The Role of Foreign Banks in Post-Crisis Asia
Diah Ratna Pratiwi
(Based on the paper written by Heather Montgomery, “The Role of Foreign Banks in Post-Crisis
Asia: The Importance of Method of Entry”, 2003, Asian Development Bank Institute).
According to Liu L., foreign banks are one obvious source for the capital which badly needed in
the Asian region particularly after the crises. Foreign participation is considered as a vital part
of creating a vibrant financial system with a wide range of financial services and also financial
industries.1
1. Penetration of Foreign Banks in Asia
The presence of foreign players in Asia, in this case foreign banks has increased
significantly in the 1990s, but not as rapid as in Central and Eastern Europe due to the
previously heavily reglated environment of financial systems in Asia, especially in
countries affected by the Asian financial crises 1997.2 The figure below shows the
percentage of the assets under foreign control:
Table 1. Penetration of Foreign Banks in Emerging Economies
Total Assets
Assets under Total Assets
Assets under
(in billion USD) foreign control: (in
billions foreign control
1994
(%) 1994
USD)
(%) 1999
1999
Central
Europe
Czech Republic
Hungary
Poland
Total
Argentina
Brazil
Chile
Colombia
Mexico
Peru
Venezuela
Total
Total
Excluding
46.6
26.8
39.4
112.8
73.2
487
41.4
28.3
210.2
12.3
16.3
868.6
171.4
5.8%
19.8%
2.1%
7.8%
Latin America
17.9%
8.4%
16.3%
6.2%
1.0%
6.7%
0.3%
7.5%
13.1%
63.4
32.6
91.1
187.1
49.3%
56.6%
52.8%
52.3%
157
732.3
112.3
45.3
204.5
26.3
24.7
1302.4
365.6
48.6%
16.8%
53.6%
17.8%
18.8%
33.4%
41.9%
25.0%
44.8%
1
Liu, L. (2002) “Sequencing PRC’s Banking Sector Reform after the WTO: Options and Strategy”, ADB Institute
2
Montgomery, Heather (2003) The Role of Foreign Banks in the Post-Crisis Asia: The Importance of Method of Entry,
Asian Development Bank Institute
1
Brazil &
Mexico
Asia
Indonesia
n.a.
n.a.
43.6
6.7%
Korea
638
0.8
642.4
4.3%
Malaysia
149.7
6.8%
220.6
11.5
Thailand
192.8
0.5
198.8
5.6%
Total
1091
2.8%
2004.2
6.3%
*In billions of U.S. Dollars as of December
Source: Mathieson and Roldos (2001), author’s estimates based on Fitch IBCA’s
bankscope
As we can see from the above figure, Asia stands out the lack of foreign presence in its
banking sector until 1999 compared to Latin American countries and the
Eastern/Central Europe. This is because of the effect of the legacy of the previously
heavily regulated financial environment in Asian countries.
2. Method of Entry
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.3 This can be seen as the
result of the regulatory policies in Asia.4 Apart from the method of entry, the number of
penetration of foreign banks in Asia from 1994 to 2000 (including entry via branching)
indicates an increase as shown in the table below:
Assests UnderForeign Control (%)
1994
1996
1998
Indonesia
n.a.
n.a.
n.a.
Korea
5.80%
5.99%
6.13%
Malaysia
n.a.
22.25%
22.21%
Thailand
n.a.
3.62%
9.41%
Source: IDB, Montgomery Heather (2003)
2000
12.48%
7.25%
24.18%
11.33%
3. Regulation of Foreign Banks Entry in Asia
The low participation rate of foreign banks in Asia is “largely a legacy of strict regulation
on foreign banks entry by the governments in Asian countries”.5 In Korea for example,
even before 1997 crisis foreign bank subsidiaries were not permitted in practice by the
Ibid
Ibid
5 Ibid
3
4
2
Korean government.6 Not only entry, formal and informal restrictions on the operations
of foreign banks were also common in Asia.7
According to Montgomery, foreign banks in Indonesia were brought back by Soeharto
(2nd president of the Republic Indonesia) after years under the Soekarno’s precidency it
was effectively expelled from Indonesia. Under Soeharto, several joint venture banks
were established following up the 1988 PAKTO reforms which opened up banking
sector to new enforcement. Before the Asian crisis, it was considered unlikely that more
foreign banking liscences would be granted. As the 1997 crisis made joint venture
banks suffered massive losses and in many cases the domestic banks had no ability to
participate in the recapitalization processes, so so response the situation the
government raised the limit of the foreign ownership of the joint venture banks. By then,
the percentage of foreign ownership in Indonesian “joint banks” was very high. Also,
since then there are many foreign banks operating as branches of their parent banks in
their home countries.8
In Korea, some restrictions were faced by foreign playes on their operations, as well as
some discriminatory treatment before 1990. After 1997 Crisis, foreign ownership
through joint ventures or fully owned subsidiaries was completely liberalized. Until
early 2000, almost all foreign entry into the banking sector in Korea there is still through
foreign bank branches rather than joint ventures.9
Compared to other Asian countries which most affected by 1997 crisis, Malaysia was
relatively open to foreign presence. Compared to other Asian countries, Malaysia has a
