.1
1.4
5.1
0.4
International Bank of
Azerbaijan
Azerbaijan
60.9
33.8
87.0
11.9
United Universal Bank
3.8
0.1
2.0
3.1
Belarus
Belpromstroibank
16.0
10.6
20.7
12.0
Belagroprombank
15.1
15.6
13.2
30.9
Belbusinessbank
8.0
5.6
10.1
3.0
Belgazprombank
1.9
0.4
1.9
3.0
Belarusbank Savings
Bank
41.7
41.2
53.8
29.5
Belvnesheconombank
10.7
5.2
15.5
5.2
BosniaFederation Investment
Herzegovina
Bank
2.2
1.2
N/A
11.3
Banjalucka Banka
1.5
0.9
7.1
1.9
Privredna Banka (PBS)
Sarajevo
1.2
0.4
6.3
1.0
Central Profit
5.8
2.3
30.3
5.6
Gospodarska Mostar
0.9
0.4
5.0
0.6
Data unavailable for PBS Srpska Sarajevo, PBS Doboj, PBS Prijedor, PBS Gradiska, PBS
Brcko, UNA Bihac, Sipad, Postanska, Ljubljanska, Semberska, Postanska sed., Kristal,
Rosvojna and Agroprom
Bulgaria
DSK Bank
12.2
10.7
17.7
15.7
Commercial Bank
Biochim
5.2
2.9
8.0
4.6
Central Cooperative
0.9
6.6
2.0
1.8
Croatia
Dubrovacka Banka
3.0
1.6
2.9
0.5
Croatia Banka
1.2
0.8
1.3
0.5
Splitska Banka
7.4
4.7
10.9
2.2
Croatian Bank for
Reconstruction &
Development
5.1
3.1
2.8
13.0
Hrvatska Postanska Bank 1.6
1.2
2.0
0.9
Riadria Banka
1.3
0.7
1.6
0.8
Czech Republic Komercni Banka
20.8
9.6
26.8
9.3
Ceska Exportni Banka
1.2
0.1
0.5
0.5
Ceskomoravka Zarucni a
Rozvojavo Banka
2.1
2.2
2.3
0.9
Estonia
No state banks left
Georgia
No state banks left
Postbank and Savings
Hungary
Bank Corp
4.4
1.8
5.5
5.1
Hungarian Development
Bank
2.7
0.9
1.8
12.4
Kazakhstan
Halyk Savings Bank
19.3
17.2
29.0
7.0
Eximbank
3.0
N/A
N/A
3.9
Kyrgyz
Republic
Kairat Bank
7.1
0.0
7.4
3.6
Savings and Settlement
Company
5.7
0.0
4.4
4.0
Energo Bank
6.1
3.3
7.4
2.8
Mortgage and Land Bank
Latvia
of Latvia
2.8
4.8
1.9
3.9
136
ANNEX 4: Market Share Ratios of State Banks: 1999-2000 (in %)
Names of Public Banks
Asset Share
Loan Share
Deposit Share
Capital Share
Latvian Savings Bank
5.0
3.0
7.0
2.0
Lithuania
Lithuanian Savings Bank 27.4
11.8
36.5
7.5
Agricultural Bank of
Lithuania
13.8
10.0
16.5
4.4
FYR
Macedonian Bank for
Macedonia
Development Promotion
N/A
1.9
N/A
2.9
Moldova
Banca de Economii
9.3
7.0
18.9
3.8
Powszechna Kasa
Oszczednosci Bank
Poland
Polski SA
18.9
9.4
27.8
7.2
Bank Gospodarki
Zywnosciowej
5.0
2.8
6.9
2.6
Banca Comerciala
Romania
Romana
33.4
29.1
31.6
53.5
Savings Bank (CEC)
10.6
2.2
12.7
10.9
EXIM Bank
2.4
1.1
0.6
2.8
Banca Agricola
3.6
2.6
3.2
2.5
Russian
Federation
Sberbank
24.7
16.9
45.0
6.4
Vneshtorgbank
5.4
1.8
6.8
10.3
Vneschekonombank
3.2
0.5
6.0
0.8
Russian Development
Bank
0.2
N/A
0.2
0.3
Rosselkhozbank
N/A
N/A
N/A
N/A
Moscow Municipal Bank 0.0
0.0
0.0
0.0
Bahkir Republic
Investment Bank
1.9
1.6
8.7
0.2
Slovak
Vseobecna Uverova
Republic
Banka
23.6
14.1
24.2
12.7
Investicna a Rozvojva
Banka
3.1
2.7
4.2
1.0
First Building Savings
Bank-Prva Stavebna
Sporitelna
5.1
3.5
5.7
2.3
Slovak Guarantee and
Development Bank
0.8
0.0
0.2
4.7
Banka Slovakia
0.5
0.1
0.6
0.7
Slovenia
Nova Ljubljanska Banka
38.1
24.2
52.3
26.8
Nova Kreditna Banka
Maribor
11.8
6.2
16.4
9.9
Posta Banka Slovenija
2.0
1.0
2.7
0.7
SKB Banka DD
10.2
6.8
13.9
7.6
Slovene Export
Corporation
1.4
0.0
0.4
4.6
Slovenska Investijska
Banka
1.0
0.8
1.2
0.6
Tajikistan
Sberbank
N/A
N/A
N/A
N/A
Turkmenistan
Vneshekonombank
N/A
N/A
N/A
N/A
Data unavailable for Sberbank, Turkmenistanbank, Turkmenbashibank, and Daykhanbank
Ukraine
Savings Bank
6.7
2.9
9.8
4.4
Export-Import Bank
6.9
6.7
7.2
5.0
Uzbek State Joint Stock
N/A
N/A
N/A
N/A
Uzbekistan
Housing Savings Bank
137
ANNEX 4: Market Share Ratios of State Banks: 1999-2000 (in %)
Names of Public Banks
Asset Share
Loan Share
Asaka Bank
N/A
N/A
Uzbek Joint StockN/A
N/A
Commercial Industrial
Construction Bank
National Bank for
N/A
N/A
Foreign Economy
Activity of Republic of
Uzbekistan
Yugoslavia
Jugobanka Bor
N/A
N/A
Beobanka Belgrade
N/A
N/A
Invest Banka
N/A
N/A
Jugobanka Beograd
N/A
N/A
Beogradska Banka
N/A
N/A
Vojvodjanska Banka
N/A
N/A
Sources: IMF; Bank Scope; Bulgarian National Bank; authors’ calculations
138
Deposit Share
N/A
N/A
Capital Share
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
ANNEX 5: Different Arrears in Selected Transition Countries as a Percentage of GDP (in percent)
1992 1993 1994 1995 1996 1997 1998
Wage Arrears
0.9
ARMENIA
Industry
0.5
Agriculture
0.1
Transportation
0.0
Construction
0.1
Trade, Material, Supply, Procurement
0.0
Education and Science
0.1
Credit and Insurance
0.0
General Administration
0.0
Health
0.1
Other
0.0
AZERBAIJAN
Total
60.6 100.2 68.30 96.80 148.20 166.10 200.00
BELARUS
Total
30.4 13.5 18.20 13.30 23.10
BULGARIA
Total
68.8 60.6 47.5 41.7 66.3 27.9 24.1
Arrears to Banks
11.0 12.2 4.2 4.6 7.2
1.7
2.3
Arrears to Suppliers
20.2 15.2 13.8 11.6 23.2 9.2
7.7
Arrears to Workers
2.9 3.1 2.4 1.6 2.3
1.1
0.9
Arrears to Government
7.8 7.5 9.5 8.5 10.4 5.5
6.1
Arrears to Pensions
2.5 2.6 2.1 2.1 2.1
0.7
1.0
Other Arrears
24.4 19.9 15.3 13.3 21.1 9.7
6.2
CROATIA
Total
3.4 6.2 7.4
8.1
11.4
KAZAKHSTAN Arrears to Workers
1.9 3.0
KYRGYZ
Total
7.3
LITHUANIA
Total
9.3
9.0
Tax Arrears
1.1 1.1 0.8
0.7
Energy Arrears
0.3 0.6 0.3 0.2
0.1
Banking Arrears
4.4
5.1
Inter-enterprise Arrears
3.9
3.1
Arrears to Workers
5.9
5.7
5.5
MACEDONIA
Arrears to Government
Wage Arrears
4.6
