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Foreign Banks and Financial Stability in Emerging Markets: Insights from the Global Financial Crisis

This commentary discusses the findings of Vogel and Winkler's research on the role of foreign banks in ensuring financial stability in emerging markets during the global financial crisis. The commentary suggests focusing on regional differences, considering medium-term impacts, and adjusting the title for more clarity.

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Foreign Banks and Financial Stability in Emerging Markets: Insights from the Global Financial Crisis

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  1. Comments on: Vogel, U. and A. Winkler:Foreign banks and financial stability in emerging markets: evidence from the global financial crisis. Marko Škreb 17th DEC, Dubrovnik, June 2011

  2. Disclaimers: • Disclosure: I work for a foreign commercial bank  • In the paper there is a lot of empirical work and econometrics. I decided not to comment on those details because both my preferences and comparative advantage lies elsewhere. I want to contribute to a lively discussion, less to nice academic work done here. • My comments will rely on personal, regional experience, • After my comments it will be „cristal clear” that my bank does not want to have anything to do with them, thus no need to spell out the „ultimate disclaimer”.

  3. What the story is all about? The authors ask a very relevant question: We know that the share of foreign banks (subsidiaries) in emerging economies have increased lately. They explore their role in financial stability of those countries in the financial crisis. Their main findings are: • Foreign banks have stabilized cross border bank flows during the crisis period, • However, foreign banks had no stabilizing impact on domestic bank lending.

  4. Political economy context of foreign banks in EME • A lot of criticism that authorities have sold their „family silver” for peanuts and we lost „sovereignity” • Some bord members of CNB were against under the excuse that foreign banks will syphon domestic funds „abroad” • Now we have a crisis originated in (most) host countries, this is a real test of their behaviour, is it not? • I disagree with authors on the reasons why foreign banks have come to EME (reduce sudden stop and … contraction in domestic lending according to Mishkin, at least in our region). There was not much choice in transition (Slovenia).

  5. Issue No. 1: Should we look at all EME? The authors examine 84 EME in all regions in the world. The regions are so different, that I doubt the usefulness of looking at aggregates for EME (you „control for this” but still). The authors recognize this and look at 5 regions (Asia, ECA, LAC, MENA, SSA). But even regions are so different by all parameters (Bangladesh and China) I would rather have more in depth regional work (especially ECA or even more focused). Why? If more specific, regional it could be more useful for economic policy making (what do you say to policy makers?)

  6. Issues No. 2 and 3: Short run after-shock and a single shock 2. Authors look at difference between the average pre shock flows (2007Q3-2008Q2) and average post shock flows (2008Q4-2009Q1). Note: later Fig 3 and 4 include 2009Q2. Short run reaction curve can be very different than medium term reaction curve (which we still do not know). For financial stability longer term flows are relevant. 3. Is Lehman the only shock we refer to here? I would assume that for emerging markets, depending on the region, the L-shock was not of equal importance to all regions and did not hit them at the same time. Academically this might be relevant, external shocks are still hitting EM.

  7. Regional financial stability depended on Vienna and IMF/EU programs

  8. Issue No. 4 Credit growth „problem” Conclusion: „… we do notfindevidenceindicatingthatforeignbankscontributed to a smootherpatternofdomestic post-crisiscredit growth”. Implicitlytheblame is on foreignbanks, but: • the time frame is tooshortto tell • We do notknowifslowcredit growth is a supply or a demandissue (alwaysboth, but which one is dominant) In Croatia, basedon veryhighliquidityandverylowmoneymarketrates I wouldassumeit is more of a demandproblem (deliberatedeleveregingofhouseholdsandcompanies): only a practitioner’s view. • Theauthors do nothave separate data on lendingfromdomesticandforeignbanks. So, whatcouldhavehappened is thatforeignbanksdidcompensate for lackoflendingbydomesticones.

  9. So, when it comes to loans… „You can lead a horse to water, but you can't make it drink”

  10. Before, banks „had a ball”, but now it’s „never more”

  11. Summing up: • Interesting and relevant question: role of foreign banks in financial stability in EME, a lot of hard work, but… • My humble, practitioner’s suggestions are: • Due to regional differences, focus on regions separately, even more than now. How useful is the „benchmark”? • Extend time horizont as Q1 (or Q2 2009) are too close to the single shock and we may still suffer. What matters for financial stability and credit growth is medium term. • Consider changing the title as it is somewhat too broad and too „promising”, lower expectations.

  12. A final point on the role of foreign banks in EME

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