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Banking as a basis for economiccooperation in less developedEuropeFranjo Stiblar aa School of Law , University of Ljubljana , Kongresni trg 12,Ljubljana, 61000, SloveniaPublished online: 13 Dec 2007.

To cite this article: Franjo Stiblar (1996) Banking as a basis for economic cooperation in lessdeveloped Europe, Communist Economies and Economic Transformation, 8:1, 79-91, DOI:10.1080/14631379608427846

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Communist Economies & Economic Transformation, Vol. 8, No. 1, 1996 79

Banking as a Basis for Economic Cooperation in LessDeveloped Europe

FRANJO STIBLAR

Less developed regions of Europe include South, East and Central European countries.In the present study, among 14 countries under observation,1 11 of them arepost-communist countries in transition. This article aims to evaluate the present statusof cooperation between countries belonging to 'Backward Europe' and its futureprospects. Cooperation in banking will be the focus of analysis.

The starting hypothesis is that large and quickly increasing gaps between thesecountries pose a natural obstacle for cooperation in banking, which is the mostsophisticated sector of the economy. The basic underlying elements of financialcooperation (international banking) are usually trade flows, which are low among thesecountries with their competitive rather than compatible economies. With the collapseof communism most of these countries replaced one centre of gravity (the former SovietUnion) with another (the EU), thus confirming the validity of the gravity model.Renewal and enhancement of regular trade flows is the only realistic way to maximumcooperation in the region. Institutional alignments are out of the question.

The question arises whether there is an independent basis, in addition to trade flows,for cooperation among banks in the region. The possibilities lie in establishing off-shorefinancial centres (Cyprus) or more developed countries in the region supplying technicalassistance in the banking field to less developed ones. In some cases they could bemore acceptable than banks from 'Developed Europe' or other parts of the worldbecause they know the region better and pose less danger that they will exploit theirdominant position. After their own experience in rehabilitation and adaptation to newmarket conditions (like, for instance, Nova Ljubljanska Banka from Slovenia), theycould share their experience with banks in the region which are only now undertakingrehabilitation. In a more optimistic view, an active financial deepening in these countriescould be used as a tool for catching up with economically and financially moredeveloped Europe. For 'Backward Europe', improvement of banking standards is atthe same time the way to fulfil conditions for joining European associations, the EUabove all.

The article starts with an analysis of economic differences among 14 countries inthe region and continues with a description of the present situation in the region'sbanking sector. The final part deals with the future prospects for banking cooperationin the region.Professor Franjo Štiblar, School of Law, University of Ljubljana, 61000 Ljubljana, Kongresnitrg 12, Slovenia.

1351-4393/96/010079-13 © 1996 Centre for Research into Communist Economies

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80 Franjo Stiblar

Table 1. Size and Level of Development, 1992

AlbaniaBulgariaCroatiaCyprusCzech RepublicGreeceHungaryMacedoniaPolandRomaniaSerbiaSlovakiaSloveniaTurkey

Area(million km2)

28.7110.956.59.5

70.0131.093.025.7

312.7237.588.457.020.2

779.4

Population(million)

3.39.14.80.6

10.310.310.32.7

38.323.59.75.32.0

58.1

GDP($ billion)

0.669.609.606.60

26.1077.9035.502.90

83.8013.8016.0010.0012.20

110.30

GDP per capita($)

20010552000

1100025347576344113362189588

1645187960861898

Large and Increasing Economic Differences among Countries in the Region

Differences in economic development between countries in 'Backward Europe' werealready significant before the transition took place. In the 1990s they just exploded,thus further decreasing chances for financial and especially banking cooperation. Boththe practical and the theoretical view is that most trade and financial cooperation occursamong countries at similar levels of development (Lindner's view on internationaltrade). Several indicators are calculated to measure the relevance of the countriesanalysed in 1992, their external position in 1992 and their economic performance in1993. An aggregate ranking of countries is calculated as an illustration of the individualposition of countries in the group.

