-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.
3 15 0,4 2  3 2  9 8  * Market shares of Controlled banks multiplied by their capital share, end of 2002  BIS Review 53/2003  Romania  7 1 0,6 6  7,5 1,2 2,3 5,9 2,2 1,5 4,3 6 3,3 3,9  Bulgaria  15  Croatia  5 1 3 3 16 9  18 4 9  3  CEEC 5- Total  Slovakia  15 0,2  Slovenia  7 9 8 6 5 3 3 3  Poland  KBC Bank Bayerische Landesbank Intesa Bci HVB Group Raiffeisen GE Capital Citibank Erste Bank Societe Generale UniCredito  Czech republic  Hungary  Role of Foreign Banks  0,1 14 6 7  7 4  2 4 3  7 27  5 19  8 0,5  20  5  As said above, the economic transformation had a large negative impact on balance sheets. Banks tended to lend to previously existing companies undergoing privatization that were faced with a sudden loss of foreign demand (mainly from Soviet Union) and had to restructure themselves by laying off a big part of their workforce. This proved to be a recipe for financial disaster. Financing of newly established companies with no track record, with business plans based more often on good intentions than on thorough analysis was no better. In addition, the political elite, who saw bank financing as the quintessential source of economic growth, encouraged this lending boom. Existing risks were widely disregarded.