The rise of Asian-owned foreign banks and the implications for credit stability in Asia

Abstract

This chapter focuses on foreign banks' local lending and its implication for credit stability in Asia. Employing a large and the most recent banking data set for 10 major Asian economies for 2000-09, this study provides fresh evidence that the country of origin of foreign banks explains variations in lending behavior. Asian-owned foreign banks showed the mildest change in credit growth during the recent Global Financial Crisis (GFC), contributing to credit stabilization in Asia in times of stress, whereas non-Asian foreign banks-particularly those from North America and Europe-cut off credit sharply from the Asian periphery, undermining credit stability in the region. Preliminary evidence suggests that the breakdown in the wholesale funding market in the GFC put pressure on non-Asian foreign banks, thus transmitting credit turbulence to Asia. The study calls for policies supporting regional financial integration with Asian-owned foreign banks, which help to build a robust and stable Asian banking system.