This paper applies the arguments of institutional economics to the issue of banking system reform. Institutional reforms are of particular importance in the financial sphere because banking operations were heavily restricted under central planning and, at the same time, banks are assigned a crucial role in the restructuring of the economies and the establishment of effective corporate control. A universal banking system provides the institutional framework which suits the requirements of Eastern Europe best because it opens a wide avenue of contract designs. Hazards of universal banking can be reduced by imposing regulatory requirements. This paper relates the theoretical findings of institutional economics to the progress made with reforms in the banking systems.