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The Role of Foreign Banks in Post-Crisis Asia. Diah Ratna Pratiwi. Penetration of Foreign Banks in Asia. The presence foreign players in Asia (foreign banks) increased significantly after Crisis 1997
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The Role of Foreign Banks in Post-Crisis Asia Diah Ratna Pratiwi
Penetration of Foreign Banks in Asia • The presence foreign players in Asia (foreign banks) increased significantly after Crisis 1997 • As a result of the financial sector liberalization that was implemented in most countries during 1980’s • However, until slightly before the Crisis 1997 and after the Crisis the presence of foreign banks in Asia remained low compared to those in Central/Eastern Europe or Latin American countries
Source: Mathienson adn Roldos 2001 (author’s estimates based on Fitch IBCA’s bankscope)
Method of Entry • The low participation rate of foreign banks in Asia is largely a legacy of strict regulation on foreign banks entry by most of the governments of Asian countries. • This is not only for the entry, but formal and informal restrictions on the operations of foreign banks were also common in the region. • Until the 1997 financial crisis, most of foreign entry into the banking sectors of Asian countries had been through offshore lending institutions or also known as branching, rather than fully-owned subsidiaries or majority joint ventures. • In Indonesia, the joint venture banks were established under the government of Soeharto following the 1988 PAKTO reforms.
Foreign Banks Entry in Asia • In Indonesia, the crisis 1997 made joint venture banks suffered massive losses. Domestic banks had no ability to participate in the recapitalization process. To response to the situation the government raised the limit of foreign ownership. By then the number of foreign banks increased. • In Korea some restrictions were faced by foreign players on their operations as well as discriminatory treatment before 1990. After 1997 crisis foreign ownership through joint ventures/fully owned subsidiaries was completely liberalized. • (cont’d)
Foreign Banks Entry in Asia • Malaysia has a relatively large presence of foreign banks. Before 1983, foreign banks in Malaysia could only makes loans in partnership with national banks, and the foreign ownership joint venture banks was limited to 30%. Between 1995-1996 foreign owned banks were established in Malaysia and since then number of foreign banks in Malaysia increased. • Thailand. Before 1997 crises no single banking liscense were issued by the government for more than 20 years. During Crisis 1997 the government relaxed the restrictions for foreign ownership
Effects of Foreign Banks Entry • Facilitating capital inflows, enhance the host country’s access to international capital • Improve financial infrastructure including accounting and transparency • Competition and efficiency • Stability
Conclusion • In post crisis Asia, foreign banks operate much more compared to the past. This also considered as an impact of the financial sector liberalization that was implemented in most countries during 1980s. • However, the penetration of foreign banks in Asia until the crisis happened still very low compared to Central/Eastern European and Latin American countries. This was considered as the effect of legacy of the previously heavily regulated Asian market. • After the crisis, the presence of foreign banks in Asia increased significantly due to both of the deregulation and the progress being made by the WTO on the Generalized Agreement on Trade Services. • Asian countries welcomed foreign financial institutions as part of the banking sectors recapitalization in the waking period of the crisis. Banking crisis brought increased foreign participation in that sector.
Conclusion (cont’d..) • The presence of foreign banks were considered able to foster the improvement of financial infrastructure, including accounting and transparency as the foreign banks may import financial system supervision adn supervisory skills from home country regulators to be implemented in the host country. • Foreign banks may help the host country in improving the financial services within the country, both by offering services directly and through increased competition with domestic banks. Increased competition will stimulate the efficiency of both domestic and foreign players in the market. And as a result of this increased efficiency, it will boost the stability of the financial sector.
