Bunk the bank, i say!

 

 

Foreign banks in emerging economies resemble a case where the guest weighs heavily on the hosts. Their wide presence in third world countries has not been a sudden phenomenon. Their emergence in sub-Saharan Africa is due to lack of local banking infrastructure while Central and Eastern Europe has begun playing host to the banks after the integration of the European countries under the aegis of the EU (European Union); Latin American governments’ efforts at liberalisation has led to the presence of international banks there. The high bank rates in developing economies have led the banks to reap rich dividends.

Loans and credits by foreign banks in developing countries have catapulted from $1.1 trillion in 2002 to $4 trillion in 2007. However, their continuous presence in these markets seems to have wider fiscal implications, especially after the credit crunch in the US. The World Bank recently warned that tighter interbank market conditions will severely affect credit flow to emerging markets. Its report entitled ‘Global Development Finance’ also revealed that even a difference of 10 basis points between two money market instruments, the London Interbank Offer Rate (LIBOR) and the Overnight Indexed Swept (OIS) rate, will cut credits by almost 3%. However, researches show that the difference has been over 10 for quite a long period. The emergence of foreign banks also reduces the effectiveness of domestic monetary policy. At present, half of the assets in countries like Argentina, Mexico, Czech Republic, Poland, Lithuania, Hungary, etc., are controlled by foreign banks. The World Bank further stresses that foreign banks are capable of raising funds internationally and as they increase, they let their lending rates to central banks go down dramatically. This eventually is a bad news for regulators in those developing countries who want to recover their economies from the most recent asset bubble.

Though the emergence of international banks is inevitable, accurate monitoring and suitable policy adoption will help avoid such problems.