The data are not the newest (1992-93), but the major goal of the calculations isto obtain a feeling about the situation in the region, not to present the most up-to-datefigures. With that in mind, certain estimates were made where reliable figures aremissing. For the purpose of the article it seems more important to include a countryin the analysis rather than to exclude it owing to lack of good data. Different availablesources of data were used to fill the tables, official (country statistics, EBRD, WIIW,UNCTAD), but also reports of different institutes.

Two features distinguish the present sample (and calculations) from data usuallypresented by international organisations (UN, IMF, WB, EBRD). Firstly, economiesin transition are presented and thus compared with three important market economiesin the region (Greece, Turkey, Cyprus). Secondly, post-Yugoslavia countries areincluded (Croatia, Serbia, Macedonia and Slovenia; not Bosnia and Herzegovina owingto lack of data).

Relevance

The geopolitical and economic relevance of the countries in 1992 is measured by fourindicators: area, population, GDP and GDP per capita (Table 1). The sum of the ranksby each of the four indicators gives an indication of the 'relevance' of each countryin 'Backward Europe'.

Table 1 shows large variations in area, population (positively correlated) and GDP

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Banking as a Basis for Economic Cooperation 81

Table 2. External Position, 1992 (%)

Exports + imports

GDP

AlbaniaBulgariaCroatiaCyprusCzech R.GreeceHungaryMacedoniaPolandRomaniaSerbiaSlovakiaSloveniaTurkey

1471895854245383336622707934

Debt

GDP

91.5132.128.027.826.553.960.729.256.126.840.625.714.549.6

Debt

Exports

1320.088.167.5

162.461.0

279.6156.270.7

289.978.4

433.354.427.5

215.9

ratio

120.025.313.013.611.953.231.712.316.29.6

51.414.36.4

33.6

Reserves

: Imports(months)

1.02.21.6

10.20.82.43.71.22.61.65.01.11.52.4

FDI

GDP

0.600.400.205.03.762.414.140.250.340.530.100.720.920.35

or GDP per capita. The largest countries (Turkey, Poland and Romania) are definitelynot the most developed (which are Cyprus, Greece and Slovenia).

External Position

The external position of the 14 countries in 1992 is measured by six customaryindicators (see Table 2):

• Openness: (export + imports)/GDP• Indebtedness: external debt/GDP;

external debt/exports;debt service/exports ( = debt service ratio).

• Foreign position: foreign reserves/imports, (measured in months);foreign direct investment/GDP.

The aggregate ranking of each country is again calculated as the sum of the rankingsby each individual indicator. It should indicate the quality of the external position,which by our hypothesis is directly related to its capacity for economic cooperationin general, and in the banking sector in particular.

Again, the results confirm great diversity between countries with regard to theiropenness, external indebtedness, external liquidity and attractiveness for foreigncapital. Some of the countries established from republics of former Yugoslavia leadin openness, as their inter-republic flows automatically became international flows ofgoods and services with the collapse of the country and proclamation of independenceby its former constitutive units.

Backward Europe includes some of the most critical debtor countries in the World(Bulgaria, Albania, Poland, Hungary, Serbia and even Greece). External indebtednessis evidently a big problem in the region.

Despite moderate economic performance and critical indebtedness, quite a fewcountries in the region are favourable destinations for foreign investment. The leaderin this regard is Cyprus, followed by Hungary, the Czech Republic and Greece.

