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INTRODUCTION: WHAT IS SPECIAL ABOUT FOREIGN BANK PENETRATION IN TRANSITION ECONOMIES?
The experience of transition economies (TEs) with foreign bank penetration has a time dimension and an organisational dimension that are intertwined. Before 1995, virtually all foreign bank entry in TEs took the form of greenfield subsidiaries set up by a foreign bank in the host country. From 1995 onward, foreign banks participated in government programmes to privatise large state-owned banks and eventually took control of these banks. Oftentimes, a foreign bank entered a TE initially as a greenfield subsidiary and, after acquiring a former state-owned bank, merged the two entities to create a large foreign-owned bank. This takeover and consolidation activity resembles financial mergers and acquisitions in many emerging market economies. What distinguishes the TE experience from foreign bank penetration in many other countries is the hybrid corporate culture of the resulting foreign-owned bank. Having a dominant market position, the foreign-owned bank is a blend of expertise in transaction-based banking from the parent and experience in relationship-based banking from the acquired bank. Thus, I characterise the resulting bank as a hybrid that combines the hard technical information and banking skills of the parent with the soft information about clients and expertise concerning the local business environment of the acquired bank.
Tensions may arise in the parent's business strategy for this hybrid bank. Parent banks in TEs are large multinational banking groups. In allocating funding to their subsidiaries, the foreign bank may take a short-term portfolio approach and focus on the risk/return tradeoffs across several host countries. By contrast, the long-term business model of the foreign parent involves making a commitment to a TE host country so as to build up the requisite reputational capital necessary for further expansion in the region. From this perspective, the parent's long-term strategy begins with establishing trust and develops into a more mature relationship in which long-term commitment mitigates short-term portfolio concerns. Consequently, the parent bank may be held somewhat hostage when economic conditions in the host country deteriorate because it is unable to withdraw support from its subsidiary without damaging its reputation and affecting adversely its long-term business interests in the region.
As a result, the impact of hybrid foreign-owned banks on host country lending depends on a...