INVESTING IN THE FINANCIAL SECTOR OF EMERGING COUNTRIES: POTENTIAL RISK AND HOW TO MANAGE THEM

Alicia Garcia Herrero, Sonsoles Gallego Herrero and Cristina Luna Abella
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Sonsoles Gallego Herrero: BANCO DE ESPAÑA
Cristina Luna Abella: BANCO DE ESPAÑA

International Finance from University Library of Munich, Germany

Abstract: The purpose of this article is to assess how the changing operations of international banks in emerging countries in the last decades have altered the risks they face as well as their mitigation techniques. The recent expansion of the international banking business through the setup of branches and subsidiaries has increased business potential, but has also changed the nature of the risks faced. Nevertheless, it is hard to determine whether risks, on the whole, are larger now than when cross- border operations were the main instrument for international banks’ activity. In addition, the article describes the various channels through which the risks faced by banks operating in emerging countries increase in times of crisis, especially when operating locally and in highly dollarized host countries, as shown in the latest crisis events. While the financial independence of subsidiaries may be considered an important tool of risk control, the possibilities to mitigate risks in local markets during times of crisis are generally scarce. This could be due to the relatively recent expansion of foreign banks’ local operations in emerging countries, as compared to the cross-border business, together with the relative underdevelopment of local financial markets, or perhaps to the nature of the local business itself.

Keywords: financial; foreign direct investment; emerging countries; risk management (search for similar items in EconPapers)
JEL-codes: F23 G15 G21 G28 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2004-04-29
New Economics Papers: this item is included in nep-fin, nep-ifn, nep-mfd and nep-tra
Note: Type of Document - pdf; pages: 15
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpif:0404015

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