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82 Franjo Stiblar

Table 3. Economic Performance, 1993 (%)

AlbaniaBulgariaCroatiaCyprusCzech RepublicGreeceHungaryMacedoniaPolandRomaniaSerbiaSlovakiaSloveniaTurkey

GDPgrowth

11.0-4 .2-3.7

3.5-0 .3

0.9-2 .3

-15.23.81.0

-25.0-4 .1

1.34.8

Inflationrate

31.072.8

1517.05.5

20.815.922.5

244.035.3

256.09993.0

23.232.370.1

Unemploymentrate

26.316.417.42.83.58.0

12.628.715.710.230.014.415.520.0

BOP

GDP

-64.3-7 .3

2.92.51.8

-2 .7-9.1-0 .6-2.7-5 .4

0.0-5 .2

1.2-0 .9

Budget

GDP

-22.0-11.1

-4 .1-3 .5

0.1-12.0

-5.7-6 .8-3 .2-4 .6

-25.0-6 .8

0.4-14.0

Investment

GDP

10.019.610.023.024.319.920.214.212.417.78.0

30.416.323.0

Economic Performance

With differences in starting positions identified, it is now relevant to find out whetherthey are currently increasing or decreasing. Only the latter trend justifies a moreoptimistic view regarding economic (and especially financial) cooperation amongcountries in the region.

Six customary indicators of economic performance were chosen for a single year1993 (see Table 3):

• GDP growth;• inflation rate;• unemployment rate;• current balance of payments/GDP, (external equilibrium);• budget deficit/GDP, (internal equilibrium);• average investment rate: investment/GDP.

In the final calculation in Table 4 countries were ranked by each indicator and theaggregate indicator of economic performance was calculated for each country as thesum of its ranks by individual indicators.

The results indicate that in 1993 the economic performance of Cyprus was the bestamong all the countries under observation. It was followed by the Czech Republic.In the second group were Slovenia and Greece. The worst economic performance wasfound in Serbia, FYR Macedonia, Bulgaria and Albania.

In detail, GDP growth was not yet reestablished in most of these countries in 1993,hyperinflation was present in some of them (Serbia, Croatia, Macedonia), unemploy-ment was still rising, only four out of the 14 countries recorded a balance of paymentssurplus (Croatia, Cyprus, the Czech Republic and Slovenia) and only two a budgetsurplus (Slovenia and the Czech Republic). The domestic propensity to invest wasrelatively low in the region, and worst in countries of former Yugoslavia.

To summarise, the results show that not only does the starting (development,external position) position differ widely among countries in the region, but also thatwith better economic performance by the more developed among the countries analysed

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Table 4. Country Ranking

AlbaniaBulgariaCroatiaCyprusCzech R.GreeceHungaryMacedoniaPolandRomaniaSerbiaSlovakiaSloveniaTurkey

AlbaniaBulgariaCroatiaCyprusCzech R.GreeceHungaryFRY MacedoniaPolandRomaniaSerbiaSlovakiaSloveniaTurkey

410517

1193

1312862

14

4751

9-119-119-11

31312862

14

1435

117862

12914

1013

Relevance

14-54-5

31012112

138867

14

952

141213114731

1086

138

1410131149

3256

127

(Sum)10.024.522.519.037.046.041.012.048.034.030.024.023.049.0

111148736

13492

10125

Economic performance

365

1413131027

111984

13

1413126-7

29

6-74

105

118

25

10111348

6-71291

6-7143

219

10125384

117

13146

External

14

117

1258

10392

13146

283

12139

105471

146

12

position

16

109

1225

117

1338

144

(Sum)31.030.039.074.570.052.547.028.548.543.015.048.557.045.5

2 88 6

6-7 214 141 12

9-10 1112 134 3

11 46-7 713 13 95 10

9-10 5

(Sum)15.036.052.562.056.035.547.039.033.053.526.056.069.035.5

Overall

(Sum)56.090.5

114.0155.5163.0134.0135.079.5

129.5132.571.0

128.5149.0130.0

Rank(14.0)(11.0)(10.0)(2.0)(1.0)(5.0)(4.0)

(12.0)(8.0)(6.0)

(13.0)• (9.0)

(3.0)(7.0)

aCo

atoaCo

s

Note: Countries are given points by indicators from 14 = maximum to 1 = minimum. The last column of each section (Sum) is thetotal for that section. The final two columns are the Overall Sum and ranking for all three elements together.

