Resilience in financial sector reform

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Structural reform

Despite the turbulence of the last five years financial sector reforms have generally remained intact, although with notable exceptions. There is significant scope for further reform and development, especially in the insurance and other financial services sector and in private equity and capital markets. It is in these areas, rather than the banking sector, that changes to scores and assessments have occurred recently.

Developments in the insurance and other financial services sector have warranted a downgrade for Poland from 4- to 3+ and upgrades from 3 to 3+ for both Croatia and Slovenia. Poland's downgrade was motivated by the government's decision to reform the pension system in a way that will marginalise the role of private pension funds and impair the multi-pillar pension system introduced in 1999. Croatia's improved score reflects an increase in competition in the insurance sector as the market shares of the top three insurance companies have fallen. In Slovenia the upgrade is due to long-awaited privatisation. The state-owned bank Nova KBM has completed the sale of a 51 per cent stake in the country's third-largest insurer, Zavarovalnica Maribor. This progress in the insurance and other financial services sector contrasts with continued challenges in the Slovenian banking sector, where the prolonged lack of progress towards resolution has highlighted weaknesses that are reflected in the market institutions gap increasing from small to medium.

Progress has also been apparent in the structures and institutions used for financing micro, small and medium-sized enterprises (MSMEs). Romania and Ukraine have been upgraded on the issue of market-supporting institutions due to important changes to the legal framework governing security/collateral for moveable property. Ukraine has also improved for immoveable property. Meanwhile, in Bulgaria the share of SME lending in total lending has risen above a certain threshold, leading to a fall in the market structure gap falling from medium to small.

Transition gaps in private equity and capital markets mostly remain medium or large. The capital market in Hungary has suffered the virtual elimination of private pensions. Turnover and volumes for traded securities have declined in parallel. In Turkey, however, the capital market transition score has been raised from 4- to 4; the country has a well-developed capital market that has grown further in recent years. Bosnia and Herzegovina's capital market score has also risen – albeit from a modest base – due to a slight increase in market capitalisation and an improved turnover ratio.

Private equity transition scores have been raised in Croatia and Estonia. A key indicator in this sector is the effective number of fund managers per 1,000 companies, which has increased in both countries. Estonia has also seen an increase in active capital, which has contributed to a narrowing of the market structure gap from medium to small.

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