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Policymakers continue to debate the merits of opening emerging market financial sectors to foreign ownership. A comparison of the 1995-2000 performance of foreign and domestic banks in select Latin American countries reveals that while foreign banks differed little from their domestic counterparts in overall financial condition, they showed more robust loan growth, a more aggressive response to asset quality deterioration, and a greater ability to absorb losses—characteristics that could help to strengthen the financial systems of their host countries.

In the second half of the 1990s, foreign banks significantly increased their ownership shares of emerging market banking systems. Contributing to this increase were moves by local banking sectors to recapitalize in the wake of financial crises, as well as the broader industry trends of consolidation, privatization, and liberalization. These forces have helped bring about an especially sharp expansion of the foreign bank presence in Latin America and Eastern Europe, where foreign institutions now account for a striking 50 percent or more of system assets in a number of countries.