Crises as Catalysts for Foreign Bank Activity in Emerging Markets

Abstract

Since the mid-1990s, banking sectors in many developing countries have experienced some important transformations. Key among them has been a rapid increase in the degree of foreign bank participation. Between 1995 and 2002, the average share of banking sector assets held by foreign banks in 104 developing countries rose from 18 per cent to 33 per cent.1 Many studies have examined the causes and implications of foreign bank participation. The contribution of this chapter is to survey the existing literature and to focus on the role of crises in serving as a catalyst for the entry of foreign banks into developing countries. The empirical analysis that follows shows that countries that experienced a banking crisis from 1995 to 2002 tended to have higher levels of foreign bank participation than those that did not. Moreover, foreign participation tended to increase as a result of crises rather than prior to them. However, post-crisis increases in foreign participation did not tend to coincide with improved provision of credit to the private sector, in part because foreign entrants often acquired distressed banks with a high share of loans that needed to be written off. By contrast, in countries where the level of foreign participation was relatively high and stable, private credit levels were significantly higher than in other countries before, during, and after crises.