The Role of Foreign Banks in Post-Crisis Asia: The Importance of Method of Entry

Abstract

PREFACEThe ADB Institute aims to explore the most appropriate development paradigms for Asia composed of well-balanced combinations of the roles of markets, institutions, and governments in the post-crisis period.Under this broad research project on development paradigms, the ADB Institute Research Paper Series will contribute to disseminating works-in-progress as a building block of the project and will invite comments and questions.I trust that this series will provoke constructive discussions among policymakers as well as researchers about where Asian economies should go from the last crisis and recovery. First, using data on the presence of foreign banks via branching as well as subsidiaries, the study shows that the presence of foreign banks in the four crisis-hit countries is actually much larger than has been previously reported once the presence of foreign branches is accounted for in the data. However, the percentage of assets controlled by foreign banks in Asia is still lower than that of other emerging economies, despite great increases in the post-crisis period. The author reviews regulations on foreign bank entry that may have limited the presence of foreign banks or influenced the method of entry (branching versus subsidiary).Given recent regulatory changes and the need for bank recapitalization in the region, the presence of foreign banks is expected to increase in the near future, so this study next takes up the policy implications of this trend. To date, foreign banks in most Asian countries appear to perform relatively worse than their domestic counterparts as measured by return on equity, cost to income ratios, and the ratio of problem loans to total loans. This finding contradicts previous research in other emerging economies, and may be due to the fact that foreign bank entry in Asia is still a very recent phenomenon, and has occurred mostly through the takeover of troubled banks in the region.The second policy issue examined here is the stability of lending by foreign banks relative to domestic banks. Macroeconomic data suggests that foreign bank lending may in some cases be more stable than domestic bank lending, particularly during crisis, but that the stability of foreign bank lending varies greatly by method of entry. Cross border claims of foreign banks are the most volatile, followed by foreign bank branch lending. Lending by foreign bank subsidiaries capitalized in the host country appear to be more stable than domestic lending, perhaps providing much needed capital during times of crisis. Therefore, foreign banks play an important role in Asia, not only in the traditional ways by providing new services and stimulating competition and efficiency, but also by contributing to stability of the banking sector in the face of macroeconomic fluctuations. However, the mode of foreign entry seems to have important implications for the contributions of foreign banks. Since lending by off-shore banks and foreign bank branches seems to be more volatile than locally capitalized foreign subsidiari...

Experience of Asian Asset Management Companies: Do They Increase Moral Hazard? - Evidence from Thailand

“…29 Interestingly, the moral hazard/institutional variable acts to decrease the new NPL ratio for foreign banks and finance companies, while its effect on new NPL ratio of state-owned banks and domestic private banks was insignificant. This result is consistent with the argument that foreign banks bring in better corporate governance to a country where they operate (see Montgomery 2003, for example). Finance companies, on the other hand, are generally considered weakly regulated where reckless lending easily takes place.…”

Slow Growth or Rapid Internationalization in Emerging Markets: The Case of Maybank Berhad

“…Governments relaxed entry barriers, resulting in an increase in foreign participation (Domanski, 2005;Montgomery, 2003). For instance, as an essential part of the open-door policy underlying the economic reform program that started in late 1978, China has permitted foreign banks to establish branches in special economic zones and selected cities since 1985 (Leung, Rigby, & Young, 2003).…”

The Mechanism of Foreign Strategic Investment Affecting Efficiency of Chinese Banks

“…Foreign bank entry in Central and Eastern European countries has led to foreign ownership in the local banking system often in excess of 80% of local banking system assets (Goldberg, 2007). The proportion of foreign-owned banks remains relatively low in Asia, but it has increased dramatically after the Asian Financial Crisis (Montgomery, 2003). Foreign ownership is especially sensitive in emerging countries since many immature financial systems in these countries rely heavily on banks to channel financial resources to development priorities (Zhu, 2007).…”