Financial Systems in Transition: Is there a Case for a Bank Based System?

This paper looks at empirical evidence and economic theory in order to find some guidelines for building the institutions of a financial system. It argues that in the countries in transition, priority should be given to stimulating information generation about investment opportunities, and to ensuring substantial external evaluation of companies' potential. The actual evolution of financial systems in Central and East European countries shows, however, that banks are playing an increasingly important role, and that very close links are developing between the banking and the industrial sectors. If banks are to become not only privileged creditors, but also shareholders of firms, the information needed for efficient restructuring may become the victim of excessive commitment.