Financial sector development has begun to accelerate throughout southeastern Europe. This has the potential, in the right setting, to contribute strongly to real convergence. It is taking place, moreover, against a backdrop of low inflation and several years of sustained growth – signs that the region has exited from a prolonged period of weak performance that reflected intermittent reforms and, in some cases, security tensions.

Against this background, the present paper explores the challenges associated with rapid financial development in southeastern Europe. It first provides a brief overview of the improved macroeconomic setting, and then suggests a conceptual map to help assess opportunities and risks in using foreign savings. It goes on to discuss the state of the financial sector, and patterns in credit growth. It then asks what structural and institutional reforms are needed to underpin healthy financial expansion. It considers how these elements can interact with macroeconomic policies in fostering growth and embedding stability. In conclusion, it discusses priorities and trade-offs for policy.