Financial Crises and the Presence of Foreign Banks

Adrian E. Tschoegl, Wharton School of the University of Pennsylvania

Abstract

Foreign banks have entered many transition and emerging economies in recent years, sometimes before economic and banking crises have developed, and often after. Today, in a number of countries foreign banks own as much as 90 per cent or more of the banking systems’ assets. The question then arises as to what the effect of the foreign presence is on crises. This chapter first discusses the motives, modes and regulation of foreign banks. In analyzing foreign entry, it is important to distinguish between classic or traditional foreign banks and the innovators, which in turn one can classify either as “bettors”, “prospectors” or “restructurers”. Innovators enter in response to the opportunities that crises create, but this chapter argues that their entry and the reforms that accompany it erode the very conditions that drew the banks. In the long-run then, it may well be that the relative and possibly even absolute importance of foreign-owned banks in host-country banking systems may shrink. Foreign banks have in most cases not played an important role in the emergence of crises, primarily because they did not have a significant presence before the crisis began. However, foreign banks can help in the aftermath of a crisis by acting as microeconomic rehabilitators of failed banks and as instruments of system wide reform.