Introduction

Finacation of the domestic financial markets, and has reached emerging countries through two main channels: the opening up of the capital account balance of payments; and foreign bank penetration of the domestic banking sector. According to the proponents of the benefits of financial integration, financial liberalization is an inevitable step on the path to development and should therefore be embraced. The main reason is that free movement of capital facilitates an efficient global allocation of savings and helps channel resources into the most productive uses, thereby increasing economic growth and welfare (Fischer, 1998). More specifically, the potential benefits of financial liberalization for emerging countries are related to (i) the greater access of emerging countries to external financial markets, probably at lower cost of capital due to better risk allocation; (ii) the pressure for an improvement in the financial supervision of domestic financial markets; (iii) the greater access to technological know-how and knowledge from other countries through foreign direct investment (transfer of technology); (iv) the development of the financial sector due to the effects of foreign banks’ entry on the credit supply, operational efficiency, best practices, and so on; and (v) the market discipline can stimulate more consistent macroeconomic policy as market forces can penalize bad policies (Prasad et al., 2003).