| This thesis is meant to be a base for further research into the banking crises that took place during the transition from socialism to capitalism. The main problem of the banking systems in Central and Eastern Europe was the accumulation of bad loans on the state-owned banks' balance sheets. To explain this phenomenon, most of the studies employed Janos Kornai's concept of soft budget constraint. We present this concept and its most significant formalizations.We argue that the occurrence of banking crises in transition economies is also explained by the looting theory. In fact, the looting and the soft budget constraint theories are closely related: financial looting generates soft budget constraints. The looting model should be included in the soft budget constraint literature, and a further formalization of the incentives faced by a state-owned bank's manager might sustain the development of both theories. |
