Economy During The Transition Period, Financial Deepening And Banking Stability

Since 1990s,most of the countries of Eastern Europe began to transform the centralplanned economy into the market-oriented economy. These countries loosened thecontrol of interest rate and exchange rate and opened the financial market to foreigninvestors. The reform brought the growth of the economy and increased the efficiencyof financial system. While banks crisis broke out later in most of the transitioneconomies and the economy fall down.China is also a country of transition. The government deepened the financial systemstep by step and made great achievement. A modern financial system came into being.However, the banks still faced lots of non-performing loans and lower capitaladequacy ratio. The ability of risk control is weak and the banking system is fragile.Does the financial deepening have direct relationship with financial crisis? Whetherthe financial deepening increases the fragility of banking system? What lessons canwe learn from the countries of Eastern Europe? The paper will study the abovequestions.There are three parts in the paper. Part 1 includes chapter one and chapter tow,providing the theoretical premise and background of transition economy and financialdeepening. Chapter one reviews the theory of economy transition. Economy transitionwas a system reform took place at the end of 20 century. It included the reconstruct ofthe ownership of enterprises, the adjustment of the government function, theliberation of financial system, the rebuild of societal safeguard system and so on. It'sconsidered that during the progress, soft budget constraints and the governmentfunction overlap do harm to the banking system.Chapter two introduces the conception of financial deepening and financial restrain.Financial deepening means that the government withdraws the overage right ofintervene into the financial market, releases the regulation of exchange rate andinterest rate, founds banks with different kinds of ownership, elevates the status ofcentral bank ect. Interest rate liberalization rises the cash flow risk of banks,strengthen on the pressure of banking competition. Opening the financial market toforeign institutions, capital account liberalization will also aggravate the bankingsystem fragility. If the financial regulatory system is not perfect, financial crises willoccur.Chapter three analyzes the cases of the transition economies of Eastern Europe.Russia has suffered from the financial crises twice during the transition. It'sconsidered that the unsteady economic condition, weakened central bank, speculativeforeign funds are factors that bring out more financial risks. Comparing with Russia,Poland and Hungary are cases of the great success stories of transition. During thefirst decade of transition, they achieved high rates of GDP growth without asignificant increase in income inequality. The success can be attributed to theirstabilization program, the strength of its gradually market-oriented reforms. But theirbanking systems face the same problem during the progress of financial deepeningsuch as non-performing loans, inefficient management.Chapter four has studied China's banking reform. The outside condition restrictionsconsist of soft budget constraints, the government function overlap, foul law andcredit entironment. The inside shortages are inefficient management, scarceconsciousness of market- oriented, and then unreasonable business structure of assetsand loans. These ingredients strengthen the fragility of China's banking system.What's more, the trend of saving rate's drop is a potential peril that will threaten thebanks if they earn profit mostly depend on the deposits and loans still.The paper discusses the factors that affect the stability of banking system and considerthe stable macro-economy circumstance, efficiently management and wellanticipation of market as the main reasons that support a stable banking system.During the progress of financial deepening, we should correctly deal with therelationship between banks and government, monetary and financial authorities,different enterprises, foreign banks. We should pay more attention to the mediaespecially the internet media. Constructing a positive public opinion is also importantpolicy, as far as the banking stability is concerned.