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«BIS Papers No 4 The banking industry in the emerging market economies: competition, consolidation and systemic stability Monetary and Economic ...»

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BIS Papers

No 4

The banking industry in the

emerging market economies:

competition, consolidation

and systemic stability

Monetary and Economic Department

August 2001

The original versions of the papers in this volume were prepared for a meeting of senior officials from

central banks held at the Bank for International Settlements in December 2000. The views expressed

are those of the authors and do not necessarily reflect the views of the BIS or the central banks represented at the meeting. Individual papers (or excerpts thereof) may be reproduced or translated with the authorisation of the authors concerned.

Requests for copies of publications, or for additions/changes to the mailing list, should be sent to:

Bank for International Settlements Information, Press & Library Services CH-4002 Basel, Switzerland E-mail: publications@bis.org Fax: (+41 61) 280 9100 and (+41 61) 280 8100 This publication is available on the BIS website (www.bis.org).

© Bank for International Settlements 2001. All rights reserved.

ISSN 1609-0381 ISBN 92-9131-622-9 Table of Contents Participants in the meeting

BIS background paper:

John Hawkins and Dubravko Mihaljek: “The banking industry in the emerging market economies: competition, consolidation and systemic stability: an overview”

Papers presented:

Antonio Ahumada and Jorge Marshall (Central Bank of Chile): “The banking industry in Chile: competition, consolidation and systemic stability”

Liu Tinghuan (The People’s Bank of China): “The entry of foreign banks into the Chinese banking sector”

José Darío Uribe (Banco de la Republica): “The banking industry in Colombia: competition, consolidation and systemic stability”

Oldřich Dědek (Czech National Bank): “Bank consolidation in the Czech Republic”

David Carse (Hong Kong Monetary Authority): “The banking industry: competition, consolidation and systemic stability: the Hong Kong experience”

S P Talwar (Reserve Bank of India): “Competition, consolidation and systemic stability in the Indian banking industry”

Burhanuddin Abdullah and Wimboh Santoso (Bank Indonesia)“The Indonesian banking industry: competition, consolidation and systemic stability”

–  –  –

Jesús Marcos Yacamán (Banco de México): “Competition and consolidation in the Mexican banking industry after the 1995 crisis”

Alberto Reyes (Central Bank of the Philippines): “The Philippine banking industry:

competition, consolidation and systemic stability”

Ryszard Kokoszczyński (National Bank of Poland): “Structural changes in the Polish banking industry - three dimensions of consolidation processes in an emerging economy”......... 118 Vladimir Goryunov (Bank of Russia): “The Russian banking sector in 2000”

Jammaz Al-Suhaimi (Saudi Arabian Monetary Agency): “Consolidation, competition, foreign presence and systemic stability in the Saudi banking industry”

Gill Marcus (South African Reserve Bank): “An approach to the consideration of bank merger issues by regulators: a South African case”

Tarisa Watanagase (Bank of Thailand): “The banking industry in Thailand: competition, consolidation and systemic stability”

–  –  –

I. Introduction

2. Forces for change

Deregulation and opening-up to foreign competition


Changes in corporate behaviour

Banking crises

3. State banks: privatisation

Performance of state-owned commercial banks

Privatisation experiences and issues

Central Europe: role of strategic foreign partners

Latin America: privatisation as part of structural reforms

Crisis-hit Asian countries: how to re-privatise nationalised banks?

Is there a residual role for state-owned commercial banks?

4. Domestic mergers and consolidation

Potential for bank consolidation

Country experiences: market-driven versus government-led consolidation

Central Europe: market-driven consolidation has only started

Latin America: consolidation as a response to inefficient banking structures............ 20 Government-led consolidation in the crisis-hit Asian economies

Bank consolidation dilemmas in the mature emerging economies

5. Entry of foreign banks

Expanding abroad

Business focus of foreign banks

Impact of foreign entry on domestic banks

Opening up the domestic banking system

6. Issues in systemic stability

Branches versus subsidiaries of foreign banks

Foreign banks and depositor protection

Competition, moral hazard and systemic stability

Annex 1: Common causes of banking crises

Annex 2: Evidence on the motives for bank mergers in industrial countries

Annex 3: Additional background tables


BIS Papers No 4 1



The banking industry world wide is being transformed. The global forces for change include technological innovation; the deregulation of financial services at the national level and opening-up to international competition; and - equally important - changes in corporate behaviour, such as growing disintermediation and increased emphasis on shareholder value. In addition, recent banking crises in Asia and Latin America have accentuated these pressures. The banking industries in central Europe and Latin America have also been transformed as a result of privatisations of state-owned banks that had dominated their banking systems in the past. The implications of these developments were considered by a small group of senior central bankers at the BIS during a two-day meeting in December 2000. Key data on banking systems in the emerging and advanced economies confirm these trends. In particular, the tendency towards a reduced number of banks and other deposit-taking institutions is evident from Table 1.

–  –  –

Yet the summary statistics on the banking systems in individual economies (shown in Table A1 of Annex 3) strongly suggest that there is much potential for further bank consolidation. Many emerging economies, notably in Asia, still have vast numbers of small deposit-taking institutions. And the banking systems in Latin America and some central European economies remain relatively underdeveloped, a legacy of the lack of confidence in the currency or the banks.