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84 Franjo Stiblar

their differentiation is increasing further. These are not characteristics that favoureconomic cooperation within the region.

Aggregate Position

The aggregate position of each country was obtained by adding together its ranks bythe three criteria: relevance, external position and economic performance (Table 4).The results have only an illustrative and approximative value and should be interpretedwith caution. Subject to these limitations, the conclusion can be drawn that in the finaloverall ranking the Czech Republic is in first place, followed by Cyprus, Slovenia,Hungary and Greece. Albania was in the worst position in 1992-93, followed by Serbia,Macedonia, Bulgaria and Croatia.

The Current Situation in the Banking Sector in Backward Europe

Status of Banking and Monetary Policy

Reliable detailed figures for the financial and monetary sector in the countries we arestudying are very difficult to obtain. Indicators for the current situation in banking andthe monetary sector are given for only 11 countries in Table 5 (Albania, Macedoniaand Serbia are missing).

According to cross section data for 1992 (the figures for the numbers of banksare more recent), there are marked disparities in the banking and monetary sector. Theselarge differences are impediments to cooperation in banking.

Table 5 shows that the absolute number of banks and the number of citizens perbank differ significantly among the countries. Poland and Turkey have the largestnumbers of banks, which is not surprising as they are the largest countries in the sample.But with the density of banks among the population the story is quite different. HereCyprus leads, partly due to its off-shore banking legislation. It is followed by Slovenia.In the next group are Croatia, Bulgaria and Slovakia with between 100 000 and 200 000people per bank. The Czech Republic and Hungary have more than 200 000 but lessthan 300 000 inhabitants per bank. In the last group are Poland, Greece, Turkey andRomania. The numbers for Greece and Turkey, which are above the average level ofdevelopment for the group and have an established tradition in financial markets,indicate that in most of the countries in transition the number of banks is too largefor the population size. It will need to be reduced during the process of normalisationof the situation.

Data on the presence of foreign capital in the banking sector are difficult to obtain.The estimates in Table 5 indicate that the longer the country has had a market-orientatedeconomy (Greece, Cyprus and Turkey as the only three representatives in the sample),ceteris paribus, the more foreign capital there is in the banking sector. The real bankdeposit interest rates for 1992 in most countries were negative (Poland, Bulgaria andCroatia led this group), which is an indication that the true restructuring of the financialsector had not even begun. In 1992 deposit interest rates were positive only in Cyprus,Greece and Slovenia.

In 1992 the real volume of bank credits decreased in Bulgaria, Hungary andSlovenia by more than 10%. It increased substantially in Romania, Poland and Slovakia,indicating an expanding banking sector.

Two further indicators representing the situation in the monetary sector are given.Broad money (real balances) was increasing in Romania, the Czech Republic and

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Table 5. Financial Sector, 1992

BulgariaCroatiaCyprusCzech R.GreeceHungaryPolandRomaniaSlovakiaSloveniaTurkey

Citizensper

bank('000)

16812014

214(381)22936498018963

(726)

Numberof

banksin

1993-94^

54404348

(27)45

105242832

(80)

Percentageof foreign

capitalin banks'

capital

insig.smalllarge31%

sizeable25%smallsmallsmall

9%sizeable

Realgrowth

rateof

credit

-17.5——3.2

-5.1-11.7

12.333.99.8

-10.4-4.6

Realgrowth

rateof

broadM2

-17.0——10.6

-1 .34.3

-17.620.6

-6.011.36.9

Realbank

depositinterest

rate

-20.3-10.0

3.5-3 .3

3.4-0 .1

-27.0

-2 .45.0

-1 .4

Realcentralbank

discountrate

-14.7—

3.3-10.6

—-0.4-0 .2

-52.2-9 .1

-10.8—

COas

atoa

2».oa

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86 Franjo Stiblar

Slovenia by more than 10%. In Romania this was related to credit expansion; in theother two countries it was connected with increased credibility, which led to a risein the propensity to save in financial instruments. Finally, the real central bank discountrates are given. Among the eight countries for which data were obtained, it was positiveonly in Cyprus. On the other hand, the rate was strongly negative in Romania, Bulgaria,Slovenia, the Czech Republic and Slovakia. However, at the time, in most of thesecountries the discount rate was not used as a decisive instrument of monetary policy.

