Banking History in U.S. and Europe's Transitional Economies
Western accountants combing through the balance sheets of East European banks are finding that the communist governments burdened many banks with loans to industries now rendered obsolete by the introduction of free markets. When the banks were freed from the central banks that controlled them, they were forced to take the bad loans with them (The Economist, 1991. p. 79). Consequently, the Baltic States, Hungary and Poland suffered through costly banking crises in the early 1990s. In the Czech Republic, 13 banks had failed by 1996 and subsequent schemes to prop up weak banks cost the Czech taxpayers at least 40 billion koruna ($1.25 billion). Bulgaria's banking system practically collapsed in 1997 as a result of fraudulent lending. And Slovakia's third-biggest bank was bailed out to the tune of almost 12 billion Slovak koruna ($348m) by the central bank in December 1997 (The Economist, 1998, p. 64). Currently, none of Slovakia's three biggest banks meets international capital requirements and nearly a third of all Czech, Slovak and Romanian bank loans are classified by regulators as possible or probable losses (The Economist, 1998, p. 64).
Banks in Europe's emerging economies can only be made safer and stronger if their governments, supervisors and managers develop a better understanding of how and why banks get into trouble (The Economist, 1997, p. S7). Unfortunately, not even banking experts can agree on the precise causes of bank failures. Generally, the typical banking crisis is the result of many factors working in parallel. Nonetheless, the banking industry of the emerging Eastern European economies can learn a lot from the evolution of the banking industry in the United States. The primary lesson, however, is fundamental. These emerging banking industries must learn to operate in an objective environment free from burdensome and often disastrous government contr...