Following the collapse of the Soviet bloc in the early 1990s, governments faced the challenge of laying the foundations of a market economy: Which economic reforms should be implemented and in what order? Reforming the banking sector reveals the difficulties of building market institutions in post-communist countries. This paper investigates what domestic political factors are conducive to a good quality reform of the banking sector using time series analysis of twenty-five post-communist states. The paper also tests the impact of IMF and EU conditionality and the level of economic development. The analysis demonstrates that reformed left and liberal/right governments implement significantly better banking forms than their unreformed left counterparts. Furthermore, the higher the level of foreign direct investment in a country, the better the quality of banking reform. Curbing corruption is also strongly related to better banking sector reform. Participation in the stricter IMF Stand-by agreement and the looser IMF PRGF program both register a statistically significant positive effect on the quality of banking reform. According to the statistical analysis, structural factors do matter. Important measures of economic development such as GDP per capita and stock market capitalization are statistically significant predictors of the quality of banking sector reform.
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