4.1
7.0
MOLDOVA
Agriculture
2.1
2.1
2.4
Manufacturing
0.5
0.5
0.7
Construction
0.2
0.2
0.3
Transport
0.2
0.2
0.3
Real Estate
0.1
0.1
0.2
State Administration
0.2
0.3
0.9
Education
0.7
0.3
1.0
Health Care and Social Assistance
0.4
0.2
0.6
ROMANIA
Total Arrears
34.60 23.90 26.10 25.15 36.07 33.74 36.15
Arrears to Suppliers
22.03 15.05 13.88 13.35 16.05 11.92 15.22
Arrears to Others
4.51 3.64 3.25 3.57 6.90 6.21 6.78
Arrears to Bank
4.03 1.42 2.07 3.12 6.22 5.81 6.06
Arrears to Government
0.00 2.37 4.83 5.11 6.89 6.62 8.08
139
1999
1.3
0.6
0.1
0.0
0.2
0.0
0.1
0.0
0.1
0.2
0.0
215.60
19.20
19.9
1.0
7.0
0.9
4.3
1.2
5.6
20.1
2000
1.5
0.5
0.1
0.0
0.2
0.0
0.1
0.0
0.1
0.4
0.0
2001
1.6
0.6
0.1
0.0
0.2
0.0
0.1
0.0
0.1
0.4
0.0
22.39 19.08
14.4 11.6
6.3
16.0
4.5
1.1
0.4
0.2
0.3
0.2
0.6
0.7
0.5
42.22
18.02
9.46
6.44
8.29
2.8
0.6
0.4
0.2
0.3
0.1
0.3
0.3
0.2
2.0
0.5
0.3
0.1
0.2
0.1
0.3
0.2
0.2
RUSSIA
UKRAINE
Total Arrears
Arrears to Suppliers
Tax Arrears
Arrears to off-budget funds
Overdue Bank Credit
Arrears to Workers
Industry
Agriculture
Construction
Total Arrears
Arrears to Workers
Other Overdue Payments
0.2
0.1
0.0
0.0
7.95
9.5
14.8 13.3
6.5
3.1
0.9
2.8
23.4
10.7
4.6
4.2
3.9
0.4
0.2
0.2
0.1
6.00
0.7
0.4
0.2
0.1
13.00
1.6
1.0
0.3
0.3
24.00
0.8
0.5
0.2
0.1
20.00
29.1
12.8
6.0
5.7
4.6
1.7
1.1
0.3
0.3
85.00
5.0
6.00 13.00 20.00 24.00 80.00
47.8
21.4
8.3
9.0
9.1
30.3
13.0
5.8
6.3
5.2
23.7
10.1
4.9
4.6
4.1
1.9
1.2
0.3
0.4
98.00
6.0
92.00
0.7
0.4
0.2
0.1
0.4
0.2
0.1
0.1
Wage Arrears
1.00 5.1
5.5
6.4
5.0
2.8 2.2
Note: Enterprise arrears to government may not equal tax arrears since tax arrears include household arrears and enterprise
arrears to government can include other forms of arrears.
140
ANNEX 6: ROMANIA: THE CLOSING OF BANCOREX170
The story of Bancorex highlights the failure of an institution that long served as the key financial
intermediary to implement the government’s poor macroeconomic policies and sustained support
for loss-making state enterprises. Such operations ultimately led to the point where its losses
were unsustainable, leading to the bank’s liquidation in 1999.
Bancorex (BX), the former foreign trade bank, was the largest and most troubled of the four fully
state-owned banks in Romania prior to its closure in 1999. Accounting for about one-fourth of
total banking sector assets in the early to mid-1990s, BX financed a significant portion of
Romania's energy import requirements, as well as imports of capital goods. BX was also used by
the authorities as a major vehicle to subsidize the state-owned energy sector and energy-intensive
industrial sector, also primarily controlled by the state. Most of BX’s clients had very poor
prospects for repaying loans, not just because of their inefficiency and poor management
practices, but also due to external constraints (particularly price controls) that they faced. The
legacies of subsidized loans, years of mismanagement, and behind-the-scenes political dealings
rendered BX the most troubled bank in the wake of exchange rate and price liberalization in
early 1997. As BX was greatly exposed to debtors who traditionally relied on directed credit and
the highly subsidized exchange rate, the termination of National Bank of Romania's (NBR)
directed credit and exchange rate liberalization in 1997 made it unequivocally evident that the
bank was insolvent.
At the end of 1997, BX received the equivalent of $600 million in government bonds (2 percent
of GDP) to restructure its nonperforming loans in the portfolio. However, the restructuring of
BX, which was to accompany the recapitalization, never took place. Although a new
management team was appointed in April 1998 and other steps were taken, a comprehensive
restructuring plan was never implemented and the bank's situation deteriorated further. When BX
was again in crisis in late 1998, the authorities considered restructuring measures with a view to
privatizing the bank, although international experience would have favored liquidation. The
authorities were concerned about the systemic risk of liquidation, and proposed an up-front
recapitalization, followed by restructuring and privatization. However, as the depth of the bank's
problems became more fully known, it was clear by early 1999 that BX was in much worse
shape than expected, and that privatization after recapitalization would be prohibitively costly. A
recapitalization would have required up to $2 billion from the budget, or almost 6 percent of
GDP.
An estimate at the end of February 1999 put the nonperforming loans of BX at about 85-90
percent of its loan portfolio, or $l.7 billion (5 percent of GDP; this number increased as more
became known about BX during the process of closing the bank), with most of the portfolio
170
Alex Pankov is the author of this annex. Sources used include (i) C. James, Banking and Financial Sectors
in East and Central Europe. Financial Times Management Reports, 1993; (ii) BankScope, Bancorex Report, 1998;
(iii) International Monetary Fund, Romania: Selected Issues and Statistical Appendix, 2001; and (iv) internal World
Bank and IMF Reports.
