The Regulatory and Public Policy Agenda for Effective Intermediation in Post Socialist Economies

Abstract

The advent of a market economy in formerly centralized economies has led to dramatic change in their financial sector, and the behavior of banking institutions. These firms must convert from de facto government agencies to credit evaluators, borrower monitors, and loan collectors. To perform these functions, substantial change has begun to transform the accounting, legal and property/bankruptcy laws in these economies. An equal change needs to occur in financial institution regulation. Financial system reforms must include a set of functions, procedures, and controls which collectively are referred to as a safety net for the system as a whole. A carefully constructed set of regulations appears necessary which will offset market imperfections without replacing them with a new bureaucratic structure. These regulations require trade-offs between stability and market discipline. In the end, however, no stability is offered by the removal or manipulation of market signals and the discipline of the price system.