A Tale of Two Regions

Foreign-bank lending to emerging markets during the global crisis differed from continent to continent. Lending by foreign banks is an important part of international capital flows to emerging markets and a defining feature of financial globalization. In the years preceding the recent global crisis, foreign-bank lending to emerging economies expanded rapidly—whether directly from foreign-bank headquarters (cross border) or through affiliates operating in host countries. In many countries, especially in Latin America and emerging Europe, lending by foreign banks became a significant source of funding for households and corporations. Although it had its pros and cons, on balance the presence of foreign-owned banks was generally believed to have enhanced competition and aided overall financial stability.

During the global credit crunch, however, foreign banks were potential vehicles for spreading the crisis from advanced economies to emerging markets. In particular, the international credit crunch raised concerns that, as had happened in previous crises, these bank flows would come to a sudden stop, disrupting macroeconomic stability and undermining economic recovery efforts. Yet this tale unfolded differently in Latin America than it did in emerging Europe.

Click here to read the entire piece from Finance & Development at the IMF.