International Banking Ties

Cooperation in the banking sector among countries in Backward Europe could bemeasured by intra-regional institutional ties (FDI, establishment of branches andsubsidiaries) and/or by functional ties (correspondent banking with open accounts andcredit lines).

With some exceptions, strong intra-regional banking ties are not yet developed.For most countries in the sample, in fact, international banking is only at the first stageof development. And, to the extent that it is developed, the majority of internationalties are frequently interregional rather than intra-regional. This means that banks fromDeveloped Western Europe are coming to the less developed countries in the regionand opening offices or establishing working cooperation (capital involvement, technicalassistance) with domestic banks. At the same time, some banks from countries in theregion are opening representative offices in Developed Europe, rather than in theneighbouring countries of the region. This tendency is probably the result of a strategyof following commodity trade flows (which are frequently stronger with the EUcountries than within the region) and/or of a wish to establish a presence in worldfinancial centres (Frankfurt, London).2

There are exceptions to this conclusion, most notably Cyprus, with its relaxedoff-shore banking regulation. It became a centre of banking (sometimes illegal) formany post-communist countries (Russia), including some countries in the region(Serbia, to avoid the embargo). The more mature market economies in the region(Greece, Cyprus and to a lesser extent Turkey) do invest among themselves, but alsoin some, usually neighbouring, post-communist countries (such as Bulgaria).

As an illustration, Slovenia's largest bank, Nova Ljubljanska Banka, has represen-tative offices in Hungary and the Czech Republic and banks in other parts of formerYugoslavia with undefined status after the collapse of the country. At the same timeit has functional (correspondence, open accounts) relations with at least one, but usuallymore, banks from each country we are studying. The bank has also developed aninstitutional presence in Frankfurt and Munich, New York and London, Vienna, Milanand Moscow, and is thus a good example of the general pattern we have described.

It is clear that the region as such (and former institutional ties as in the case ofYugoslavia or CSSR) is not and will not be a special reason for closer banking ties.Geographical proximity, even if supplemented by historical ties, has ceased to be themost important factor for economic integration in the contemporary world, in which,with the increasing level of development, economic factors mainly determine tiesamong countries. Different regional economic cooperation units will be developed inthe future than in the past; countries on the edge of the region especially will probablytighten their economic ties with neighbouring countries outside the region. At the sametime, almost all of them will try to increase banking cooperation with Developed Europeand the EU particularly as a new centre of gravity (replacing the former Soviet Union).

The legislation on foreign direct investments (FDI) in the banking sector in the

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Banking as a Basis for Economic Cooperation 87

countries being examined differs widely. But, with some exceptions, most notablyCyprus, countries in transition are reluctant to open their doors widely for foreign banksat this early stage of the restructuring of their economies. Banking and the financialsector are very important for retaining an independent national economy (sometimesthis is compared with ownership of land and property). As long as Europe consistsof national states (that is, the 'Europe of regions' remains only a distant futuristic idea),one way for countries in transition to protect their own national states seems to beby retaining majority control in their banking sectors.