141
being in foreign currency. At that time, Bancorex accounted for one fourth of total banking
system assets and 47 percent of all foreign currency loans. Finally, in April 1999, BX collapsed
in a liquidity squeeze as depositors lined up to withdraw their money. It became clear that a rapid
liquidation was the only solution which would avoid further runs on the bank and a systemic
crisis during a fragile external economic period. Realizing the magnitude of BX's problem, in
April 1999, the authorities finalized a liquidation plan aimed at the orderly removal of BX from
the banking system
The final resolution of BX was completed in the following manner:

Following the appointment of a special administrator to replace BX's management
(February 1999), all bad assets at the end of 1998 were transferred to the newly
established Asset Recovery Agency (AVAB) for loan workout and debt recovery by July
31, 1999.

Some of the deposit liabilities and most foreign debt liabilities were transferred to
another state-owned bank, Romanian Commercial Bank (BCR), while a large part of the
deposits were withdrawn before July 31, 1999, owing to delays in transfers. The NBR
provided special credit to staunch the financial hemorrhage of the bank. Both BCR and
the NBR were compensated by government securities in corresponding currencies.

The remainder of BX was merged with BCR, which absorbed the balance sheet of BX,
as the authorities considered an actual liquidation politically unacceptable and too
lengthy to complete. BCR received government securities to compensate for the hole in
BX's balance sheet, and was given the right of first refusal on any BX assets transferred
(on and off the balance sheet).

The government approved the withdrawal of BX’s banking license on July 31, 1999
(effective August 2).

The final absorption of BX by BCR was completed in September of 1999, while BCR's
exercise of its right of first refusal of the BX assets, which were transferred to AVAB in
exchange for government securities, continued well into 2000. The Ministry of Finance
also agreed to guarantee BX's more than $400 million in off-balance sheet items
transferred to BCR.
The closure of BX removed a large destabilizing factor in the Romanian financial system, albeit
at a very heavy cost to the taxpayers, and removed some $2 billion in non-performing assets
from the banking system, which helped to improve the general soundness of the system. In this
process, the government took on public debt amounting to $1.5 billion (net of provisions and
other assets) or 4.5 percent of GDP in 1999. To this cost should be added the 1997
recapitalization of $500 million; the assumption by the government of off-balance sheet items;
and legal liabilities (the exact amount of which is still unknown)
It should be noted that the heavy fiscal costs incurred in connection with the liquidation and
closure of BX are mostly the realization of losses which were actually incurred before 1997,
caused both by the use of BX as a vehicle for quasi-fiscal payments and by the mismanagement
of the bank. Estimates indicate that nonperforming loans before the recapitalization of 1997
142
amounted to about $1.5 billion, and much of the off-balance-sheet and legal liabilities had been
incurred before then as well. It should also be emphasized that delays in the overall process may
have increased the cost to the taxpayers by as much as several hundred million dollars.
143
ANNEX 7: UKRAINE: THE LIQUIDATION OF BANK UKRAINA171
Bank Ukraina (BU) was one of the four state-owned specialized banks that were spun off from
the Soviet All-Union banks as Ukraine gained its independence from in 1991. Throughout the
1990s, BU remained one of the largest banks in Ukraine, employing (in October 2000) 16,600
people in a large network of 512 branches. The bank mainly concentrated its lending activities in
the agricultural sector, while the other state banks specialized in industrial lending
(Prominvestbank), social programs (Ukrsotsbank), and household savings (Oschadny Bank; see
Box 5.2, above). A fifth state bank, Ukreximbank, was formed in 1992 to process Ukraine’s
foreign trade payments.
All specialized banks but Oschadny and Ukreximbank were corporatized (and thus nominally
privatized) in the course of 1992, primarily via “ownership transformation” whereby a number of
large state-owned enterprises took substantial ownership shares in the banks that serviced their
sectors. During the ensuing years, the ownership structure of BU and other similarly corporatized
banks became even more complicated. This change was largely the result of a 1993 order by the
Government that all state enterprise shares in these banks should be transferred to the Ministry of
Finance. This prompted the banks to devise a method of transferring ownership through the
distribution of shares to the employees of client enterprises, and of the banks themselves. Thus,
ownership of BU and the other two former state banks became divided among tens of thousands
of shareholders, most of them individuals.
Not surprisingly, decision-making within these banks was not controlled in a meaningful way by
the shareholders. Most major policy and personnel decisions were still made by top managers of
the state enterprises that were majority shareholders prior to the share redistribution. In the
absence of a major outside entity owning a controlling stake, this meant that the state continued
to exercise considerable indirect and informal influence in those three banks’ affairs. In the case
of BU, the government also exerted direct influence on the decision-making process by retaining
a residual state shareholding of at least 13 percent until 1998, when it was finally sold for cash (it
was later alleged that the package was undervalued). Specifically, the government seemed to
manage the institution through the Ministry of Agriculture, Ministry of Finance, and the National
Bank of Ukraine (NBU). Additionally, regional authorities appeared to exercise some control
over regional offices. This complicated governance structure was harmful to the financial
position of the bank, and effectively turned the bank into a series of regional banks operating
under the same name.
Personal links of BU with the government appeared to be, at the beginning of transition, a good
source of financing and profit. Major decisions on channeling budget funds, financing individual
projects, or attracting more lucrative enterprises as bank clients were made in agreement with, by
171
Alex Pankov is the primary author of this annex. Sources include (i) World Bank mission reports; (ii) A.
Roe, et al. “Ukraine: The Financial Sector and the Economy,” World Bank Report, 2001; (iii) Intellinews reports;
and (iv) Ukrainian News Agency.
144
recommendation of or under pressure from government authorities. However, despite a number
of benefits that BU received from the Government during these years (e.g., free access to budget
funds, state procurement contracts, government guarantees for trade finance deals, etc.), by the
late 1990s, the BU ended up with a large proportion of bad assets on its balance sheet. This
resulted from poor management quality, unmanageable liabilities, and serious external
interference with BU’s daily banking operations and strategic decisions. To make things worse,
the bank’s dire financial position was long obscured by inaccurate loan classification practices
and low levels of loan provisioning that resulted in a serious overestimation of assets and capital.
The continuation of government-directed loans to non-viable state-owned enterprises that were
approved under some form of “instruction” by local governments, ministerial resolutions, or
presidential decrees proved to be particularly harmful to BU’s financial health. This was because
most of the directed loans were never intended to be repaid. When the bank prepared a list of
government-directed loans in 2000, only UAH 75 million ($13.8 million) were formally
acknowledged by the government,172 leaving UAH 433 million ($80 million) unacknowledged.
The analysis of the loan portfolio also revealed highly controversial lending to shareholders of
the bank, to daughter companies, and to affiliated companies. As an example, two BU
shareholders—Atlanta International (UAH 31 million) and Association Interagro (UAH 92
million—appeared on the list of government-directed loans as well.
