Financial sector development in the future EU member states and Russia

Financial sector development in the future EU member states and Russia

Published Jan 2004

Authors

P. Gaspar, O. Zamulin, L. Vinhas de Souza

Publisher

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What needs to be done next for the complete convergence to the developed economies?

Financial liberalisation is a key element in the EU convergence process of transition economies. Two main factors determine the importance of the development of the financial sector for future EU members and Russia. On one hand, a rising number of theories support the presence of a strong correlation between financial sector development and the resulting economic growth and stability. On the other hand, the currently low levels of financial development in the future EU member-states and Russia require active measures toward accelerated catch-up and convergence to developed economies.

By focusing on the structure and functionality of the financial sector in future EU member-states, this paper tries to identify the typical common characteristics which distinguish transition economies from the advanced industrial economies and how their financial performance is affected by the differences. In the first section of the paper, a brief description is made of the financial sectors in future member-states. The second section assesses the main policy issues concerning the development of the financial sector. The third section is entirely devoted to the analysis of the Russian financial sector after the banking crisis of August 1998. In the last section, the lessons learnt from the development of financial sectors in transition economies are summarised.

The main conclusions are:

  • the speed and success of banking sector reform is a key element in the process of financial transformation
  • there is a tight bidirectional relation between macroeconomic and banking sector stability
  • when cautious and adequate, banking regulation could minimise the vulnerability of the financial sector
  • although essential for financial sector restructuring, banking privatisation is not a sufficient condition for successful financial reforms.

The authors suggest that in order to be effective privatisation should be carried out without delays, by attraction of strategic foreign investors, in a strictly liberal and prudential manner.

Finally, the authors note that even with the high presence of all the favorable conditions - foreign owners and competition on the financial markets, rapid growth and real convergence to the EU - the development and upgrading of the banking sector remains a long-term process.

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