International financial contagion - Why are Eastern Europe's banks not failing when everybody else's are?

While the Asian financial crisis spread to Russia and Brazil, the transitio n economies in Central and Eastern Europe (CEECs) are largely unaffected by international financial contagion. This is the more surprising considering that most economies have experienced severe banking sector problems in the past, that large bad loan ratios are still prevalent, that banking regulat ion and supervision are only slowly improving, and that stabilizing policie s have slowly been eliminated. What insulated the CEECs from the recent wav e of financial instability? To consider the counterfactual, we first provid e a framework that links banking crises to financial deregulation. We then focus on a number of macro- and microeconomic factors, using data compiled from the IMF's International Financial Statistics, from the World Bank's Wo rld Debt Tables, and from the BIS's Consolidated International Banking Stat istics. We first compare past experiences in CEECs with those in other emer ging economies as a cross-sectional reference point. We then consider wheth er the situation in CEECs has changed since the last banking sector problem s, in order to establish a reference point across time. Our results indicat e that the factors leading up to past banking crises are generally differen t in CEECs from those in other emerging economies. However, in recent years , the characteristics of CEECs have become more similar to those of other e merging economies. JEL classification: F3, F4, P5.