Financial Crises and the Presence of Foreign Banks

The paper distinguishes between the classic or traditional foreign banks with their emphasis on corporate and wholesale banking, and the innovators responding to transition, deregulation or crisis in emerging markets. The innovators come in three varieties—bettors, prospectors and restructurers—with their role depending on their type. The paper argues, on the basis of 12 short national or regional case studies, that foreign banks have had little effect in evitting crisis, in great part because generally they were not present in any scale before the crisis. In the recovery phase foreign banks can act as rehabilitators of weak or failed banks, and can help ward off future crises by taking banks out of government or family ownership. The paper’s most controversial argument is that to the degree that reform succeeds, the conditions that attracted the foreign banks may disappear and the domestic banks are able to grow more rapidly. In subsequent decades many of the foreigner owners are likely to sell their subsidiaries to local banks and investors. Thus in succeeding decades, the ratio of assets in foreign- owned banks to total banking system assets should decline, even in the absence of government policies that aim for that result.