Initial conditions for economic reforms The task which confronted the countries after the fall of the communist regime was enormous. It involved radical change of the whole political, institutional, and economic system. Along with the rejection of the communist one-party rule, the principles of the past economic system, i.e. state ownership of the means of production and the central planning and management of the entire field of economic activity, being entirely discredited, were rejected too. The issue was thus substitution of the previous system and not its reform. The goal was a transition toward a democratic society - and toward a functioning market economy, based on the dominance of private ownership. The respective move from the Communist centrally planned economy back towards a capitalist market economy implies a qualitative change in the entire economic and social regime. As such it is a unique process in modern economic development. The challenge is not only to stabilise, deregulate and liberalise the economy, as was the case in countries with extensive interventions such as Spain or Chile several years ago. The transition in Central and Eastern Europe required basic institutional, systemic as well as socio-political changes at the same time; it is inevitably a multidimensional process. It follows that, while stabilisation programmes and reforms in the other parts of the world economy may provide useful lessons from their experience, there are substantial differences implied both in the initial conditions and in the substance of the process.

Furthermore, new flow of credit demand has been sluggish, owing to the low-growth prospect, low private investment, excess capacity in many industries, and low commodity prices. The loan growth prospect has also been hampered by the more attractive funding sources in the capital market. Debt overhangs of both corporates and households in many Asian economies have also undermined investment and consumption, while threatening financial stability in some countries. In addition, the trend towards trade protectionism and growing geopolitical tension in the Northeast Asia and the South China Sea could jeopardise both growth and stability in our region, leading to financial volatility and possibly much higher cost of funds. Along with rapidly changing and increasingly volatile economic and financial environment, technology advancement is fast re-designing financial and business landscape. Sharing economy will soon become the key feature of modern economy and financial system. Crossborder transactions of e-commerce as well as payment and settlement will become more widespread. New fin-tech firms have offered financial products unbundled from the 2  longstanding value chain of banks. Certain banks’ existing business models might be obsolete and they must be agile enough to keep up with customers’ new lifestyle and requirements as well as competitors’ new business practices. In the current world, banks having economies of scale and scope might not gain advantages without agility and economies of speed. And, one should not forget that new forms of technology also bring along new forms of risks. Among others, cyber safety should be in the top priority of all banks.