Business oportunities

Central banks are powerful organizations. In addition to being endowed with significant statutory powers most are usually able to leverage these powers by applying what is referred to as “moral suasion”. This is politically correct talk for arm-twisting. Implicit threats or rewards may accompany the arm-twisting. Moral suasion is the ar t of getting banks to do things that the central bank wants but has no legal power to impose.
Their ability to influence domestic banks’ actions in the “national interest” is one of the reasons why most central banks act to ensure that locally controlled banks remain dominant in the domestic market. They usually seek to achieve this end by two means:
Foreign limits on control and ownership. They often impose limits on the proportion of shares in local banks (usually set at 40%, of issued shares) that can be held by foreign individuals or institutions. This usually results in two classes of shares and in many cases a “foreign premium” where shares on the “foreign board” trade at a premium to those on the local board. Individual holdings are also usually subject to a 5% limit. Central banks or regulators can also exercise their powers to approve senior management and board level appointments to ensure that management control remains in local hands whatever the ownership structure.
Restrictions on foreign banks’ operations. They also often try to restrict the market share of foreign banks. Measures include limits on the total number of banking licenses given to foreign banks. This often prevents the entr y of new foreign banks. Other restrictions that are often imposed concern the sor ts of businesses they are allowed to under take, limits on the number of branches and ATMs and being prohibited from being a member of the domestic clearing system (forcing them to clear all such transactions through a local bank). This heavy level of protection and regulatory requirements has had a significant influence on industry structures in many developing countries.