Banking in Emerging Markets

Abstract

Do banks play a special role in developing economies? Or is economic development held back by inefficient banking systems? If so, how will world financial integration affect economic and financial development? These are some of the questions addressed in this symposium. Given the importance of these issues, it is surprising that there are still few generally accepted answers to these fundamental questions. Most of the theory on financial intermediation is concerned with the role of banks in developed economies. It assumes that a well-functioning institutional structure is in place and, with some recent exceptions,1 it generally abstracts from macroeconomic issues such as inflation, budget deficits, and currency crises. Much of the theory deals with the fundamental questions of why banks exist, what added value they bring, whether they are inherently susceptible to runs, whether they tend to take excessive risks, and how they should be regulated (see Bhattacharya and Thakor, 1993). Another central issue concerns the structure of the whole financial system and why some developed economies (Germany, Japan) have bank-dominated systems, while others (UK and USA) have market-dominated systems. The issues related to the role of banks and the structure of the financial system have gained special prominence with the collapse of the communist regime in the Soviet Union in 1989 and the transition of East and Central European countries away from central planning to market-based economies. An immediate question arose for these countries. How should they set up their financial system? Which type of financial system should they adopt, a bankor market-dominated system? More generally,