Chapter 1: Emerging Market Finance: New Challenges and Opportunities

Emerging economies have faced new challenges and opportunities in banking and finance in the midst of increasing uncertainty in the post-crisis era. First, global banking continues to play an important role in affecting the competitiveness and efficiency of the domestic banking sector and the direction and magnitude of international capital flows. The growing presence of foreign banks in emerging economies has raised various concerns about their role in undermining the efficiency of host country monetary policy and banking stability, increasing vulnerability in banking and financial markets, and expanding spillover effects and contagion of foreign shocks from advanced economies to emerging markets. Second, stock markets in emerging economies have experienced increasing volatility and diverging market performances due to increasing policy uncertainty in advanced economies, multifactor determinants of the stock market pricing mechanism and herd (or adverse herding) behavior of stock market investors during crisis as well as post-crisis periods. Third, firms in many emerging markets have also been challenged by capital structure disruptions and the collapse of trade finance during crisis as well as post-crisis periods. In order to maintain sustainable long-term economic growth of developing economies and emerging markets and to expand opportunities to all participants in the path and processes to economic development, inclusive economic development strategies are called. This objective can be achieved through the enhancement of social and financial inclusion by allowing equal and easy access to essential financial services for the broader population, including low-income households and small- and medium-sized enterprises.