The situation of the bank deteriorated dramatically from 1998. Its share of bad loans became
unsustainable even by Ukrainian standards, and BU had to rely on central bank credits be
maintain its liquidity position. The IMF-led diagnostic review of the bank in the same year
confirmed its deep insolvency. The state-protected bank came to be seen as having wasted the
country's financial resources by subsidizing loss-making industries and the largely unreformed
agricultural sector. In November 1998, after considering renationalizing the bank, the authorities
finally put it into a rehabilitation program, and in June 1999, the NBU instructed BU to sign a
Commitment Letter aimed at bank recovery. However, the bank failed to comply with the targets
of the recovery program. Given the high level of deterioration in its loan portfolio
(approximately 75 percent of which was non-performing by the end of 2000, although estimated
as high as 90 percent if reclassified under IAS), negative liquidity, and capital erosion, the bank's
financial condition became dangerous enough to be a potential threat to the entire banking
system. This resulted in the introduction of the Provisional Administration in the bank as of
September 25, 2000.
After extensive analysis of BU’s situation conducted by the World Bank in early 2001, the
government came to realize that there was no alternative to immediate and orderly liquidation.
Under a recast IAS balance sheet at year-end 2000, BU's capital shortfall amounted to UAH 900
million, with UAH 650 million of loan loss provisions (about 56 percent of total assets) required
to cover the level of non-performing loans. The World Bank concluded that there was no
prospect of the bank becoming commercially viable or self-sustaining, even if it were recapitalized to achieve minimum capital adequacy standards, as the temporarily improved income
This included Ukraine’s state-controlled energy company, NAFTA K, which was on the list of the biggest
borrowers as well as on the list of government-directed loans. Total exposure to this company was UAH 179 million
($33.2 million).
172
145
stream would be steadily reduced by continued and rising nonperformance. The government had
no plans to cover the capital shortfall, and no potential third parties were willing to lend to BU or
provide additional capital. There was thus no viable means by which the bank could obtain the
liquidity and capital necessary to continue its operations.
The World Bank analysis demonstrated that BU’s role as a provider of credit to Ukraine’s vital
agricultural sector would not be an obstacle to bank’s liquidation. First, BU allocated only $25
million per year over 1999-2000 to the agricultural sector. This annual amount of credit was
negligible, relative to the size of the Ukrainian agricultural sector (which has a turnover of about
$8 billion per year). Second, BU had ceased to allocate these credits already, since the
appointment of a provisional administrator in late 2000. BU simply did not have resources to
provide new agricultural loans.
On July 16, 2001, after three years of delays and political infighting, NBU annulled BU’s
banking license and effectively launched the bank liquidation procedure. In parallel, the
Prosecutor-General’s Office launched a criminal investigation against the bank’s board of
directors, who were suspected of abuse of office. The liquidation procedure, prepared with
assistance from the World Bank, is coordinated by the Agency on Bankruptcy Issues. The World
Bank’s technical assistance included advice on the deposit compensation process, loan workouts
and debt recovery, staff retrenchment and compensation, and agricultural finance reform in the
wake of BU’s demise.
The issue of dealing with 1.5 million individual deposit accounts (totaling UAH 271 million, or
$50.2 million) represented a special challenge to the authorities in view of the potential for panic,
and the impact this could have for the banking system as whole. According to the liquidation
plan, individual depositors are entitled to full compensation from the Deposit Insurance Fund of
up to UAH 500 ($92.6) per account. There stands to be a substantial loss for a small number of
individual household depositors exceeding this limit, as well as corporate depositors and BU’s
creditors, including the NBU, who will have to wait for proceeds from the debt recovery process
that is expected to last at least two to three years.
Given the highly politicized nature of BU’s resolution process, it is too early to judge the success
of the bank’s long-delayed liquidation, and its final cost to the taxpayers. The latter figure is
likely to be in the tens of millions of dollars, as the total outstanding NBU credit to BU alone
amounts to UAH 398 ($73.7 million), a result of state-directed credits to agro-enterprises and
liquidity support for the bank from 1996-99. It also remains to be seen whether the authorities
will be able to draw any lessons from the BU disaster. Already, vague plans have been voiced at
the highest levels of the Ukrainian government to recreate a state agricultural bank using the
branch network and infrastructure left by BU.
146
ANNEX 8: UKRAINE: OSCHADNY BANK173
Oschadny Bank, the traditional state savings bank, was formed as a specialized savings bank
under the initial reforms introduced after Ukrainian independence in 1991. Prior to that,
Oschadny was a part of the larger Gosbank system, specializing in deposit safekeeping, pension
payments, transfers, utilities payments, and other services at the retail level. In contrast to the
three other remnants of the Gosbank system (Bank Ukraina, Prominvestbank, and Ukrsotsbank)
that were privatized (at least nominally) in the early 1990s, Oschadny remains fully state-owned
to date.
Oschadny, although a small bank by international standards, is one of the largest banks in
Ukraine. As of late 2000, in addition to headquarters (in two buildings), SB had 26 full service
regional offices, 450 branches (full service district offices), 7,847 outlets, and 24 agencies.
Staffing was 38,015, or 35,227 on a full time-equivalent basis. In many rural locations, the bank
is the only formal financial institution providing basic payment services and deposit safekeeping.
In this regard, Oschadny has about 25-30 percent of total household deposits in the banking
system. Thus, on a comparative basis with other banks in Ukraine, Oschadny is the leading
institution in mobilizing household deposits, mainly in local currency. Nonetheless, its
importance in this area is mitigated by general monetary patterns indicating that only 9.8 percent
of total deposits held with banking institutions are held with Oschadny. This suggests that most
enterprise and foreign currency deposits are placed with other banks (or held outside the banking
system), and that its aggregate deposit holdings in the end are not so significant that a major
change in Oschadny’s operations and status would in any way destabilize Ukraine’s financial
markets. To the contrary, continued loss-making operations, excessively risky lending,
investment, and off-balance sheet financing (via guarantees, trade finance, etc.) to enterprises,
and financing to third parties through subsidiaries, affiliates or other conduits represent far more
serious risks to system stability than a reorganization of Oschadny under current circumstances.
The total amount of household deposits in Ukraine was only about $330 million in late 2000,
small for a country of 50 million. Thus, while perceived to be “large” in Ukraine, Oschadny is
not really a significant bank in terms of aggregate intermediation, reflecting the comparative
insignificance of banking and financial intermediation in the economy.
Similar to other state and quasi-state banks, Oschadny’s financial situation deteriorated in the
late 1990s, due to the lack of restructuring earlier in the 1990s, as well as management and
operating practices common to government-controlled banks in Ukraine that have proven to be
financially unsustainable. The bank is characterized by a series of weaknesses, including (i) high
operating costs associated with excessive branch structures and employment, and other operating
inefficiencies; (ii) government-directed lending that has resulted in a substantially impaired
portfolio, reduced levels of earning assets, and after-tax losses; (iii) ongoing governance
problems associated with central and regional government involvement in decision-taking, and
with the wholly non-transparent interventions of key business groups connected to the bank’s
173
Alex Pankov is the primary author of this annex. Sources include (i) World Bank mission reports; (ii) A.
