result of bank crisis resolution in the twelve countries under consideration. If anything, there has been a decrease in financial depth in most of the countries. Financial intermediation in all three country groups remains considerably lower than in OECD countries, with financial intermediation in the CIS being the lowest.

# **b. Banking Sector Soundness**

Two measures of banking sector soundness - the ratio of non-performing loans to total loans (Table 3) and the capital to asset ratio (Table 17) - indicate that the results of bank crisis resolution in the twelve transition countries were generally positive, although improvements are still necessary.

With respect to the ratio of non-perforning loans to total loans, all the _CEE_ countries showed large improvements during the 1990s, ranging from a 20 percent reduction in the case of the _Czech Republic_ to an over 70 percent reduction in the case of _Hungary._ For the _Baltic_ countries, this ratio fell sharply in _Latvia_ and _Estonia,_ but in _Lithuania_ the initial improvements were subsequently reversed somewhat. Among the _CIS_ countries, all showed improvements except for _Ukraine,_ where the ratio actually worsened which is not surprising since there was no bank restructuring in _Ukraine._ Despite the generally positive trend, however, the bad loan problem remains critical in most countries. In fact, at the end of the 1990s, the share of nonperforming loans was close to or higher than 10 percent in all the sample countries except for Estonia, and was significantly higher than 10 percent in the _Czech Republic, MIacedonia, Lithuania_ and _Kazakhstan._ Data on the capital adequacy ratio suggest that the level of capitalization is satisfactory in those countries for which data is available. Even in countries where the authorities did not undertake major injections of capital, as in the _Baltics,_ the restructuring and downsizing operations have produced better capitalized banking systems. Among the _CEEs, Bulgaria_ had the highest capital adequacy ratio in 1998 of around 37 percent due to revaluation gains.

# **c. Banking Sector Efficiency**

The effects of bank crisis resolution on banking sector efficiency were mixed. One measure, interest rate spreads<sup>45</sup> , indicates that the banking sector has become more efficient in the _CEEs_ and _Baltics,_ while it remains far from efficient in the _CIS_ countries. Another measure - central bank credit to commercial banks as a share of GDP<sup>46</sup> - indicate that there were improvements in this area for all three country groups.

In the _CEEs_ and the _Baltics,_ interest rate spreads have, by and large, been declining in the latter part of the 1990s, suggesting increasing banking sector efficiency during that period. In 1998, the average interest rate spreads of the two country groups were around 8 percent, which was still twice the level in the OECD countries. By contrast, in the four _CIS_ countries, interest margins were extremely high, averaging 33 percent in 1998, reflecting the lack of competition and inefficiency in their banking systems.

For all three country groups, central bank credit to banks as a share of GDP generally declined through the 1990s, reflecting a decrease in the reliance of the banking system on the central bank, and suggesting an increase in efficiency. By 1998, this ratio had fallen to around I percent or smaller in the

> **45** See Appendix Table 9 for data on interest rate spreads for the twelve countries and for OECD countries.

> **46** See Appendix Table 10 for data on central bank credit to banks as a share of GDP for the twelve countries and for OECD countries.

45