Cross-border banking and foreign affiliates came to dominate the financial systems of many countries in Eastern Europe, Latin America, and Sub-Saharan Africa in the 1990s. Yet, the regulatory reform agenda, set by countries with limited exposure to foreign banks at home, has largely neglected the needs of host jurisdictions. Thus, host regulators with foreign-dominated banking systems find themselves with a de facto lack of control over their financial systems while being at the same time largely shut out from key international decision-making forums. This presents host regulators with a dilemma between undertaking potentially costly national policies in a global financial system or relying on cooperative solutions by forums in which they have little voice.
This paper develops how this situation differs from the well-known “regulator’s dilemma” in IPE and how it shapes the demand for cooperation by host states under conditions of asymmetric interdependence. It then illustrates the “host’s dilemma” experienced by emerging European states between 2004 and 2007 before highlighting the surprisingly effective response of international institutions once the crisis hit the region in 2008. Based on this, it suggests three conditions under which international institutions might successfully mitigate the host’s dilemma: low politicization, high ideational consensus, and high implementation capacity.