Emerging Europe and Central Asia, perhaps now more than ever, faces the urgent need for financial sector reforms. Reforms are needed not only to make the region more resilient to financial shocks but also to support efforts to strengthen income growth, particularly that of the middle- to lower-income earners, many of whom since the global financial crisis have questioned the benefits of greater economic and financial integration.

The report argues that financial development must go beyond improving the access to and pricing of credit. It should help build a broad-based and balanced financial system of both bank and non-bank markets, one that enables responsible financial inclusion of firms and individuals and enhances financial efficiency and stability. The presentation and debate delved into the right balance across the four key dimensions of financial development:

• Stability (e.g. addressing nonperforming loans and decreasing the volatility of private credit)
• Efficiency (e.g. reducing overhead costs and net interest margins on assets)
• Inclusion (e.g. increasing the use of electronic payments and insurance)
• Depth (e.g. developing capital markets and diversifying a country’s financial system)

Finding the right balance in financial development also involves trade-offs that are often overlooked, much to the peril of policymakers. Too much credit and overly generous support for financial inclusion (even if well-meaning) have led to financial bubbles and crises. Likewise, too much financial sector repression to achieve stability has generated financial exclusion and inefficiencies with negative consequences for economic opportunities and growth.