There is popular impression that banking crisis are associated with financial reform, and many government, especially in developing countries, considered an enhanced risk of crisis to be one to the costs. Deregulation and internationalization of financial services in Argentina, Brazil, Chile in 1970s ended in banking crisis and boarder financial crisis. This result confirms that degulation and internationalization of financial system without preparation of domestic institutions may cause higher systematic risk. Another main reason why most countries delay their liberalization of financial service is that financial sector is believed to as a strategic sector in economic development. Financial sector is the medium through which most of economic transaction are conducted.
Banks also play important role in monetary transmission of monetary policy.
Banks are also expected to provide safe assets to small deposits for whom monitoring and scrutinizing financial institutions is costly, and they make loans to borrower who are less visible in capital markets, such as small and medium sized enterprised that require credit to carry on their regular business. Developing-country governments with immature financial system often dominated by banks have tended to organize their financial systems to channel financial resources to development priorities. Both developed and developing countries share the concern that foreign financial institutions will have different priorities and will tend to ignore domestic objectives. For example, during 1997 currency crisis, it is widely believed that foreign banks, such as Citibank, play a major role in supporting capital outflow without consideration of national damage. Another worry is that foreign investors unfamiliar with emerging and still-underdeveloped markets may exhibit a home country bias, leading them to retreat promptly and massively at the first difficulty.