Causes and Effects of Crises on Financial System Stability in Emerging Countries

AbstractFormer socialist countries are characterized by an early transition recession transformation and faced several destabilizing events such as: high levels of inflation, the relative immobility of production factors (primarily labor), incorrect or ambiguous definition of property rights; preponderance of sector unemployment; evidence of discrepancies between the revenue rising population, the existence of an underground economy of higher dimensions. Major emerging economies from Central and Eastern Europe are post- communist countries that faced transition after adopting market-based economy and become emerging markets. An important issue during transition was the creation of a two-pillar banking system (e.g. Central Bank and commercial banks), while bank restructuring involves not only profit performing banks but, more importantly, changes in lending practice. The difficulty of restructuring and the magnitude of recapitalization slowed significantly the achievement of independent governance by privatization in state-owned banks. After a short period of market-based economy, emerging countries had been affected by the crisis started in the developed countries (characterized by lower growth, higher unemployment and poverty, and changes in inequality). Through several channels, crisis had affected also emerging countries differently, depending on the extent to which they are vulnerable to particular canals. Romania's status in the context of transition bears the characteristics determined by the situation inherited from the centralized economy and the options of political forces after 1989. The starting point was unfavorable both from an economic perspective, but also social, economic inefficiency due to the existence of industrial projects and sometimes senseless economic, profound structural economic imbalances, sizing of industries and alarming social indicators. Developing countries were affected by the crisis that began in developed countries, characterized by low economic growth, boost unemployment and poverty and inequality changes. A number of transmission channels of the crisis also affected differently, also developing countries, according to the extent that they are vulnerable to certain channels. Emerging economies in Central and Eastern Europe are the post-communist economies that have experienced the transition, after the adoption of market-based economy. In the last part of the paper we are looking for some transmission channels of crisis and some possible effects on post- communist countries during crisis, using dummy variables and some OLS estimators of the major factors identified as transmission channels using a dataset from EBRD databases