Insuﬃcient exit can lead to overcapacity and excessive risk-taking by weakly capitalized banks, weaken aggregate profitability, and limit banks’ ability to rebuild buffers following negative shocks. Generally, the link between competition and financial stability depends on the nature of the shock, risk-taking incentives at the level of the individual firm, and the overall structure of the banking system.
Those benefits include access to skills and control systems that might not be available locally, the introduction of international business standards into local markets, and reduced vulnerability to inappropriate political influence. Another important element is that the introduction of foreign capital constitutes a useful device for spreading risk in small and narrowly based economies. The consequences of unforeseen shocks are thus rendered less damaging.