The current financial crisis therefore has significantly affected the financial institutions of the world along with other non-financial institutions also. Due to this reason, the overall extension of credit to the non-financial institutions has been affected over the period of time. It is however, important to note that international banks specially working in developing countries have relatively limited contacts or business relationships with the international banks therefore they have not been affected the way international banks have been. In countries like China where the financial sector is mostly under the control of government, banks exposure towards toxic debt is limited therefore despite having the international presence, these banks are not fully affected by these changes.
It is also however, critical to understand that there is an indirect threat faced by the international banks due to general decline in the stock prices as well as the falling housing market. Since most of the banks do not keep most of their capital in the form of cash therefore declining asset values will force them to allocate more capital to cover the potential risks. In such an environment there are chances that the overall credit extension to private sector may decline and financial institutions may require the support of their governments to keep them solvent. Theory also suggests that a reduction in the bank credit may result into a decline in the investment activity in the country and this will invariably affect the growth and may result into the creation of unemployment within a country.
Since most of the emerging countries such as China, India, Korea and Japan are depending on exports as their major economic variable for growth therefore the current financial crisis may result into the substantial decline in the export business and thus may