Roe, et al. “Ukraine: The Financial Sector and the Economy,” World Bank Report, 2001; and (iii) the Ukrainian
News Agency.
147
management and related authorities; (iv) the inability or unwillingness of the government to
honor financial obligations to the bank in the form of payments on guarantees and capital
contributions; and (v) lagging performance in the upgrading of management systems and
informational technologies to lower costs, and to enforce centralized policies on the bank’s
regional offices.
Oschadny experienced after-tax losses of $22 million in 2000. There is a possibility that these
and other cumulative losses from before (as well as since 2000) are understated due to
questionable loan classification standards and overvalued collateral. Thus, the financial condition
of Oschadny may be more serious than reported. Beyond that, there is the ongoing risk that
Oschadny’s condition may worsen due to its efforts to aggressively increase lending, reflecting
its desire to grow out of its problems. Oschadny was appointed by the government in mid-2000
to act as the authorized bank to service clearing accounts of electricity utility companies and
their branches. Oschadny performed this responsibility until October 2001, and the potential
losses from these operations and incremental lending remain to be seen.
Solving the problem of Oschadny depends largely on the willingness and capacity of the
Ukrainian authorities to take decisive action in terms of governance and strategy. Although strict
market logic argues for the bank’s closure, its central place in Ukraine’s social fabric makes this
solution unlikely in the foreseeable future. To reverse current losses, the bank’s management has
pursued a cost-reduction strategy by closing some non-viable offices and releasing staff. The
bank closed 148 branches and 2,933 operational offices (agencies) from January 1, 1998 to
December 31, 2000. However, the financial and institutional gap is still so large that it is
questionable whether Oschadny can become competitive without a major restructuring and cost
reductions, coupled with large volumes of financial assistance from the government. Preliminary
estimates in early 2001 indicated that Oschadny would need to reduce its costs by about 40
percent to achieve breakeven.
The key condition for stabilizing the situation requires that Oschadny not be used as a quasifiscal institution, or as a vehicle for directed lending as it so often has been in the past. As shown
by the case of energy companies’ accounts, the bank still has a severe problem in terms of
corporate governance, with a high level of politicization of management decision-making. This
subjects the institution and government (as its sole shareholder) to a high level of financial risk,
and points to the need to promote more professional practices at the supervisory and
management board levels. At a minimum, safeguards need to be put in place to ensure that
Oschadny decision-making is grounded in commercial principles. During the restructuring
period, any "social" or "governmental" activity should be insulated from the bank’s balance sheet
and subject to commercial pricing. Any lending or investment should be explicitly guaranteed (in
documented form) so that Oschadny is utilized strictly as an agent that assumes no risk.
There is a risk that, to avoid the social consequences of closure and liquidation, the government
will permit SB to seek to grow out of its problems, attempting to leapfrog from its current status
as a specialized savings bank to a full-service "universal" bank. This is an extremely dubious and
high risk strategy, due to the weak financial condition and limited institutional capacity of the
bank. Under such circumstances, it is almost certain that Oschadny would assume more risk than
is prudent, to generate high earnings and fund its accumulated losses. Adverse selection becomes
148
a strong possibility under such circumstances, especially since the bank does not have the
systems or the experience to accurately measure risk and return.
Even with the best of intentions, the bank’s restructuring will be costly and time-consuming in
terms of management, operations and finance. It will also be complex due to the weakness of
information regarding its extensive branch network, the need for a more modern personnel
management system, and the determination of retrenchment levels as part of the effort to reduce
the cost structure of the bank. For these reasons, Oschadny’s restructuring can be expected to
take years, consume significant management time and energy, and present a major cost to
Ukraine’s taxpayers.
149
ANNEX 9: CZECH REPUBLIC: CESKA SPORITELNA174
In 2000, the Czech government sold Ceska Sporitelna, the state savings bank and the country’s
second largest bank, to Erste Bank of Austria. The sale brought to a close one of the
government’s most lengthy and difficult bank privatizations. It also helped pave the way for the
privatization the following year of the Czech Republic’s largest remaining state-owned bank,
Komercni Bank. However, the sale of Ceska Sporitelna came at great expense to the government
as it followed several years of consolidation and restructuring that culminated in a massive
government bailout during the final year before the sale. The government strategy proved far
more costly than originally expected and, most likely, than if it had pursued privatization more
vigorously at an earlier stage.
First Phase of Bank Privatization
Founded in 1825, Ceska Sporitelna was the state savings bank during the socialist era and
remains the largest retail bank in the Czech Republic. As of 2000, it had $12 billion in assets, a
34 percent market share in retail savings, and a network of 934 branches. As part of the Czech
government’s financial sector restructuring during the mid-1990s, Ceska Sporitelna was included
in the first wave of Czech privatization programs.
Recognizing that the commercial banks created from the monobank system inherited significant
stocks of non-performing loans from the central planning era, the government developed a twostaged program to financially restructure and then privatize the new banks.175 A total of 37
percent of the Ceska Sporitelna’s shares were offered for vouchers and 20 percent was sold to
towns and municipalities, while 40 percent was retained by the state. The government pursued
this policy as well for its other three major state-owned banks, including Komercni, Investicni,
and Obchodni. By the end 1995, these four banks in total accounted for 62 percent of banking
system assets, and were 47-63 percent divested by vouchers, with the state-owned National
Property Fund retaining the largest block. While not fully privatized, these banks were
effectively “corporatized” with the expectation that full privatization would occur after
additional restructuring and as accession to the EU neared.
Acceleration of the Privatization Process: Toward a Strategic Investor
Despite these measures, Ceska Sporitelna languished in this quasi-privatized status until mid1999, when the government began to speed up its planned sale of a majority stake in the bank. In
the meantime, the bank’s prospects had been hurt by poor lending decisions that resulted in an
increase in non-performing loans. By mid-1999, the bank was expected to lose $389 million—
the equivalent of more than half of the bank’s capital. According to reports at the time, the bank
needed to cover the loss by writing off part of its capital, which would then result in its capital
174
Alex Gross is the author of this annex. Sources included (i) M. Borish, W. Ding, and M. Noel, On the Road
to EU Accession: Financial Sector Development in Central Europe. World Bank Discussion Paper No 345, 1996;
(ii) Economist Intelligence Unit, country reports (various), 1999 and 2000; and (iii) US Department of Commerce National Trade Data Bank, November 3, 2000.
175
Borish, Michael, Wei Ding, and Michel Noel, On the Road to EU Accession: Financial Sector
Development in Central Europe. World Bank Discussion Paper No 345, World Bank, Washington DC 1996.
