B) Reread the article more carefully and underline the parts where conditions for avoiding banking problems in transition economies are mentioned

The number of countries experiencing significant banking problems has increased substantially in recent years. It should be stressed that the problems are hitting industrial and developing countries alike.

The problems arose from weaknesses and distortions in the banking systems and above all from the failure of the central banks to successfully fulfil their principal function of maintaining economic stability through a credible and responsible monetary policy.

Serious banking problems were almost inevitable in transition economies, because uncontrolled and unsupervised growth in commercial bank lending quickly unmasked hidden problems which brought about crises in many of the former centrally-planned economies.

Although the experiences of different countries differ according to each country's circumstances, the following general conclusions with regard to transition economies can be made:

• One of the most important conditions for avoiding serious banking crises is the pursuit of stable macroeconomic policies, which must be priority number one in transition economies.

• The transition process implies a dramatic change in the role and instruments of monetary policy. One cannot deny the fact that by the end of 1994, most countries in transition had shifted, to varying degrees, to market-oriented (indirect) instruments of monetary policy. For example, as a result of reforms in the monetary, exchange and banking areas, the CIS countries have achieved a market-based determination of interest rates.

• Competition in the banking system is important. Entry of foreign banks may offer a means to foster competition, but proliferation of banks is not necessarily a good thing in all countries. Some new banks may be weak and poorly managed. Systematic bank insolvencies have typically been a combination of poor lending decisions, inadequate licensing and supervision procedures. It is very costly and counterproductive to keep unhealthy banks alive. The lender-of-last-resort function involves net injections of liquidity into the economy and thus has a monetary impact that conflicts with the chief objective of monetary policy, that of maintaining stability and low inflation.

• Given the small size of the domestic monetary sector, the banking sector is highly sensitive to even minor changes in capital flows. Rapid and uncontrolled increases in banking assets should be discouraged. In some countries the cost of sterilizing capital inflows remains an issue.

Words you may need:

experience v испытывать, знать по опыту

hit v поражать, ударять

alike adv подобно, одинаково; в равной мере

credible adj заслуживающий доверия

responsible adj ответственный

inevitable adj неизбежный

unmask v (зд.) вскрывать

hidden adj скрытый

pursuit of stable macroeconomic policies проведение стабильной макроэкономической политики

one cannot deny нельзя отрицать

foster v поощрять, благоприятствовать

proliferation n распространение

insolvency n неплатежеспособность

licensing n лицензирование

conflict v входить в противоречие

sensitive adj восприимчивый, чувствительный

capital flows n финансовые потоки

sterilizing n стерилизация (предотвращение негативного воздействия притока капитала)

Ex. 18. a) Read the article to find the characteristics of a country's economic system that are taken into account when an exchange rate policy is determined.