by Joe Peek and Eric S. Rosengren
September/October 2000

Foreign entry into domestic banking markets remains a contentious issue. Whether privatizing a state bank in Brazil or selling a failed bank in Japan, the proposed sale of a large domestic financial institution, possibly to a foreign acquirer, frequently results in a major controversy. Many Asian countries have yet to experience major foreign penetration of domestic banking markets, while Latin American countries have privatized many of their banks and have encouraged foreign banks to enter their domestic markets. Because many Latin American countries opened their markets during the 1990s, and because they have experienced exchange rate and banking crises as well as severe fluctuations in their macroeconomies over this period, Latin American countries provide a good laboratory for understanding the effects of foreign bank penetration. The authors examine the legal and economic conditions that have affected foreign bank penetration in Argentina, Brazil, and Mexico and review how foreign banks have reacted to recent crises affecting these countries. They find that foreign banks viewed the economic problems as providing opportunities to expand, either by acquisition or by internal growth of existing subsidiaries. The same was not true for offshore lending, however.

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