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Multinational banks and developing countries

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Snapshot for April 19, 2000

Multinational banks and developing countries

In the recently released Meltzer report, the free entry and operations of foreign banks were pushed to the fore as a recommendation for sound economic policy. Not that multinational banks (MNBs) needed another push to extend their operations in less industrialized countries. It is questionable, though, whether a greater presence of foreign banks in less industrialized economies actually makes for sound economic policies.

Less industrialized economies have become more open to MNBs, often because of a need for international capital. In particular, countries that have undergone financial crises are often looking to stabilize their banks with the help of international investors. Hence, MNB operations expand quickly after financial crises. In Korea and Thailand, MNB loans dipped briefly after the financial crisis hit, but then recovered and accelerated (see figure). A similar trend is also observable in Mexico, where MNB loans more than doubled from $1.8 billion at the beginning of the peso crisis in December 1994 to $4.3 billion in December 1995, and then jumped to $8.0 billion in December 1996 (see figure). The need of policy makers to find investors for troubled banks coupled with the fact that, after a rapid devaluation, domestic assets can be bought at bargain basement prices helps explain the increase in MNB loans after a crisis.

Even though the operation of MNBs has been growing rapidly in less industrialized economies in recent years, their impact seems less than beneficial. A greater presence of MNBs has been associated both with less credit for small- and medium-sized borrowers and with potentially greater financial and macro economic instability. This rapid multinational bank growth in the wake of recent crises may be laying the seeds for future problems in these economies.

Source: Bank for International Settlements, Consolidated International Banking Statistics.

For more information on this topic, read the EPI Issue Brief, Banking on Multinationals.

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