relatively large presence of foreign banks.10 Before 1983, foreign banks in Malaysia
could only make loans in partnership with national banks, and the foreign ownership
joint venture banks was limited to 30%. However, between 1995-1996, several 100%
foreign owned banks were established in Malaysia and since then many foreign banks
are operating in Malaysia.11
The government restrictions restricted the growth of foreign banks branches in
Thailand. Even before the 1997 Crisis, no single banking lisence was issued by the Thai
government for more than twenty years.12 Almost all foreign banks were allowed to
operate only one branch in Bangkok and locally incorporated banks were requires by
law to be owned by national citizens so there was no foreign banks which enter the
Ibid
Ibid
8 Ibid
9 Ibid
6
7
10
Ibid
11
Ibid
Ibid
12
3
country via joint ventures or foreign owned subsidiaries.13 The financial crisis in 1997
changed the condition since banks needed huge amounts of new capital which the local
banks could not provide. In response to that the government relaxed the restrictions for
foreign ownership, allowing foreing interest to enter the market.14
4. Effects of Foreign Banks Entry
As the regulatory changes enacted in the wake of the Asian financial crisis in 1997, the
presence of foreign international institutions / banks started to increase significantly in
the following years.15 The presence of foreign banks plays an important role in
facilitating capital inflows, which in the end would enhance the host country’s access to
international capital. The presence of those foreign banks may improve financial
infrastructure including accounting and transparency.16 They will effectively give an
“impact” to the host country’s banking system by importing supervision and supervisory
skills from home country regulators (Levine (1996), Liu (2002a), Liu (2002b)).
In the wake of Asian crisis in 1997, foreign banks were also considered as having
destabilizing effect as they provided additional avenues for capital flight (Park (2002))
Other effects brought by the presence of foreign banks in the post-crisis:
a. Competition and Efficiency
 Greater openness to foreign banks will benefit emerging market in Asia
although some foreign entrants may provide competition for domestics
banks. But domestics player do not need to worry, they will still play
crucial role as long as they keep on their local knowledge and
relationships in the retail and small and medium enterprises loan
markets sectors. In this case, usually foreign banks have specific markets
to target when they enter a new country’s market. These specific
markets targetted by foreign banks: foreign exchange and derivative
tradings, trade finance and investment, global underwritting bonds and
equities.17
b. Stability
Montgomery, Heather (2003) “The Role of Foreign Banks in Post-Crisis Asia: The Importance of Method of Entry”,
Asian Development Bank Institute Ibid
14 Ibid
13
15
16
17
Ibid
Ibid
Ibid
4
 Since the 1997 Asian Financial crisis created an enormous economic
damage, the main concern of the policy makers in Asia is often not the
efficiency or even competietion, but stability.18
 Foreign banks can rely upon their parents’ funding so that this make
them “less vulnerable to business cycle” in the host country.19 This
situation may provide a more stable source of credit than domestic
banks. They’re also able to provide credit during economic downturns.20
The above situations can actually be a stabilizing force.
5. 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”.21
-
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.
-
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
foreign and domestic players in the market.22 And as a result of this increased
efficiency,this boost the stability of the financial sector.
***
Ibid
Ibid
20 Ibid
18
19
21
22
Ibid
Ibid
5
References:
Tschoegl, Adrian E. (2003) Financial Crises & the Presence of Foreign Banks, the World Banks
Montgomery Heather (2003) The Role of Foreign Banks in the Post-Crisis Asia: The Importance
of Method of Entry, Asian Development Bank Institute
Liu, L. (2002a) “Beyond Sequencing: A Risk Management Approach to Financial Liberalization”,
ADB Institute
(2002b) “Sequencing PRC’s Banking Sector Reform after the WTO: Options and Strategy”,
ADB Institute
Levine, R. (1996): “Foreign Banks, Financial Development and Economic Growth,” in C.E.
Barfield (ed.), International Financial Markets: Harmonization versus Competititon.
Washington D.C., American Enterprise Institute Press
Mathieson, D.J. and J.Roldos (2001): “The Role of Foreign Banks in Emerging Markets,” in R.E.
Litan, P.Masson, and M. Pomerleano (eds.), Open Doors: Foreign Participation in Financial
Systems in Developing Countries, Washington D.C.: Brookings Institution Press
Park, Y.C. (2002): “Financial Liberalization and Economic Integration in East Asia,” mimeo,
Asian Development Bank Institute
6