JournaI of Banking and Finance 17 (I9931 931-957. North-~oiland Banking sector and restructuring in Eastern Europe* Andrea Sommariva zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHG European Bank,fiw Recconstrucrion and Develapment, London, UK Received September 1992, final version received April 1993 The paper seeks to achieve a number of objectives. First, to analyze the underlying causes of East European commercial banks’ illiquidity problems. Second. to examine the case for public versus private (informalf approaches to bankruptcy and bank restructurings as general approaches to these problems. Third, to evaluate the d&rent modeIs of restruct&ing banks fin particular e&&t alternative models are identified). Fourth, to brie& describe the models that have been &osen by a number of Easi European countries. Final& to layout the criteria for policymakers choice of a particular restructuring model. zyxwvutsrqponmlkjihgfedcbaZYXWVUTSR 1. zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA Xntroducticm As Eastern European countries move to liberalize their economies, the transformation from rigid state control to a free market system has been far from smooth and far from complete. Central to a successful transformation is a strong and stable banking system in which savers/investors have confidence in the banking system as a repository for their funds and in which bank credit is allocated to projects on a strict net-present-value basis. Indeed, it is difficult to imagine any successful transition from a socialist to a capitalist economy without the banking system operating at a reasonable level of efficiency. This has been recognized by many regulators in the West who view banks as being special or unique when compared to other firms -- either real sector or financial [see Corrigan (1882) for example]. In order to perform their ‘unique’ functions, as informed lenders and providers of deposit contracts (media of exchange), banks have to be liquid on the asset side of their balance sheets. This means that normal demands Correspondence to: Professor Anthony Saunders, Stern School of Business, New York University, 44 West 4th Street, Suite g-160, New York, NY 10012, USA. *The views expressed in this paper are those of the authors and are not necessarily those of the EBRD. We would like to thank StaR members of the Financial Infrastructure Department of the EBRD, particularly Motoo Kusakabe, Paolo Miurin, Ferdinand0 Buffoni and Istvan Ipper. ~3~~~266~93~~~6~~ 8 19993-Elsevier Science Publishers B.V. All rights reserved