Do Foreign Banks Enhance Banking System Efficiency?

Several EMEs have eased the regulatory norms for the entry of foreign banks over the last two decades as an integral component of their financial sector liberalisation policies (see Chapter 7). One of the important reasons why they allowed foreign banks into their economies was because of the much needed funds foreign banks could help bring in to recapitalise their domestic banking systems. While the immediate motivation was related to the financing issues, foreign bank entry impacts the domestic banking system of the host economy in numerous other ways. For instance, foreign banks could facilitate reductions in cost structures, contribute to improvements in operational efficiency through introduction and application of new technologies and banking products, enhance marketing skills and management, as well as strengthen corporate governance structures (Claessens et al., 2001). In relation to this, as some studies note, foreign banks could enhance the quality of human capital in the domestic banking system by importing highly skilled personnel to work in the local host subsidiary, as well as via knowledge spillovers to local employees which may in turn benefit the customers in terms of access to new financial services (See among others, Levine, 1996; Claessens and Glaessner, 1998).