‘Domestic Bank-Centered’ Financial Liberalization: Origin, Crisis, and Response

Abstract

Existing explanations of international financial liberalization tend to understate the economic and political importance of related policies governing domestic financial markets. Further, these approaches often fail to specify fully the links between the international economy and domestic politics. Initial financial liberalization is often ‘domestic bank-centered’, i.e. it preserves a privileged position for weakly regulated domestic banks as the capital account is opened. On the other hand, there is much greater variation in later-stage financial policy developments, particularly following banking or currency crises. Adequate explanations should be able to explain, not just the initial pattern of financial liberalization, but also subsequent policy developments. This paper's main refinement is to explore the nature and implications of ‘dispersed’ interest group preferences. Initially more passive, poorly organized dispersed groups are viewed as the key link between the economic effects of crisis and variation in crisis-response policies. The explanatory value-added is explored through case studies of financial sector policy change in South Korea, Mexico, and Hungary.