Banking Sector Restructuring in the Baltics 1
For any country a banking crisis can be a costly experience, but for a country in transition it can also cause significant disruption to the transition process itself and undermine the authorities' efforts to construct a modern, market-based financial system. Although the Baltic republics of Estonia, Latvia and Lithuania have been in the vanguard of transition in the Former Soviet Union (FSU), and have made significant steps towards a market-based economy, their transition efforts were almost undermined by serious banking crises in the mid-1990s. The banking crises in the three Baltic republics shared some common roots but they manifested themselves in different ways and at slightly different times in the transition. The main similarities relate to the broad context in which they arose, specifically the environment of simultaneous transition and adjustment, which puts tremendous strain on banks and their enterprise borrowers and reveals the inherent weakness in the banks and their regulations. Another similarity relates to the factors internal to the banks: weaknesses in management and in general banking skills.
These countries' banking crisis experience provides a series of case studies from which it is possible to draw some general conclusions, concerning both the causes and the implications of serious banking crises in countries in transition. This chapter aims to extract these general conclusions. It begins by describing the efforts to construct a market-based banking system in each of the Baltic states and then considers the various factors, including errors of policy, that contributed to the banking crisis. This is followed by an analysis of the authorities' response to the crisis and the measures that were adopted to attempt to