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Regulatory rules on foreign banks may limit the growth of developing countries

The growing restrictions imposed on foreign banks operating in developing countries disturb the better growth prospects by limiting the flow of funding to companies and households, according to the latest report of the World Bank.

International banking can bring important development benefits, but it is not a panacea and brings risks, says the Global Financial Development Report 2017/2018: Bankers without Borders. The central bankers from emerging economies should consider how to maximize the benefits of cross-border banking while minimizing costs, also adds the report.

The crisis and the economic slowdown of 2007-2009 have led to a wide reassessment of the benefits and costs of international banking and of constraints that have stopped the rise of globalization of financial services of cross-border lending. But developing countries may need to revise the value of international banks as critical ways to access global credit and faster economic growth, while they continue to manage risks.

“The international banking really poses risks of volatility, especially for countries with weak regulations and institutions, which need to be curbed”, said the World Bank President, Jim Yong Kim. “But without a competitive banking sector, the poor people will not be able to access basic financial services, many companies will be excluded from the markets, and growth in developing countries will be stalled”, added he.

The banking funding is vital to a thriving private sector, especially in support of small and medium-sized enterprises. Developing countries can maximize the benefits of a stronger banking system while at the same time protecting themselves against risks by improving information sharing through credit registers, strictly enforcing property rights and treaties and ensuring strong control over banks. After banks from the developed economies withdrew after the crisis, the lenders in developing countries intervened to fill the vacuum and expand beyond their borders, forming 60% of the new bank stocks since the crisis. As a result, banking relations between developing countries and the regionalization of international banking operations have increased.

At the same time, the total assets of the largest banks in the world grew by 40%, which raises concerns that the post-crisis regulatory efforts have failed to address the risks to banks that are too big to fail.

Many countries are looking at the recent widening of major international banks and restricting foreign banking. Almost 30% of developing countries have imposed restrictions on foreign bank branches. However, they deprive countries’ economies of access to global credit opportunities that companies and households can win.

If done properly, allowing foreign banks to enter and improving financial openness, can reveal systemic benefits, including improved financial stability, greater competition and better resilience to economic shocks.

The report also looks at the benefits and risks of rapidly expanding financial technologies around the world. According to the report, these technologies can speed up transactions, lower costs, improve risk management, and expand financial services for the population that has less access to services. However, they pose risks due to the lack of security networks, potential misuse of personal data and electronic fraud.

About Manuel Fajardo

Manuel Fajardo is from Brazil, living in Porto Alegre. He works in Finance Apprise Journal, as analysts and content writer. In my responsibilities are finance and business news for Latin America, Asia and Australia.

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