MOREPRESS RELEASE
PRESS/208
19 February 2001
(01-0828)
RISKS AND BENEFITS FOR DEVELOPING COUNTRY BANKING SYSTEMS FROM THE
INTERNATIONALIZATION OF FINANCIAL SERVICES EXAMINED IN NEW BOOK
BY THE WTO AND THE WORLD BANK
A new book by the WTO and the World Bank " The Internationalization of Financial
Services: Issues and Lessons for Developing Countries"  offers a comprehensive review of the
benefits and risks of internationalization of fina ncial services. Based on wide-ranging cross-country
analysis and a number of detailed case studies, internationally recognized researchers analyze the
effects on banking systems from opening up ⎯how stability and efficiency improved, the relationship
between capital account liberalization and internationalization of financial services, and the
importance of the supporting framework for reaping the gains and minimizing the costs of opening
up.  The book will be useful for policymakers considering further liberalizing their country's financial
sector in the context of the new round of multilateral negotiations on services, launched by the WTO'sServices Council in February 2000, and for policy makers interested in strengthening financial
systems around the world.
The internationalization of financial services is  an important issue for the strengthening and
liberalizing of financial systems in developing countries. The elimination of discriminatory treatmentbetween foreign and domestic financial services providers and the removal of barriers to the cross-
border provision of financial services opens the door to the entry of foreign suppliers. There has been
considerable support for the view that this favors the building of financial systems that are more stable
and efficient by introducing international standards and practices. At the same time, there have been
concerns about the risks that internationalization may carry for some countries, particularly in the
absence of adequate regulatory structures. This book examines various factors affecting the relative
costs and benefits of internationalization and provides an insight into the diversity and significance ofthe effects of internationalization on domestic financial systems.PRESS/208
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MOREThe main findings are:
• Internationalization of financial services can help countries build more robust and efficient
financial systems by introducing international practices and standards; by improving the quality,
efficiency and breadth of financial services; and by  allowing more stable sources of funds. Given
the present state of institutional development of many developing countries' financial systems,
these benefits could be substantial.
• Empirical evidence shows that increased competitiveness enhanced through financial sector
openness spurs economic growth.  Evidence also su ggests that it is the number of foreign entrants
in the market rather than their market share that has a positive effect on the functioning of
national banking markets. Increased competition may imply a reduction in domestic bank profits,
but banking customers gain through reduced net interest margins, lower costs of fee-basedservices and the availability of a greater variety of services.
• Foreign and domestic financial institutions differ in their performance, interest and operational
focus. Analysis suggests that reasons for foreign entry, as well as the competitive and regulatory
conditions found abroad, differ significantly between developed and developing countries.
• The extent of the benefits of internationalization depends largely on how it is phased in with other
types of financial reform, particularly domestic financial deregulation and capital account
liberalization. The experience of the European Union, in particular, shows thatinternationalization and domestic deregulation can be mutually reinforcing.
• The degree of capital account liberalization can determine the potential gains and benefits of
internationalization. Internationalization does not, however, require moving to a fully open capitalaccount. Analysis suggests that internationalization of financial services results in less distorted
and less volatile capital flows while also promoting financial sector stability.
• Experience shows that it is vital to strengthen  the supporting institutional framework in parallel
with domestic deregulation and internationalization: this is particularly true of the regulatory and
supervisory functions of the state but it also applies to the use of the market in disciplining
financial institutions. Both factors can play a crucial role in minimizing the potential risks of
opening up, particularly when it comes to  dealing with large non-performing loans.
• Multilateral agreements like GATS allow countries to add credibility to their plans for financial
system liberalization. In particular, agreements can help with the sequencing of reform.
Authorities may liberalize domestically today and, through agreements, commit to future
internationalization after allowing a period of time to strengthen financial regulation and
supervision.
The papers collected in this volume arose from a World Bank funded research project,
culminating in a conference, jointly sponsored by the World Bank and the WTO Secretariat, which
took place in Geneva in May 1999. The book includes: case studies focusing on the effects of opening
up the financial services sector in various developing countries and transition economies; themotivations for and effects of foreign entry on domestic financial systems;  the differences between
foreign and domestic financial services; the relationship between internationalization and capital
account liberalization; the importance of domestic deregulation and the quality of the institutional
framework for internationalization; the politica l economy of internationalization; the value to
countries of committing to internationalization;  the WTO Financial Services Agreement of December
1997.PRESS/208
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The individual contributions are:  1. Overview; S. Claessens, M. Jansen.  I: Analytical
Aspects and Trade  Agreements.  2.Internationalization of Financial Services: A Trade-Policy
Perspective; B. Hindley.  3. Financial Services and Regional Integration; M. van Empel, A. Mörner.
4.Financial Services Liberalization and GATS; Y. Qian.  II: The General Evidence.  5. Financial
Sector Openness and Economic Growth; F. Eschenbach, et  al. 6. How Does Foreign Entry Affect the
Domestic Banking Market? S. Claessens, et al.  7. How Does Financial Services Trade Affect Capital
Flows and Financial Stability; M. Kono, L. Schuknecht.  III: The European Experience.  8. Lessons
from European Banking Liberalization and Integration; X. Vives.  9. The Impact of the Single Market
Programme on EU Banking: Select Policy  Experience for Developing Countries; E.P. Gardener, et al.
10.Consequences for Greece and Portugal of the Opening-Up of the European Banking Market; P.
Honohan.  11. The Opening of the Spanish Banking System: 1985/98; J.M. Pastor,  et al.  IV:
Experiences of Developing Countries and Transition  Economies.12.  On the Kindness of
Strangers? The Impact of Foreign Entry on Domestic Banks in Argentina; G. Clarke, et al.  13.
Foreign Investment in Colombia's Financial Sector; A. Barajas, et al. 14. Foreign Entry in Turkey's
Banking Sector, 1980/1997; C. Denizer.  15. Experience with Internationalization of FSP. Case-study:
Hungary; J. Király, et al.  16.Foreign Direct Investment in the Banking Sector: A Transitional
Economy Perspective; L. Papi, D. Revoltella.
Note for editors: You may obtain a review co py of the book (title below) by contacting
Una Flanagan, WTO Publications
41-22-739-5208una.flanagan@wto.org
The Internationalization of Financial Services
Issues and Lessons for Developing Countries edited by Stijn Claessens and Marion Jansen,
Joint WTO/World Bank  Kluwer Law International, The Hague
ISBN 90-411-9817-2
END