From Reputation amidst Uncertainty to Commitment under Stress: More than a Decade of Foreign-Owned Banking in Transition Economies

Abstract

The experience of transition economies (TEs) with foreign bank penetration has a time dimension and an organisational dimension that are intertwined. Before 1995, virtually all foreign bank entry in TEs took the form of greenfield subsidiaries set up by a foreign bank in the host country. From 1995 onward, foreign banks participated in government programmes to privatise large state-owned banks and eventually took control of these banks. Oftentimes, a foreign bank entered a TE initially as a greenfield subsidiary and, after acquiring a former state-owned bank, merged the two entities to create a large foreign-owned bank. This takeover and consolidation activity resembles financial mergers and acquisitions in many emerging market economies. What distinguishes the TE experience from foreign bank penetration in many other countries is the hybrid corporate culture of the resulting foreign-owned bank. Having a dominant market position, the foreign-owned bank is a blend of expertise in transaction-based banking from the parent and experience in relationship-based banking from the acquired bank. Thus, I characterise the resulting bank as a hybrid that combines the hard technical information and banking skills of the parent with the soft information about clients and expertise concerning the local business environment of the acquired bank.