150
adequacy ratio falling below the legal minimum set by the Czech National Bank. This forced the
state to intervene to recapitalize the bank, and increased the incentive for the government to
privatize the bank.176
Although several foreign banks expressed an interest in Ceska Sporitelna, the government felt
that some of their offers insufficiently valued the bank’s franchise. Rather than launching a
formal tender, the government entered exclusive negotiations with Erste. In the end, although
Erste raised its bid, the bank paid only approximately 1.55 times book value for the Ceska
Sporitelna.177 The state also was forced to make significant concessions. In particular, it gave
Erste Bank five-year guarantees on about half of Ceska Sporitelna’s loans. Prior to the sale,
approximately $1.1 billion of non-performing loans were transferred to the state, which also
increased the bank’s share capital by $201 million to bolster attractiveness to foreign buyers.
The state had a strong interest in privatizing Ceska Sporitelna. Most importantly, in doing so, the
state rid itself of responsibility for the bank’s losses before the bank’s market position slipped
further, making it less appealing to a strategic investor and bringing on further losses. It marks
government divestiture of one of its last two major state-owned banks—a hurdle that to date had
stood in the way of EU accession.
Ceska Sporitelna has been a loss-making bank and will also need serious restructuring of its
large network of branches, as well as a strategy for dealing with more than 16,000 employees.
Erste Bank took on the bank primarily because it has significant long-term interests in the region,
and was keen to establish a foothold in the Czech market. It was attracted by the potential cost
savings that could occur with a rationalization of operations. Both Erste and Ceska Sporitelna are
retail banks offering a similar range of products, including investment funds, leasing and
insurance. In the deal, Erste also committed itself to a major capital increase at Ceska Sporitelna,
setting aside $571 million for housing and small business programs, and providing an additional
$29 million for venture capital.178
The Ceska Sporitelna privatization offered important lessons for the government as it pursued its
last major privatization with Komercni Bank the following year. Like Ceska Sporitelna,
Komercni Bank suffered huge losses from non-performing loans and required two massive
government bailouts. Many potential bidders in the Ceska Sporitelna case were not interested
because details of the bailout were unclear. As a result, the government entered a bidding process
with only one major bidder. The Komercni privatization was pursued with such lessons in mind.
176
Economist Intelligence Unit, country reports (various), 1999 and 2000
177
Ibid.
178
US Department of Commerce - National Trade Data Bank, November 3, 2000
151
ANNEX 10: RUSSIA’S SBERBANK179
Sberbank, the Russian state savings bank, occupies a unique place in the banking system as it is
by far largest bank in the country. With more than $20 billion in assets, nearly 200,000
employees, and 21,000 branches, Sberbank has the widest network of any bank throughout the
country. It has a virtual monopoly of the county’s deposits, with an estimated three quarters of
retail ruble deposits in 2000 and an estimated 50 percent of foreign currency deposits in late
2001.
Recent indicators show that Sberbank controls approximately 23 percent of the banking system
assets. In addition, its share of total bank loans has grown rapidly since the 1998 crisis,
increasing from 12 percent in 1998 to more than 25 percent in 2000. These figures reflect the
bank’s considerable market power, accounting for up to 75 percent of commercial lending in
some regions. In 2000 a ranking of international banks by “The Banker” placed Sberbank as
301st in the list of the world’s largest banks.
The Role of Sberbank in the Early 1990s
During the last decade, Sberbank has continued to play the role of a traditional state savings
bank, despite the numerous rapid changes and developments in the banking sector. Sberbank was
created as a joint-stock company in 1991 during the government’s reform and restructuring of
the banking sector. It was at this time the government broke up the two-tier system, consisting of
the Gosbank (the central bank) and five specialized banks that had existed in the Soviet Union
since 1987. This reform allowed for private banks to exist for the first time, and led to the
creation of some 800 new banks taking the capital of the previous state banks. Sberbank was the
largest among these banks, and one of the first to be “privatized,” with its major shareholder
becoming the Central Bank of the Russian Federation.
Sberbank’s Role Since the 1998 Financial Crisis
The dominance of state banks in Russia is high and has been increasing since the financial crisis
in 1998. Sberbank emerged from the crisis with a stronger market position than ever before.
While thousands of people lost their savings with the collapse of some of Russia’s leading banks,
including Inkombank and SBS-Agro, Sberbank benefited from a government retail depositor
protection scheme, whereby depositors were encouraged to transfer their deposits to Sberbank.
This helped strengthen Sberbank’s public image as a secure financial institution, and reinforced
the perception that the bank was “too big to fail.”
The 1998 crisis also led to a shift in some of the bank’s operations. Before this time, Sberbank
invested most of its assets in government securities. Since the crisis, it has aggressively expanded
its lending to the corporate sector. The bank has established itself as the dominant source of
179
Alex Gross is the author of this annex. Sources include (i) M. Fuchs, Building Trust Developing the
Russian Financial sector (draft), World Bank, 2002; (ii) A. Aslund and R. Layard, Changing the Economic System
in Russia, 1993; (iii) Sberbank Annual Report, 2000; and (iv) M. Builov, “Who Owns Russia,” The Russia Journal,
2002.
152
loans to large Russian corporations, such as oil, gas, chemicals, construction, and trade
enterprises, and to state and municipal bodies.
The Future of State Banking in Russia
Sberbank’s continuing dominance reflects the unwillingness of the government to address some
fundamental policy issues that affect development of the financial sector. Sberbank has several
advantages, including its (i) large branch network with a broad geographic distribution; (ii)
perceived state guarantee on deposits; (iii) strong internal payment system; and (iv) key role in
distributing state pension payments. However, its dominant position in the sector comes with
significant costs to the system as a whole, not the least of which is the detrimental impact on
competition in the banking sector. The government’s involvement in Sberbank also presents an
inherent conflict of interest, as the Central Bank is not only the owner of the largest bank, but
also the supervisor and the state authority responsible for monetary policy.
The Russian government’s involvement in the banking sector is not limited to Sberbank alone. A
recent study commissioned by the government itself revealed that state organizations hold stakes
in more than 469 banks throughout the country. While most of the shares are small, the state has
blocking shares in 45 banks. The government has announced that it plans to divest ownership in
all banks where the public share is less than 25 percent. While this will reduce the number
dramatically, it means the government will leave Sberbank—and several of its other largest stateowned banks—largely untouched.
153
ANNEX 11: LATVIA: THE RESTRUCTURING AND PRIVATIZATION OF
UNIBANKA180
The case of Unibanka represents a success story among transition countries. While it initially
engaged in activities that undermined the quality of its loan portfolio and put bank capital at risk,
its restructuring exercise proved successful, as reflected in its ability to withstand systemic
weaknesses in the mid-1990s and to attract strategic investment in the second half of the 1990s.