This overview has benefited greatly from the cooperation, comments and statistical input of the central banks invited to the meeting and central bankers and private sector bankers interviewed before the meeting. Special thanks go to Philip Turner for extensive comments and Marc Klau for statistical assistance, to Emma Warrack and Edith Sutton for secretarial assistance and to Nigel Hulbert, Tom Minic and Liliana Morandini for editorial assistance. Background work on Asian economies was partly carried out by George Pickering, Robert McCauley and Ben Fung of the BIS Representative Office for Asia and the Pacific. Agustin Villar contributed to the discussion of developments in Latin America. Helpful comments were received from Palle Andersen, John Heimann, Masanori Ishizuka, Phil Lowe, Setsuya Sato, Kostas Tsatsaronis and Bill White. Opinions expressed are those of the authors and are not necessarily shared by the BIS or the central banks involved.

BIS Papers No 4 Against this background, the paper first reviews the main forces for change in the emerging economies’ banking industry (Section 2), and then analyses how these forces are affecting the structure of their banking systems through privatisations (Section 3), domestic mergers (Section 4) and entry of foreign banks (Section 5). As discussed in individual sections, these structural changes raise a number of microeconomic questions about economies of scale and scope, competition within the banking market, and the business focus of domestic and foreign banks. In addition, bank consolidation raises some important macroprudential issues - in particular, about the impact of consolidation on supervisory structures and systemic stability in an industry dominated by a small number of institutions (Section 6).

2. Forces for change

This section provides an overview of some of the main forces shaping the banking industry in the emerging market economies in recent years. The approach followed is eclectic and no attempt is made to assign weights to the different forces for change that are identified. The reason for such an approach is simple: banking, like other economic activities, is in the midst of rapid - many would argue historic - structural change driven by the development and application of new information technology (IT). Because the core area of this technology is information processing - which also lies at the heart of financial intermediation - and because the development and use of IT are bound to continue (regardless of the movement in new technology stock indices), it is still far too early to grasp where exactly the banking industry is headed. At least three other forces underlie recent changes in the emerging economies’ banking industry: domestic deregulation and external opening-up of financial sectors, changes in corporate behaviour and banking crises.

Deregulation and opening-up to foreign competition Banking in the emerging economies was traditionally a highly protected industry, living off good spreads achieved on regulated deposit and lending rates and pervasive restrictions on domestic and foreign entry (see Section 3). For many years, there was little pressure to disturb this cosy and wasteful world. However, global market and technology developments, macroeconomic pressures and banking crises in the 1990s have forced the banking industry and the regulators to change the old way of doing business, and to deregulate the banking industry at the national level and open up financial markets to foreign competition. As a result, borders between financial products, banks and non-bank financial institutions and the geographical locations of financial institutions have started to break down.

These changes have significantly increased competitive pressures on banks in the emerging economies and have led to deep changes in the structure of the banking industry. As discussed in the sections that follow, these changes include the establishment of many new institutions, privatisation of state-owned banks, mergers and consolidation, and a large increase in the presence of foreign banks.

One of the main catalysts for increased competition at the domestic level has been the removal of ceilings on deposit rates and the lifting of prohibitions on interest payments on current accounts.

These deregulation measures have reduced sources of cheap funding for many banks and put pressure on their profits. Intensified competition has made it harder for banks to cross-subsidise different activities and has forced them to price risks more realistically and to charge explicitly for previously “free” services. This has been unpopular and poses considerable public relations challenges for banks. Banks also increasingly face competition from the non-bank financial industry, especially for lending to large companies (see below). Accompanying deregulation has been greater emphasis on capital adequacy, which has encouraged banks to securitise some assets, generate more fee-based income, and try to improve efficiency. In some emerging economies, higher required capital ratios have been an important spur to mergers (or sales to foreign banks) for poorly performing banks, which would have had trouble raising new capital to meet such standards (see Sections 4 and 5).

The causes of financial consolidation in the advanced economies are similar; see Group of Ten (2001).

BIS Papers No 4 3 At the international level, the easing of restrictions on foreign entry and the search by global institutions for profit opportunities in the emerging economies have led to a growing presence of foreign-owned financial institutions in domestic banking systems. As a result, most emerging economies now increasingly look to foreign banks to provide the capital, technology and know-how needed in banking (see Section 5). But most international banks are investing through local vehicles and local brand names, seeking both to exploit customer loyalty and to avoid antagonising local nationalist sentiments. Another reason for this approach is that it enables international banks to focus their “brand name” activities on large financial centres and reduce the number of locations in which they are present.

Technology According to conventional wisdom, new information technology is not at present likely to impinge much on the development of the banking industry in the emerging economies, which remain technologically behind the industrial countries. For example, the low level of penetration in most emerging economies (Table A2 in Annex 3) means that the internet is not seen as a threat to traditional banks. Given the signs of a possible bursting of the e-banking “bubble” in the United States and Europe, some have also argued that the issue of electronic banking may go away before the emerging markets need to worry about it.

This conventional view can be challenged on several grounds. As noted above, the major issue about new IT is its impact on the processing of information, which is the very essence of the banking business. Perhaps the most significant innovation has been the development of financial instruments such as derivatives that enable risk to be reallocated to the parties most willing and able to bear that risk, thereby inducing more investment in real assets and fostering the development of banking and

financial markets in general. The use of such instruments is not the preserve of industrial countries:

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