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The role of foreign banks in post-crisis Asia: the importance of method of entry

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  • Montgomery, Heather

Abstract

This study examines the role of foreign banks in post-crisis Asia, focusing particularly on the four countries most affected by the Asian Crisis of 1997 - Indonesia, Korea, Malaysia and Thailand. First, using data on the presence of foreign banks via branching as well as subsidiaries, the study shows that the presence of foreign banks in the four crisis-hit countries is actually much larger than has been previously reported once the presence of foreign branches is accounted for in the data. However, the percentage of assets controlled by foreign banks in Asia is still lower than that of other emerging economies, despite great increases in the post-crisis period. The author reviews regulations on foreign bank entry that may have limited the presence of foreign banks or influenced the method of entry (branching versus subsidiary). Given recent regulatory changes and the need for bank recapitalization in the region, the presence of foreign banks is expected to increase in the near future, so this study next takes up the policy implications of this trend. To date, foreign banks in most Asian countries appear to perform relatively worse than their domestic counterparts as measured by return on equity, cost to income ratios, and the ratio of problem loans to total loans. This finding contradicts previous research in other emerging economies, and may be due to the fact that foreign bank entry in Asia is still a very recent phenomenon, and has occurred mostly through the takeover of troubled banks in the region. The second policy issue examined here is the stability of lending by foreign banks relative to domestic banks. Macroeconomic data suggests that foreign bank lending may in some cases be more stable than domestic bank lending, particularly during crisis, but that the stability of foreign bank lending varies greatly by method of entry. Cross border claims of foreign banks are the most volatile, followed by foreign bank branch lending. Lending by foreign bank subsidiaries capitalized in the host country appear to be more stable than domestic lending, perhaps providing much needed capital during times of crisis. Therefore, foreign banks play an important role in Asia, not only in the traditional ways by providing new services and stimulating competition and efficiency, but also by contributing to stability of the banking sector in the face of macroeconomic fluctuations. However, the mode of foreign entry seems to have important implications for the contributions of foreign banks. Since lending by off-shore banks and foreign bank branches seems to be more volatile than locally capitalized foreign subsidiaries, policy makers in Asia should encourage foreign players to enter via fully-owned subsidiaries or joint ventures and move away from the previous pattern of branch-based entry.

Suggested Citation

  • Montgomery, Heather, 2003. "The role of foreign banks in post-crisis Asia: the importance of method of entry," MPRA Paper 33031, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:33031
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    Cited by:

    1. Pasadilla, Gloria & Terada-Hagiwara, Akiko, 2004. "Experience of Crisis-Hit Asian Countries: Do Asset Management Companies Increase Moral Hazard?," Discussion Papers DP 2004-17, Philippine Institute for Development Studies.
    2. C. P. Chandrasekhar, 2011. "Rethinking regulation: international banks in Asian emerging markets," PSL Quarterly Review, Economia civile, vol. 64(258), pages 249-266.
    3. Lee, Chien-Chiang & Hsieh, Meng-Fen, 2014. "Bank reforms, foreign ownership, and financial stability," Journal of International Money and Finance, Elsevier, vol. 40(C), pages 204-224.
    4. Ahmet Faruk Aysan & S. P. Ceyhan, 2006. "Globalization of Turkey's Banking Sector: The Determinants of Foreign Banking Penetration in Turkey," Working Papers 2006/20, Bogazici University, Department of Economics.
    5. Aysan, Ahmet Faruk & Ceyhan, Sanli Pinar, 2006. "Globalization of Turkey’s Banking Sector: the Determinants of Foreign Bank Penetration in Turkey," MPRA Paper 5489, University Library of Munich, Germany.
    6. Tri Mulyaningsih & Anne Daly & Riyana Miranti, 2015. "Managing the endogeneity problem of the market structure: a study on banking competition," Economic Journal of Emerging Markets, Universitas Islam Indonesia, vol. 7(2), pages 135-154, April.
    7. Okuda, Hidenobu & Rungsomboon, Suvadee, 2006. "Comparative cost study of foreign and Thai domestic banks in 1990-2002: Its policy implications for a desirable banking industry structure," Journal of Asian Economics, Elsevier, vol. 17(4), pages 714-737, October.
    8. Christoph Walkner & Jean-Pierre Raes, 2005. "Integration and consolidation in EU banking - an unfinished business," European Economy - Economic Papers 2008 - 2015 226, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.

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    More about this item

    Keywords

    bank; Asia; foreign;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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