Mounting banking sector problems At the onset of transition the Czech economy already had a higher level of financial intermediation than most other formerly planned economies. On the surface, the financial sector developed extremely rapidly, with a large number of banks competing for clients and credit/GDP ratios that rivalled west European levels. The number of banks rose from five in 1990 to 55 in 1995, when banking sector assets exceeded 150% of GDP. However, lax licensing laws and supervision, coupled with extensive state interference in the lending decisions of the large state-owned banks, encouraged imprudent lending, insider deals and outright fraud. Problems first appeared in 1994 with the start of a wave of failures affecting the small-bank segment of the market, which was particularly prone to financial difficulties.
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