The history of Unibanka is an integral part of the general transformation of the Latvian banking
system from its earlier monobank roots to its current two-tier system. Following the breakup of
the Soviet Union, Latvia found itself in much the same position as the other FSU countries. It
inherited branches of the specialized Soviet banks: the Savings Bank (Latvijas Krajbanka), the
Agricultural Bank, the Industry and Construction Bank, the Housing and Social Development
Bank, and the Foreign Trade Bank. In addition to the inherited problems of large non-performing
loan portfolios and management who were unused to lending along commercial lines, the
branches were suddenly cut off from their former head offices. Moreover, the banks found that
the authorities in Moscow were unwilling to pass on to the newly independent branches the
assets needed to cover substantial portions of their liabilities.
Unlike most of the other newly independent countries that converted these branches directly into
nationally owned specialized banks corresponding to the old Soviet banks, the Latvian
government placed all of the branches of the specialized banks (except the branches of the
Savings Bank) under the direct supervision of the Bank of Latvia (the Central Bank). These
branches dominated the credit business, since the Savings Bank, initially, did not make loans to
either private or public enterprises. As a result, at the end of 1991, the 45 branches controlled 83
percent of all credit to business and also held three-quarters of enterprises’ demand deposits.
In comparison to its Baltic neighbors, which generally kept the individual specialized banks
separate, this strategy allowed the Latvian government a wide range of options. The government
could sell the branches to the emerging private sector; privatize them either individually or in
groups; or structure one or more state banks. However, it also gave the Bank of Latvia a great
deal of responsibility at a time when both the sector and the Central Bank itself were undergoing
dramatic transformation. In practice, the Bank of Latvia did not play an active role either
promoting governance or encouraging the branch managers to run the banks according to strict
commercial criteria. Therefore, the managers, who had little experience in commercial banking
and little loyalty to their new managers at the Bank of Latvia, found themselves with a great deal
of discretionary power during extremely difficult external conditions. The result was that the
branches developed significant volumes of non-performing loans.
By 1993, the Government decided on a strategy for dealing with the remnants of the state
banking sector, using a combination of the above mentioned approaches. It was decided to keep
the Savings Bank in the public sector and submit it to considerable institutional development
Alex Pankov is the author of this annex. Sources include (i) A. Fleming and S. Talley, “The Latvian
Banking Crisis: Lessons Learned,” World Bank Research Paper, 1996; (ii) Fitch Credit Agency, Unibanka Rating
Report, 2000; (iii) BankScope, Unibanka Reports, 1999-2001; and (iv) the Baltic News Service.
180
154
support and bring in new management prior to privatizing the bank in due course. The main
remnant was dealt with in three ways. First, nine branches were sold to private commercial
banks. Second, 15 of the branches were consolidated into eight new private commercial banks.
Finally, on September 28, 1993, the rump of 21 branches was structured into one state bank – the
Universal Bank of Latvia, or Unibanka – and subject to intense institutional development
supported by the World Bank, the Government of Switzerland, and the European Union. Most of
the bad loans were concentrated in the branches that constituted this bank (40 percent of total
assets in March 1994). As part of the rehabilitation process, these loans were taken off
Unibanka’s books and replaced with seven-year Government bonds in the amount of LVL 25
million ($50 million). As a result of rapid growth in credit provided by private banks, Unibanka
accounted for only seven percent of total credit by the end of 1994 and was the country’s second
largest bank in terms of assets.
One of the main reasons cited by the Government for creating Unibanka was to provide an
insurance policy against catastrophic failures in the private banking sector. This logic was put to
serious test in the first half of 1995, as the insolvency of the country’s largest bank (Bank Baltija)
triggered the systemic crisis in which about 40 percent of the assets and liabilities of the banking
sector were lost, and seven banks, including three of the 10 largest banks, had collapsed.
Although the crisis had a large effect on both large state banks, neither Unibanka nor the Savings
Bank was directly involved in the crisis and neither bank needed to be closed or bailed out.
Unibanka, which was already healthier than the Savings Bank, was not as badly harmed as the
Savings Bank. Since deposits from individuals accounted for the majority of deposits in the
failed banks, these depositors probably lost confidence in the sector. As a result, the crisis had a
greater effect on the Savings Bank than Unibanka because almost all deposits in the former
institution were deposits by individuals. Between December 1994 and December 1995,
individuals’ deposits in the Savings Bank fell by almost 17 percent (in real terms), and total
deposits fell by 13 percent. At the same time, individuals’ deposits in Unibanka increased by 16
percent, while total deposits increased by nearly 30 percent. (Assets increased by 33 percent, and
profits by 77 percent, in real terms). It appears plausible that Unibanka benefited from (and the
Savings Bank suffered from) a flight to quality following the crisis, i.e., that depositors
reallocated assets towards banks that appeared better managed, more strongly capitalized, and
less risky in the composition of their portfolios. Surveys of Latvian banking professionals
consistently rated Unibanka as the safest bank in Latvia.
In accordance with the Government's decision, privatization procedures were launched at
Unibanka on October 3, 1995. The board of the Latvian Privatization Agency approved the
bank's basic privatization regulations, which provided that Unibanka would be privatized in four
years. During 1995, the first stages of Unibanka’s privatization were carried out. Share capital
was increased to LVL 11.5 million (about $23 million), and a little over 50 percent of the shares
were sold for privatization certificates. Twenty-two percent of shares were sold publicly; 13.5
percent were sold to customers of Unibanka; and 14.5 percent were sold to employees. The
Privatization Agency held the remaining shares. In October 1995, the bank's shareholders
decided to reorganize the bank into a joint-stock company, Latvijas Unibanka, and a new charter
was approved for the bank. In January 1996, Unibanka became the first company to be listed on
the Riga Stock Exchange official list.
155
According to the bank's privatization regulations, its share capital was increased during the next
privatization round by attracting additional capital from a strategic investor. In May 1996,
Unibanka’s share capital was raised by LVL 6 million (about $12 million), and the newly issued
shares were purchased by the EBRD and Swedfund International AB. This gave the EBRD
control of about 22.6 percent of total shares and Swedfund control of about 7.5 percent of shares.
Over the next three years, most of the remaining state-owned shares were sold in the
international market through a GDR program, and a part of the shares was sold through special
auctions at the Riga Stock Exchange. Overall, the state received LVL 66.1 million (about
$113.4million) by the time privatization was complete in late 1999, including LVL 21.3 million
in cash and LVL 44.8 million in privatization vouchers.
By September 2001, Unibanka's paid-up share capital was LVL 37.1 million ($59.9 million).
More than 98 percent of share capital belongs to the Swedish bank Skandinaviska Enskilda
Banken (SEB). A major force in the general trend towards banking sector consolidation in the
Baltics, SEB initially purchased a 23 percent interest in Latvijas Unibanka at a special auction
held in the stock market in late 1998. It then steadily purchased shares from the other bank's
shareholders, including the EBRD’s shares. Starting in early 2001, Latvijas Unibanka's shares
are no longer quoted at the Riga Stock Exchange.
Unibanka is currently the second largest bank in Latvia and the fifth largest in the Baltics (by
assets). As a universal bank, it provides a wide range of commercial and retail services,
concentrating on the domestic market, where it has a solid franchise. SEB has helped Unibanka
improve risk management, retail operations and implement credit controls. The bank’s
performance since the completion of privatization has been very satisfactory, and positive
economic forecasts for Latvia bode well for future growth in Unibanka’s operations.