Future Prospects: Banking Cooperation as a Basis for Economic Cooperation

Future Development of the Banking Sector in the World

One determinant of the future development of banking and banking cooperation inthe region could be the predicted future development of banking in the world. Someexperts predict that only four or five banks will control Europe after the year 2000.In such a 'black' scenario there is no place for banks from Backward Europe asindependent institutions. Other less pessimistic predictions (Bollenbacher, 1992; TheBanker, 1988; Institutional Investor, 1994) talk about winning banking strategies forthe 1990s in which banks will offer new products and services to their clients in away quite different from before. Data show that in recent years the profitability ofbanks and their economic efficiency has been steadily declining.3

In the future, banks will have to cover three major forms of banking services:

(a) processing (payments, automatic clearing, electronic transfer, asset management,collecting letters of credit, brokerage, stock exchange and other capital marketservices);

(b) major traditional banking functions (collecting deposits and extending credits,leasing, trading, guarantees, investments, issuing insurance and letters of credit);

(c) advisory functions for clients (mergers and acquisitions, issuing bonds and stocks,financial engineering, business finances, personal financial planning, investmentconsulting, investment management).

The quality of banking services will become crucial for successful banking; this dependson credibility, responsibility, knowledge, attitude, communications, safety, understand-ing and personal touch.

According to the same sources, the winning banking strategy should includemaximizing non-interest income, increasing the value of assets, optimizing the volumeof capital, marketing of financial services, adequate management of financial risks andcontrol of costs.

It is clear from the outset that most of the banks in Backward Europe lag far behinddeveloped banks from Western Europe in most of the above functions and efforts. Thus,a lot needs to be done just to catch them up.

Development of Banking in the Region

The question arises, how realistic is the starting thesis that banking could become oneof the mechanisms for decreasing the gap between Backward and Developed Europe?The idea is that, with rapid development of the banking sector, Backward Europe couldestablish the preconditions for catching up more quickly in the real sector of theeconomy. To achieve that, the future banking functions we have enumerated should

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88 Franjo Stiblar

be established and developed in the countries of Backward Europe even more rapidlythan in Developed Europe. Realistically speaking, this is not probable because ofthe lack of knowledge and experience (comparative disadvantages). Banks in post-communist countries learn modern banking from banks from the West through technicalassistance in restructuring programmes. The only advantageous factor could be thatbanking in post-communist countries is in the process of establishing totally newfoundations, which means there should be fewer obstacles in the way of newtechnologies in these banks than in the case of existing well established banking. Butthat is probably not enough.

Regardless of the general catching-up idea there is an independent additional reasonfor banks in the region to modernise and catch up with Western standards. This isthe intention of most countries in the region to join the EU. For that to happen at sometime in the foreseeable future, one of the preconditions would be to establish a bankingsector meeting EU standards (EU Directives on banking). That means in many casesmore than fulfilling BIS standards for prudential regulation and supervision.

Related to the quest to join the EU as a primary goal of most of the countries inthe region there is this immediate question how important (and relevant) is the strategyto achieve this as a block. It would mean, first, establishing economic ties (and in somecases closer political relations too) between countries in the region, and, second,negotiating entry to the EU as a stronger block power. It is clear that the existing EUmembers would not like such a block negotiator and that they (as the strongernegotiator) will enforce bilateral negotiations and entry to the Union. At the same time,some more advanced countries in Backward Europe are also not willing to wait andprefer individual treatment by the EU hoping that it could bring them earlier entryinto the Union.

Trade Patterns as a Primary Reason for Banking Cooperation in the Region

A major and classical reason for banking cooperation in the region remains intra-regional trade flows which need to be supported by banking activities. Table 6 indicatesdirections of trade for 10 out of the 14 countries in the sample (mostly for 1992, butalso for some other years between 1990 and 1993). Based on the UNCTAD Yearbook,1993, published in autumn 1994, the results clearly show the relatively small shareof total trade between countries in the region. Among the reasons for that are the politicalsituation (war, embargo), existence of large centres (EU, Soviet Union), and compet-itive rather than compatible economies.

The data are given only on an aggregate level. The three categories of destinationsin the structure of trade of each country are Europe, Developed Countries andnon-European Less Developed Countries. Europe is further divided into EuropeanUnion, Eastern Europe and Other Europe. The two categories which should approx-imately cover trade with Backward Europe by countries in the sample are EasternEurope and Other Europe. Even so, Other Europe includes not only Turkey and Cyprusbut also EFTA and some other countries.

