The Challenge of Banking in a highly Uncertain Future- R V Lago

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INTRODUCTORY

STUDY

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The Challenge of Banking in a highly ^ 1 Uncertain Future Ricardo Lago*

INTRODUCTION

M

ost studies of banking in transition follow the approach of analysing the initial shortcomings that these economies have in the pursuit of a sound financial system. Typical limiting factors include: initial lack of financia! skills; inadequate regulatory framework; weak procedures to repossess collateral; related lending practices; ineffective supervisión; under-capitalised banks; macroeconomic instability; and reckless bankers and oligarchs that cheat on depositors, lenders and minority shareholders. The menú is sometimes completed with subservient central bankers ready to bail out government, bankers and depositors with yet another run of "inflation tax" levied on the pockets of moneyholders. All this is true for many countries, but in this paper we take a completely different angle. Let us assume for a moment that, in the beginning, a transition economy is endowed with American bankers, British supervisors, Germán auditors, the Frenen legal framework and Swiss supervisory boards. Further, let us also assume that the chairman of the central bank were Alian Greenspan and the minister of finance Paul Volker. Well, even if all these "ifs" were to hold, the claim of this paper is that banking may have a high chance of being a money-losing proposition, at least until such time that a critícal thresholdti transformation and relative stability had been achieved. The obligatory point of departure for any analysis of the financial sector in transition economies is Janos Kornai's four simple principies defining the "hard budget constraint": buyers pay for the goods they buy; debtors pay back their debts; taxpayers pay their taxes; enterprises pay their costs out of revenues.2 Indeed, these are some of the many functions of the financial system: to ensure that payments for transactions take place as due and that economic agents abide by the relevant solvency constraints. Far from being mechanical, both tasks are a difficult endeavour. First, * Ricardo Lago, Deputy Chief Economisr, European Bank for Reconstrucción and Development. 1 The views expressed are those of the author alone and do not necessarily reflect the views of the EBRD. I would like to thank Alan Bevan and Michel Jernov for their comments. 2 SeeKorna¡ (1993), page315. BV 7-8/2002


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