Foreign and Domestic Bank Participation in Emerging Markets: Lessons from Mexico and Argentina

ver the past decade, numerous financial systems have opened up to direct foreign participation through the ownership of local financial institutions, frequently as a direct consequence of—and as a perceived solution to—financial crises. Significant increases in such foreign participation have characterized the transition experience of Eastern Europe and the post–Tequila Crisis period in Latin America. However, the crisis experience in Asia has been markedly different to date, and is more notable for the limited nature of majority investments by foreign banks, despite the need for large-scale recapitalization of the region’s troubled financial systems. Arguments supporting a policy of openness to foreign participation are far from universally accepted. The benefits to emerging markets of foreign participation in domestic financial systems are widely exposited and argued to be broadbased. These arguments are mirrored by a set of concerns over the potentially adverse effects of opening to foreign participation (or at least opening too quickly). There is a shortage of hard evidence to support either side. This article contributes factually to the debate over the opening of emerging markets to foreign participation by exploring the experiences of Argentina and Mexico—two