troubled banks' assets. The costs of central bank interventions in these countries mainly consist of provisions and losses on credit extended to distressed banks (Table 10). Overall, for the twelve countries, the direct costs of banking problems arising from government assistance far outweighs the costs arising from central bank assistance.

With regards to the actions taken by the central bank and to the cost suffered by the monetary institution, some distinctions among the different groups of countries can be drawn.22 (a) In _Bulgaria,_ the _Czech Republic, Estonia_ and the _Kyrgyz Republic,_ the monetary authorities intervened extensively in the banking sector and the cost to the central bank was sizable, ranging from 1 percent of GDP to 12 percent of GDP. (b) In _Hungary, Poland, Macedonia, Latvia, Lithuania_ and _Georgia,_ central bank intervention was limited and related costs were low (less than I percent of GDP).

# **a. Problems arising from extensive central bank involvement in bank restructuring**

The experience of _Bulgaria,_ the _Czech Republic, Estonia_ and the _Kyrgyz Republic_ shows how central bank involvement in banking sector restructuring can lead to a number of problems.

First, losses incurred by the central bank are ultimately borne by the government budget. In the _Czech Republic_ the government, through several agencies", bore most of the cost of bank restructuring. The central bank bore the cost of the "Consolidation Program II", launched at the end of 1995, that focused on small and medium sized banks, newly created in the early years of the transition. However, the government had to issue a guarantee (for an amount equivalent to 1.2 percent of the 1998 GDP) to the Czech Republic National Bank to cover losses from this program. As the central bank intends to take 24 advantage of the guarantee ', part of the cost of central bank assistance to the banking sector will eventually fall on the government budget. In addition, in the early 1990s, the central bank of the _Czech Republic_ extended a credit to the asset management company _Konsolidacni Banka._<sup>_25_</sup> _As Konsolidacni Banka's_ obligations are guaranteed by the state, the government budget will ultimately bear the residual cost.

In _Estonia_ the central bank intervened extensively to support the banking sector during the 1992 and the 1994 crises despite the presence of a currency board. Partly as a result of this assistance, the monetary authority suffered losses in 1994. To cover the loss, in 1996 the government recapitalized the central bank to the amount of 0.3 percent of GDP (Table **9).26** In the _Kyrgyz Republic_ the central bank extended sizable loans to the bank specialized in directed credit to the agricultural sector (Agromprombank) in the early 1990s. When this insolvent bank was eventually liquidated, the outstanding loans of the National Bank (equivalent to nearly 4.3 percent of the 1996 GDP) represented a loss. Consequently, in 1996 the government replaced this amount in the central bank balance sheet by a long term, interest bearing, bond.

22 Information on Georgia, Kazakhstan and Ukraine on methods and cost of central bank intervention is extremely scanty, and therefore not discussed here.

> 23 The privatization agency (National Property Fund) and two asset management companies _(Konsolidacni Banka_ and _Ceska Insaksni)._

**24** See Czech Republic National Bank, Annual Report, 1998, p. 4.

25 At the end of 1998 the outstanding credit amounted to nearly 2.4 percent of GDP. A small part of this loan (0.7 percent ) has been provisioned.

26 The central bank dealt with the 1992 crisis differently from the 1994 crises. In 1992 the monetary authority acted quickly to close the troubled banks and rescued only those credit institutions whose problems were generated by exogenous events (two banks, facing solvency problems after losing access to part of their assets in Moscow, were merged and recapitalized with the support from the government and the central bank). By contrast, in 1994 the central bank tried to rescue a large insolvent bank and bail out creditors.

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