Before the former Yugoslavia broke apart, its numerous banks were linked by a common currency, shared economic burdens, and a single accounting network for public or corporate banking transactions.

But then, in the turbulent 1990s, new, smaller banking sectors went their separate ways, with the failed federation’s former members adopting different monetary policies and suffering varying damage from war and economic upheaval.

Asked about “old Yugoslavia” nowadays, bankers say it rises or falls with the rest of south-east Europe, as big brand-name banks from Austria, Italy and other EU countries race to penetrate nearby markets with lots of room for growth.

Interest rates, in Serbia like in the whole region, are high by European standards, and credit facilities are unsophisticated. On the bright side, the effects of the US credit squeeze have been only indirect, says Radovan Jelasic, governor of Serbia’s central bank.

Yugoslavia’s successor state and largest former republic shoulders the heaviest weight from the 1990s.

The former “big four” Serbian banks are under long-running bankruptcy proceedings – the outcome of rampant currency arbitrage and money laundering during the decade of international sanctions.

The biggest, Beobanka, owed DM1bn (€500m), versus claims of about DM7bn in its rotten loan portfolio. Billions more of the state’s money ended up in private bank accounts in Cyprus, Israel, Lebanon and elsewhere, local economists say.

But smaller private-sector players had also sprouted up to circumvent sanctions, so that Serbia had 90 banks by the time pro-democracy protesters overthrew the autocratic leader, Slobodan Milosevic, in October 2000.

With aggressive reforms under the new pro-western government in 2001, the sector was merged and privatised. Today, among 34 active banks in the market of nearly 8m people, three quarters of the assets are under foreign control. The last big state-owned bank, Komercijalna, should be ready to go on sale next year, officials say.

For now, the sector is too fragmented, bankers complain. The largest market share, belonging to Italy’s Banca Intesa, is only 11 per cent. Austrian, Greek and French banks are also prominent.

While the central bank is cautious about issuing greenfield licenses, the two latest instances reflect the country’s latest political and economic shift. Opportunity, a US bank focused on small and medium enterprises, received its license a year ago and Russia’s Bank of Moscow received preliminary approval in the past two months – a part the groundwork for a Russian takeover of Serbia’s energy sector, bankers say.

Croatia
A victor at the end of the 1990s wars, Croatia has moved faster to adopt new technologies and western European-style retail banking services.

“The Croatian banking sector stacks up very well. It’s one of the more developed ones ... stimulated by pension reforms and other activities,” says Goran Saravanja, chief economist at UniCredit in Zagreb.

More than 90 per cent of the sector is in foreign hands, with recent mergers putting Italy’s UniCredit at the head of the pack. The bank’s balance sheet is more than half of the size of Serbia’s entire banking sector

Yet the main competitors in the coastal country of 4.5m are perpetually battling the central bank’s lending restrictions, as rapid, heavily euroised credit growth puts devaluation pressure on the local kuna.

Croatia has also been harder hit by US credit squeeze aftershocks, with interest rates rising sharply in recent months.

Slovenia
Slovenia stands out as the only ex-Yugoslav country already in the EU, yet it is also the one with the least foreign bank ownership. Nearly 70 per cent of banking assets are domestic, with much of that still in state hands, says Tomaz Saunik, a Slovenian political analyst.

The country of 2m, with a relatively strong economy, would welcome a gradual expansion of foreign investment, Mr Saunik says.

After adopting the euro at the start of last year, Slovenia has faced inflation close to 6 per cent, well above the EU average. But the insular banking sector has escaped the effects of the US credit crisis.

Meanwhile, the state-run market leader, Nova Ljubljanska banka (NLB), has built a renewed ex-Yugoslav presence, buying up subsidiaries in Serbia, Montenegro, Macedonia and Kosovo. The bank remains shut out of Croatia and Bosnia because of unresolved disputes over old frozen accounts.

Bosnia-Herzegovina
Bosnia-Herzegovina’s banking reforms have been vigorous since the 1992-1995 war, making the sector strong and sophisticated compared to the rest of the economy.

Yet banking is still overshadowed by politics in the ethnically complex country of 4m, sharply divided between two “entities” under the Dayton peace treaty. Two thirds of banks are licensed in the Muslim-Croat federation, with the rest based in the Serb republic.

“Although we have quite harmonised legislation, the entities have their own regulatory agencies and effectively function as separate markets. This creates problems for investors,” says Sead Miljkovic, a Sarajevo lawyer.

Because banks tend to cover their local lending by borrowing from EU-based parent banks, the credit crisis is a worry for Bosnia. Interest rates are not bad at 7-10 per cent but could rise with the cost of credit in EU countries, Mr Miljkovic says.

Montenegro
Montenegro, the smallest ex-Yugoslav state with just 650,000 people, has also opened up to foreign investment in the banking sector. A recently passed banking law, drafted in consultation with the International Monetary Fund, improved the regulatory framework, except that parliament inserted some loopholes for domestic banks, critics say.

Prva Banka (First Bank), the only one under majority Montenegrin ownership, has expanded massively in the past two years by attracting the accounts of state-owned companies. The bank’s largest shareholder is Aco Djukanovic, brother of the prime minister, Milo Djukanovic.

“When the private sector is close to government, there can be problems,” says Mark Crawford, head of Opportunity Bank’s fast-growing Montenegro operation. “But that’s the nature of the beast in this part of the world.”

The credit squeeze has had no impact so far, Mr Crawford says, although it may dent the demand for second homes from British, Irish and western European buyers.

Macedonia
Foreign banks have so far shown the least enthusiasm for Macedonia, although France’s Société Générale has entered the market and Austria’s Erste could follow. Untold numbers of non-performing loans remain from the 1990s – the factor that reportedly turned off Austrian bankers who had wanted to buy Stopanska, a leading local bank.

Kosovo
Kosovo, the ethnic Albanian-dominated breakaway province of 2m that declared independence from Serbia on February 17, had already built up a thriving banking sector during nine years of United Nations rule. Austria’s Raiffeisen has done well serving thousands of international administrators and consultants.

While ethnic tensions are high, the US credit squeeze gives Kosovo and Macedonia little reason to worry.