Foreign Banks in the Crisis
One reason governments have protected their banks from foreign ownership is that they feared foreign-owned banks would “cut and run”—i.e. abandon their host markets—in a financial crisis. An unexpected finding of this chapter, however, is that while foreign banks’ commitments to host markets have indeed been fleeting in crises, those commitments were weakest when the relationship between foreign banks and host markets was not characterized by ownership. Thus it was foreign ownership through a “second home market” model and bank subsidiaries during the acute phase of the US financial crisis (2008–9) that saved East Central Europe from economic catastrophe. In Western Europe, meanwhile, where foreign bank ownership levels were low but cross-border lending was significant, bank lending retreated behind national borders. This chapter also rejects the argument that the Vienna Initiative, a voluntary bank rollover agreement, compelled foreign-owned banks to maintain their exposures in East Central Europe.