-20 -30 -40 -50 -60 -70 1995  1996  1997  1998  1999  2000  2001  2002  21  The legislative and regulatory framework has been already harmonized with the EU requirements. Special missions of experts from the EU countries have confirmed this in all of the new member states. However, the acqui communautaire are still developing and improving. This represents additional challenge for the new member states, since they must first adopt the existing rules, and also get ready for the coming changes. The new member states are ready for application of Single Passport policy [it basically means that any bank from any EU country could provide services in the whole EU without additional licensing requirements.]. Since the domestic banking markets in the new member countries are competitive enough and have already a strong presence of foreign institutions, this should not lead to dramatic changes in lending in these countries. Being a part of larger economic area, with banking sectors dominated by foreign institutions, will represent a new challenge for bank supervisors. The need for greater and more efficient cross-border cooperation will probably lead to changes in focus of the supervisory agencies. After their accession to the EU, I do not expect any contagion effect among the Central European countries in case of difficulties of one of them. The institutional investors do not any longer view these countries as very coherent group. This assertion can be illustrated on developments of the exchange rate over the past two years.

The experience until the ‘60s  One of the main conclusions reached in the aftermath of the Great Depression was that competition in the banking sector could jeopardise financial stability. By putting downward pressures on profit margins, competition stimulates banks to take on new risks, thus reducing capital buffers. Consequently, for the following four decades, until the late ‘60s, many measures were aimed at controlling competition. Particularly, limits were imposed on lending and deposit rates, on loans to the private sector, on main monetary variables (which are nowadays set by credit institutions). Likewise, worldwide restrictions were in place on cross-border capital flows and foreign exchange markets. Note also that back in those days commercial banking was separated from investment banking (Glass-Steagall Act) and there was no financial innovation. In addition, policy rates were set by governments. Commercial bankers were paid well (but not remarkably well compared to other professionals) and the 3:6:3 rule accurately described their daily routine: borrow at 3%, lend at 6% and be on the golf course at 3 p.m. In such a “risk-free” environment, capital requirements began to be eased, reaching 5% of bank assets. Extended liability was replaced by limited liability. During 1945–1971 no major banking crisis occurred (Eichengreen and Bordo, 2003), but this came at the cost of lower profitability of banks, whose capacity to innovate and support the economy went down. But, as Andrew Crockett (2011) put it, facilitating informed risk-taking, the financial system is a key element in achieving optimal levels of productivity growth and rising living standards.