Future Role of Foreign Banks in Asia

Abstract

Although the Asian Crisis has brought consensus on the necessity of strong domestic financial systems, there is less agreement as to the role of foreign banks in achieving the goals of economic growth and stabilization. Foreign banks are one obvious source to turn to for the capital so badly needed in the region. Proponents of foreign bank entry argue that foreign participation is a vital part of creating a vibrant financial system including a wide range of financial services and industries. But policymakers in the region worry about the potential bad effects of opening up their financial markets to foreign participation. Recent research showing a pattern in which financial crises tend to be preceded by financial liberalization has increased concern about the effects of opening up the banking system to foreign participation. In particular, there are concerns that foreign bank entry will expedite de facto capital account opening, perhaps contributing to instability of financial markets and the banking sector. A recent ADB Institute study on the role of foreign banks in postcrisis Asia comprehensively reviews the arguments for and against foreign bank participation in emerging markets and surveys the empirical evidence available on the issues of efficiency, competition and stability.