156
ANNEX 12: INTERNATIONAL BANK OF AZERBAIJAN181
Ten years after the establishment of a two-tier banking system, the Azeri banking system
remains at a critical stage of development. While the Government of Azerbaijan has made good
progress in stabilizing its economy since 1995, its efforts to address a number of structural issues
in the financial sector have had mixed results. While some advances were made in upgrading
prudential regulations for banks, strengthening off-site supervision, and in regulating foreign
exchange markets, the banking sector suffers from poor management and governance, limited
technology, problem loans, and insufficient capital. It is estimated that only 10-20 percent of the
total money in circulation passes through the banking system.
Tackling the issue of state-owned banks has proved to be one of the government’s most difficult
and complex tasks. Despite early attempts to recapitalize, restructure and privatize state-owned
banks since 1996, state ownership in the banking sector remains high, dominated by the
International Bank of Azerbaijan (IBA). This bank was left with a near monopoly when the
government consolidated its three other troubled state-owned banks into a single entity in 2000.
While this step marked significant progress in reducing public ownership, the banking system
remains highly concentrated and underdeveloped.
Consolidation Of Three State Banks
Throughout the government’s reform efforts during the mid-1990s, some of the biggest lossmakers in the sector were state-owned banks, including Amanat bank (the savings bank),
Prominvest (the industrial investment bank), and Agroprom (the agro-industrial bank). Nonperforming loans were particularly problematic at Agroprom and Prominvest, accounting for
more than 90 percent of their portfolios. By late 1999, the government recognized that
consecutive recapitalizations of these three banks had failed to improve performance, and that it
needed to take more radical measures.
As a result, in February 2000, the government created the United State Industrial Bank from the
merger of the viable operations of the three banks. The bank was later renamed United Universal
Bank. The government issued a new limited license to the entity, allowing it only to collect
deposits, perform foreign exchange activities, invest in government securities, and perform cash
payment services for the Social Protection and Pension Funds and other budget entities. The
terms of the license further prohibited the bank from engaging in lending for two years, so that it
will in effect operate as a narrow bank.
The government plans to develop the operational structure of United Universal and to establish
an effective lending capacity to help strengthen the bank, improve its efficiency, and create
conditions for the eventual privatization of the bank through the sale of a controlling share to a
strategic investor.
181
Alex Gross is the primary author of this annex. Sources include (i) internal World Bank documents, 19992000; (ii) BankScope, Fitch IBCA; (iii) Economist Intelligence Unit (various country reports); and (iv) EBRD.
157
International Bank Of Azerbaijan Dominates The Banking Sector
With the decision to create United Universal, the government solidified IBA’s position as the
country’s leading and best capitalized bank. IBA has 75 percent market share of banking sector
assets, and 40 percent of retail deposits. In 2000, bank assets stood at $614 million, and its loan
portfolio grew by 22 percent. The bank has close links to many government departments and
state organizations, including the important Oil Fund, and acts as an intermediary for
government-guaranteed credit lines to Azerbaijan.
IBA was established in 1990 as a replacement for the Azerbaijan branch of Vnesheconombank,
the former Soviet foreign trade bank. In keeping with its origins, the foreign trade operations are
well established, but IBA also accepts deposits from and issues loans to Azeri firms. The bank is
steadily increasing its retail operations. The bank has 32 branches and approximately 700
employees, providing it with a relatively large network given the small size of the country.
Towards Privatization
In 2001, the government reiterated its commitment to privatize IBA and issued a presidential
decree to that effect. At present, the Ministry of Finance owns 50.2 percent of the bank’s shares.
The EBRD, which has been providing support for the IBA in the form of a credit line targeted to
small and medium enterprises, has indicated an interest in taking on a 20 percent equity stake.
The remaining state shares are expected to be auctioned at a later date.
Despite its dominant position, IBA faces many governance and management problems and is
plagued by inefficiency. Its profitability was weak in 2000, with after-tax
earnings of only $9 million. The slight increase in profit that the bank did see was primarily due
to the net interest income earned on the placement of funds of the Azeri Oil Fund. These
revenues are not expected to be repeated in 2001. Further, the level of overdue loans rose in 2000
(as did loan loss provisions), and IBA’s loan loss reserve cover was only 12.5 percent of gross
loans at end 2000.
While the government’s recent moves related to IBA and United Universal represent progress,
privatization is just one element of the financial sector reforms that are necessary. The broader
challenge is to make banks more central to economic activity in Azerbaijan in terms of deposit
mobilization, lending, and an increased array of services.
158
ANNEX 13: METHODOLOGY FOR THE STUDY ON STATE BANKS IN EUROPE
AND CENTRAL ASIA
The team relied on primary data from the following sources as the main tools in assessing the
current state of public sector banks in Europe and Central Asia:

Bank-specific data were generally taken from Bureau Van Dijk’s BankScope and are
based on the banks’ official annual reports. It should be noted that the data for some
banks in BankScope (primarily in CIS countries) are unqualified and/or unaudited.
Internal World Bank data were used in a few instances (Bosnia-Herzegovina, Kyrgyz
Republic, Uzbekistan, Yugoslavia).

Aggregate data for the banking sector were mostly derived from the IMF’s
International Financial Statistics (IFS).

Data on stocks and flows of arrears were primarily sourced from official IMF reports
and working papers. This was supplemented with data from externally distributed reports
from the EBRD (Transition Reports), the European Union (EU-TACIS), and the World
Bank.

Macroeconomic data were primarily sourced from the World Bank’s World
Development Indicators database.
At the same time, the team used secondary data from the following sources to detail the history
of state banking in transition economies over the past decade, including the case studies for
selected state-owned banks:

Official and externally distributed publications by the World Bank and IMF; EBRD
(Transition Reports for years 1998-2001); European Union (EU-TACIS Country
Economic Trends); bank rating agencies (Fitch Research and Moodys); Economist
Intelligence Unit (various country reports); and OECD (annual reports).

Publications and websites of government agencies, including the central banks (annual,
quarterly, and monthly reports on the financial sector) and the state statistical committees.

Internal World Bank documents on the financial sectors of the Europe and Central
Asia region.
Amounts presented in US dollar-equivalent terms are signified by the term “$” and have been
converted on the basis of year-end dollar exchange rates for “stock” figures and average
exchange rates for “flow” figures, unless already available in US dollars.
All regional macroeconomic and financial indicators have been calculated as either simple
arithmetic averages, or sums of country indicators depending on the nature of the indicator (e.g.,
percentage, dollar value per bank, total dollar value). The averages have been calculated using all
data that were available. When the countries included in the same indicator for different years
were different due to data availability, footnotes have been provided.
159
Despite efforts to create comprehensive data sets for 1992-2000, gaps still remain. These
particularly relate to both aggregate and bank-specific data for the first half of the 1990s, due to
the poor data collection and accounting standards common to many countries in the early
transition period.
160
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