In the aftermath of the collapse of communism in Eastern Europe, transition economies faced acute problems in transforming their economic institutions to be compatible with a market economy, including the financial sector. This article explores some of the major problems involved in this transformation process posed by restructuring of the financial system and the pace and sequencing of financial reform. The article considers bank-dominated and market-oriented financial system design; "shock therapy" as against "gradualism" in reform; the scope of financial sector reforms and liberalization; and the optimum sequencing of financial sector liberalization.