Abstract
The Czech Republic privatised industrial enterprises rapidly but kept state control of its big banks, which were expected to finance the transition to a market economy. The outcomes were not entirely successful, certainly not for the banks themselves, which ended up technically bankrupt and were eventually sold to foreign investors.
This study analyses the actions of bank managers and the policies of government to understand what went wrong, based on personal interviews with top managers and bank financial statements. It concludes that state ownership of banks was adverse to their performance, and that the implicit contract between bank managers and government ministers (you make risky loans and we'll get growth now and bail you out later if we need to') did not work.
Conflict between government's objective to finance the transition and banks' private profit objective might be resolved with clearer channels for government influence, better functioning markets and institutions, and bank managers with market economy experience. Lessons learned from the Czech experience apply not only to future cases of banks in transition economies but also to business relationships with government generally in turbulent times.