LONDON (Reuters) -- The EBRD needs to review its strategy of integrating emerging European economies directly into western Europe's financial system as this has exposed the former Soviet bloc to “excess risks”, Japan said on Saturday.

Japan, one of the largest shareholders in the European Bank for Reconstruction and Development , said the development lender had helped to privatize banking sectors in these countries without ensuring the development of domestic capital markets, leaving them dependent on foreign fund flows.
“While market economies actually took root in the region, they have turned out to be neither sound nor sustainable after all,” Shinsuke Suematsu, Parliamentary Secretary of the Ministry of Finance said at the annual meeting of the EBRD.
“Even if a financial market has been introduced, it will be for nothing if it were to end up promoting the deterioration of external balance of the country to an unsustainable level,” he said in prepared comments to fellow governors of the EBRD.
The criticism comes as the EBRD's 60-odd shareholders begin a review of whether it requires additional capital to cope with the deepening economic crisis in its 30 countries of operation.
Suematsu said the EBRD, set up in 1991 to help former communist countries make the transition to market economies, had to “fundamentally review” the way it operates.
“ introduction of markets or development of private companies as market players alone cannot bring about long-lasting stable economic growth,” he added.
Suematsu said the EBRD should adopt a “broader perspective” when providing its assistance to local banks, including promoting business in local currencies.
The credit crunch has savaged many economies in central and eastern Europe, raising questions whether the European Union and the EBRD could have done more during the boom years to reduce the region's vulnerability to the global turmoil.
Owned by 61 countries as well as the EU, the EBRD's investments have helped to drive the region's transition and growth in sectors ranging from telecoms to banking and manufacturing.
It has said it plans to invest a record 7 billion euros in the region in 2009 and is contributing loans and investment to a 24.5 billion euro two-year package for the region, with other multilateral lenders.