The results show that in 1992 Bulgaria sent over 78% of its exports to Easternand Other Europe, while its imports from these two regions accounted for less than19% of its total imports.

The only other country for which these two regions recorded a share in excessof 50% was Czechoslovakia, 52% of whose imports came from them in 1992. Neitherexports to nor imports from the region for any other countries in the sample muchexceeded one-third, with the largest figures for Hungarian exports (over 34%),

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Table 6. Directions of Trade (Structure in %, 1990-93)

Bulgaria, 1992ExportsImports

Cyprus, 1992ExportsImports

Czech R. 1992ExportsImports

Greece, 1992ExportsImports

Hungary, 1992ExportsImports

Poland, 1992ExportsImports

Romania, 1992ExportsImports

Slovenia, 1993ExportsImports

Turkey, 1992ExportsImports

ex-Yugoslavia 1990ExportsImports

Europe

86.069.3

66.460.3

74.085.3

76.071.2

80.170.0

74.270.6

57.162.8

69.673.1

63.653.8

80.077.4

EU

7.650.9

59.352.4

45.133.1

64.162.7

45.842.8

57.953.1

32.525.2

57.455.7

51.043.9

45.744.3

EasternEurope

76.98.1

3.12.5

19.738.8

6.44.0

19.46.7

5.94.4

19.024.7

5.35.4

8.23.7

28.323.3

OtherEurope

1.510.3

4.05.4

9.213.4

5.54.5

19.920.5

10.413.1

5.612.9

6.912.0

4.46.2

6.89.8

Developedcountries

11.268.3

67.378.6

56.948.3

76.479.4

66.669.4

71.372.1

42.938.3

70.474.4

64.268.6

58.662.1

LDCs

11.823.4

27.213.8

11.312.8

15.415.4

13.95.5

11.810.5

36.236.5

——

27.422.5

13.214.6

toas?*-

s"ato

3

OQO

Source: UNCTAD Yearbook, 1993 (published in November 1994).Dow

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90 Franjo Stiblar

Romanian imports (37%), and ex-Yugoslav exports (35%) and imports (33%).Especially low shares of trade with other countries in the region are observed for Cyprus(exports and imports each less than 10%), Greece (exports less than 12%, imports lessthan 9%), Slovenia (in 1993) (exports 12%, imports 17%), Poland (exports 16%,imports 17%) and Turkey (exports 12%, imports 10%).

Even in 1990-93 less than one-third of trade flows between pairs of countries inthe region were really significant (the measure of significance of a particular flow beinga 33% or larger share in the total trade of a country). And there is no doubt that tradeflows within Backward Europe definitely decreased further after 1993. One reason isthe economic sanctions introduced by the UN on Serbia and Montenegro; another isthe sanctions Greece applied to FYR Macedonia, the third is the war in the Balkans,which further disrupted transport between countries in the region.

All this gives slim prospects for development of intra-regional banking on the basisof trade flows (as their support), because trade flows within the region are small anddecreasing even further. Some bilateral trade flows in the region are stronger, however,and they could lead to stronger bilateral banking ties.

Is There a Basis for Cooperation between Banks in Addition to Servicing Trade Flows?

With weak trade ties, the question arises whether there is a reason for establishingbanking cooperation regardless of or even despite the intensity of trade flows. Twoideas could be mentioned here.

The first idea is the establishment of offshore banking centres, following theprosperous experience of Cyprus. Banks from most of the countries of the region andmany countries from outside it (Russia, Western countries, Arabic countries) estab-lished representative offices, subsidiaries, branches or directly invested capital inCyprus domestic banks in recent years. The banking business is flourishing in Cyprusand the density of banks, as already observed, is by far the largest in the region. Offshorebanking does not require strict domestic banking regulation. Instead, regulation forit is less stringent, thus making founding of banks and their offices attractive for foreigncountries.

