19 February 2001
Risks and benefits for developing country banking systems from the internationalization of financial services examined in new book by the WTO and the World Bank
A new book by the WTO and the World Bank “The Internationalization of Financial Services: Issues and Lessons for Developing Countries” offers a comprehensive review of the benefits and risks of internationalization of financial services.
internationalization of financial services is an important issue for
the strengthening and liberalizing of financial systems in developing
countries. The elimination of discriminatory treatment between foreign
and domestic financial services providers and the removal of barriers
to the cross-border provision of financial services opens the door to
the entry of foreign suppliers. There has been considerable support
for the view that this favors the building of financial systems that
are more stable and efficient by introducing international standards
and practices. At the same time, there have been concerns about the
risks that internationalization may carry for some countries,
particularly in the absence of adequate regulatory structures. This
book examines various factors affecting the relative costs and
benefits of internationalization and provides an insight into the
diversity and significance of the effects of internationalization on
domestic financial systems.
The main findings are:
of financial services can help countries build more robust and
efficient financial systems by introducing international practices
and standards; by improving the quality, efficiency and breadth of
financial services; and by allowing more stable sources of funds.
Given the present state of institutional development of many
developing countries' financial systems, these benefits could be
evidence shows that increased competitiveness enhanced through
financial sector openness spurs economic growth. Evidence also
suggests that it is the number of foreign entrants in the market
rather than their market share that has a positive effect on the
functioning of national banking markets. Increased competition may
imply a reduction in domestic bank profits, but banking customers
gain through reduced net interest margins, lower costs of
fee-based services and the availability of a greater variety of
and domestic financial institutions differ in their performance,
interest and operational focus. Analysis suggests that reasons for
foreign entry, as well as the competitive and regulatory
conditions found abroad, differ significantly between developed
and developing countries.
extent of the benefits of internationalization depends largely on
how it is phased in with other types of financial reform,
particularly domestic financial deregulation and capital account
liberalization. The experience of the European Union, in
particular, shows that internationalization and domestic
deregulation can be mutually reinforcing.
degree of capital account liberalization can determine the
potential gains and benefits of internationalization.
Internationalization does not, however, require moving to a fully
open capital account. Analysis suggests that internationalization
of financial services results in less distorted and less volatile
capital flows while also promoting financial sector stability.
shows that it is vital to strengthen the supporting institutional
framework in parallel with domestic deregulation and
internationalization: this is particularly true of the regulatory
and supervisory functions of the state but it also applies to the
use of the market in disciplining financial institutions. Both
factors can play a crucial role in minimizing the potential risks
of opening up, particularly when it comes to dealing with large
- Multilateral agreements like GATS allow countries to add credibility to their plans for financial system liberalization. In particular, agreements can help with the sequencing of reform. Authorities may liberalize domestically today and, through agreements, commit to future internationalization after allowing a period of time to strengthen financial regulation and supervision.
The papers collected in this volume arose from a World Bank funded research project, culminating in a conference, jointly sponsored by the World Bank and the WTO Secretariat, which took place in Geneva in May 1999. The book includes: case studies focusing on the effects of opening up the financial services sector in various developing countries and transition economies; the motivations for and effects of foreign entry on domestic financial systems; the differences between foreign and domestic financial services; the relationship between internationalization and capital account liberalization; the importance of domestic deregulation and the quality of the institutional framework for internationalization; the political economy of internationalization; the value to countries of committing to internationalization; the WTO Financial Services Agreement of December 1997.
individual contributions are: 1. Overview; S. Claessens, M.
Jansen. I: Analytical Aspects and Trade Agreements. 2.Internationalization
of Financial Services: A Trade-Policy Perspective; B. Hindley. 3.
Financial Services and Regional Integration; M. van Empel, A.
Mörner. 4.Financial Services Liberalization and GATS; Y.
Qian. II: The General Evidence. 5. Financial Sector
Openness and Economic Growth; F. Eschenbach, et al. 6.
How Does Foreign Entry Affect the Domestic Banking Market? S.
Claessens, et al. 7. How Does Financial Services Trade
Affect Capital Flows and Financial Stability; M. Kono, L.
Schuknecht. III: The European Experience. 8. Lessons from
European Banking Liberalization and Integration; X. Vives. 9.
The Impact of the Single Market Programme on EU Banking: Select Policy
Experience for Developing Countries; E.P. Gardener, et al. 10.
Consequences for Greece and Portugal of the Opening-Up of the
European Banking Market; P. Honohan. 11. The Opening of
the Spanish Banking System: 1985/98; J.M. Pastor, et al. IV:
Experiences of Developing Countries and Transition Economies.12.
On the Kindness of Strangers? The Impact of Foreign Entry on Domestic
Banks in Argentina; G. Clarke, et al. 13. Foreign
Investment in Colombia's Financial Sector; A. Barajas, et al.14.
Foreign Entry in Turkey's Banking Sector, 1980/1997; C. Denizer.
15. Experience with Internationalization of FSP. Case-study:
Hungary; J. Király, et al. 16. Foreign Direct
Investment in the Banking Sector: A Transitional Economy Perspective; L.
Papi, D. Revoltella.
Internationalization of Financial Services
Issues and Lessons for Developing Countries edited by Stijn Claessens and Marion Jansen,
WTO/World Bank Kluwer Law International, The Hague