To prevent unstable ('hot') capital influencing the domestic monetary policy ofCyprus, assets and liabilities of the offshore banks are not included in the domesticfinancial system at all. A negative side point is that a lot of grey and black marketfinancial business flows are directed to these offshore banks. There is a certain degreeof trade-off between clean prudent banking and additional earnings for the countryfrom the offshore banks established on its soil. Cyprus opted for business.

However, even if Cyprus can be taken as an example for other countries to follow,how many countries could establish such offshore centres? These centres are attractiveonly if they are rare. There would certainly not be enough offshore business for allcountries in Backward Europe.

The second way to intensify banking cooperation in Backward Europe is for banksin financially more developed countries in the region to supply know-how, technicalassistance, to banks in less developed countries in the region. Banks from DevelopedEurope are penetrating Backward Europe, especially countries in transition, aggres-sively. But more developed countries in the region can have certain advantagescompared to banks from Developed Europe. They know the region better. They couldalready have some business relations established which only need to be intensified.And they could be accepted as more friendly (less dangerous) in the eyes of the countriesand banks which would receive technical help. An important point here is that many

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Banking as a Basis for Economic Cooperation 91

of these banks in the more advanced countries in the region already went (successfully)through similar rehabilitation procedures and thus could share their own experiencein rehabilitation of banks with other countries in the region.

Notes

1. In alphabetical order: Albania, Bulgaria, Croatia, Cyprus, Czech Republic, Greece,Hungary, FRY Macedonia, Poland, Romania, Serbia, Slovakia, Slovenia and Turkey.

2. It is interesting to note that none of the post-communist countries in transition establishedits own subsidiary in New York, the largest financial centre in the world, except Slovenia.Nova Ljubljanska Banka d.d. has its 100%-owned subsidiary, LBS, in Manhattan.

3. Some performance indicators for the whole world banking community in 1990 fromInstitutional Investor (1994) and from Bollegraf (1992) are: profit/founding capi-tal = 10.4%, profit/balance sheet total = 0.61%, balance sheet total/founding capital = 17;share of non-interest income =12%, net banking margin = 2.59 percentage points;non-interest income/balance sheet total = 0.003; labour costs/balance sheet total = 0.01.

References

Annual Report of Ljubljanska Banka, 1993, July 1994.G. A. Calvo, M. S. Kumar, E. Borensztein & P. R. Masson, 'Financial Sector Reforms and

Exchange Arrangements in Eastern EUrope', IMF Occasional Paper 102, Washington DC,February 1994.

W. C. Gray & W. Jarosz, 'Foreign Investment Law in Central and Eastern Europe', PRWP1111, The World Bank, Washington, DC, March 1993.

D. M. Kemme in A. Rudka (ed.), Monetary and Banking Reform in Postcommunist Economies(Institute for East-West Studies, New York, 1992).

Mitgliederinformation, The Vienna Institute for Comparative Economic Studies, 1993, 12; 1994,1; 1994, 2.

B. Pleskovič, 'Financial Policies in Socialist Countries in Transition', PRWP 1242, The WorldBank, Washington, DC, January 1994.

I. Ribnikar, 'Sanacija bank', mimeograph, Ljubljana, 1993 pp. 1-11.F. Štiblar, 'Financial Sector in Socialist Economies in Transition: Current Situation and Open

Questions', Conference on Financial reform in Post-Socialist Countries, Syracuse Univer-sity Business School, Syracuse, June 1992.

F. Štiblar, 'Ljubljanska banka—A Case Study', paper for CEEPN Conference in Budapest, June1994.

J. E. Stiglitz, 'Financial Markets and Development', Oxford Review of Economic Policy, V,4, 1990.

M. Voljč, 'Bank Rehabilitation and Private Sector Development—Some Lessons fromSlovenia', EBRD Annual Meeting Seminar, St. Petersburg, April 1994.

Sources of Data

EBRD Reports.Individual Country Statistics.UNCTAD Yearbook, 1994.WIIW statistics.

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