NOT surprisingly, the countries that have been the most energetic in tackling the disposal of banks' bad loans have also gone furthest in restoring banking systems to health. The mere act of setting up a national asset-management company, even if it dithers over what to do with its bad loans, is a step in the right direction.

The most active governments have done much more than that. They have knocked heads together to encourage mergers, used public funds to recapitalise the most promising banks, shut the weakest ones and swiftly privatised those taken into government hands when they posed a systemic threat.

South Korea, again, leads the way. The number of commercial banks there is down to fewer than a dozen, from 33 in 1997. Immediately after the crisis, the government set aside a huge chunk of money, up to 15% of GDP, for cleaning up and restructuring the banking system. Mergers among the stronger banks were encouraged through government purchases of their non-performing loans, and two leading banking groups emerged. A series of mergers among weaker banks was helped along with government recapitalisations which, in effect, nationalised two of them, but both have now been privatised again.

Two other big banks, nationalised in December 1997 because of the systemic risk their losses posed, were cleaned up, recapitalised and had their management changed. One, Korea First Bank, the country's ninth-biggest, was sold in 1999 to Newbridge Capital, an American private-equity group that has been active in post-crisis South Korea, and is thriving. Seoulbank, the tenth-biggest by assets, has been sold to Hana Bank, a larger domestic rival, to form the country's third-biggest group. That union may well set off a fresh round of mergers.

Consolidation has not always gone smoothly. When Housing & Commercial Bank (H&CB), a big mortgage lender, was merging with Kookmin Bank (to form the country's biggest bank, under the Kookmin name), H&CB's boss was held hostage by his employees for two days.

Thailand closed the bulk of the 90-odd finance companies which, because of their short-term foreign-currency borrowings, were a source of so much instability. Only one commercial bank has been closed since, though some have merged. The government plans to privatise the state banks, yet people doubt whether it really wants to give up control of the biggest ones. After all, the prime minister, Thaksin Shinawatra, is committed to stimulating the economy, for which the state banks are an essential tool. In 2002, when private banks scarcely increased their lending, Krung Thai Bank aimed to expand its loan book by 8%, partly by financing government projects and state enterprises and partly by poaching retail customers from private-sector banks.

In Malaysia, the government helped recapitalise the banking system and at the same time raised minimum capital requirements, thus forcing a consolidation in which 54 banks merged into ten broad groups. Zeti Akhtar, the central-bank governor, reckons the groups are now big enough to compete when foreign banks have full access in 2007. The government, she says, will now stand back and let these groups bed down. Eventually three or four full-service banks are expected to emerge, along with perhaps a handful of specialist banks. Malaysian policymakers claim, with satisfaction, that they acted to pre-empt a crisis, not to respond to one—though to most outsiders it did look remarkably like one at the time.

A pre-emptive strike would certainly have been the right thing for Taiwan, which managed to sail through the Asian financial crisis mainly thanks to continuing American demand for Taiwanese information-technology products. It was not until the technology bust a few years later that the shortcomings in Taiwan's own banking system were laid bare. They turned out to be very similar to those elsewhere in the region. Since then the government has got through several finance ministers, but has still not managed to introduce serious reform. Late last year the president, Chen Shui-bian, could not bring himself even to clean up the notoriously loss-making co-operative sector, which lends to farmers and fishermen. Instead of letting the many weaker commercial banks fail, the government expensively props them up. So the banks lose even more money as they write off bad loans, without much prospect that this will reduce their bad-loan ratio.

At the time of the crisis, Indonesia had 238 banks of various kinds, including 160 private banks. Many of these were owned by the big business conglomerates, which milked their captive banks as an easy source of funds. The crisis exposed a tremendous concentration of risk in the banking sector. The government shut down 66 banks and spent tens of billions of dollars providing liquidity support for the system, a good chunk of which bank owners undoubtedly syphoned abroad.

Today the Indonesian Bank Restructuring Agency (IBRA) controls almost all the biggest banks, formerly private ones as well as seven state banks. Although they have been fully recapitalised through the special issue of $50 billion-odd in government bonds, bank consolidation and reprivatisation has been erratic. In 2000 bids for the country's biggest retail bank, Bank Central Asia, were blocked as being too low. Last March the bank was sold to an American private-equity firm, Farallon Capital Management. Next on the block is Bank Mandiri, the country's biggest, to be floated in April, followed by Bank Danamon. If the government is bold, it will sell these at a price to tempt a big foreign bank. Indonesia's banking system would benefit from a strong foreign presence.

When the full extent of the financial crisis became clear, banking experts predicted a great wave of cross-border mergers among Asia's banks, offering a once-in-a-lifetime chance for the world's biggest and most powerful banks—HSBC, Citigroup, Deutsche Bank and the like—to establish a dominant position in Asia. A precedent was not hard to find: following Latin America's banking crisis of 1994-95, foreign banks raised their share of the local banking system from 6% to 22% in Mexico and from 15% to 55% in Argentina.

In Asia, the crisis wiped out the capital of many local banks several times over, and banks struggled to raise fresh capital. New debt and equity issues by banks in the region fell by three-quarters in 1998. Governments that had long kept their banking markets closed to outsiders recognised the desperate need for outside capital. South Korea, Thailand and Indonesia all opened their doors to allow full foreign ownership of local banks; the Philippines and Taiwan raised the limits on majority stakes held by foreigners.

Yet the predicted dominance by international banks has not materialised—and given the meltdown of Argentina's banking system a year ago, perhaps some big banks might no longer want it. Foreign capital has certainly helped transform some countries' banking markets, notably South Korea's. Yet acquisitions by foreign banks, hedge funds and private-equity funds have for the most part been made opportunistically rather than to fit a grand strategy. If Asia's banks are to become robust, competitive and well-run, and if they are to do a half-decent job of allocating capital in the economy while making a healthy return for themselves, there is a need for much more consolidation and foreign investment.

Some planned foreign involvement has been frustrated by domestic political sensibilities, machinations even. Last year Standard Chartered, with ambitions to become a dominant consumer bank in developing Asia, thought that its bid for Indonesia's Bank Central Asia was in the bag, only to find that the deal was handed to Farallon Capital Management. In South Korea, Seoulbank was originally to be sold to HSBC, but a local outcry against the supposedly cushy terms scuppered the deal, to Hana Bank's eventual benefit. Foreigners are frequently accused of gouging the locals. Even in Japan, the media have claimed that the government's plans for painful bank reform are being carried out at the behest of George Bush's administration, which, in turn, is said to be in the pocket of the American private-equity groups, so-called vulture funds, that buy up distressed financial assets.

HSBC, for its part, does not consider acquisitions like Seoulbank as bonanzas. “We looked hard at banks in Thailand and Korea,” says Aman Mehta, chief executive of HSBC in Asia. “They involve very lengthy negotiations with governments, while any such acquisition requires a long investment phase before we see a return.”

Perhaps when banking sectors are in a state of flux, nimbler, more opportunistic foreigners—private-equity funds, for instance—are better placed. When Newbridge bought Korea First Bank, it pledged to inject capital. In return, it was able to change top management—the bank has a European as chief executive—and streamline branches; it also had wide discretion over handing back inherited bad loans to the government. It was a similar option that locals most objected to in HSBC's bid for Seoulbank.

Newbridge has multiplied the value of its investment in Korea First Bank severalfold. At around the same time, Goldman Sachs put $500m into Kookmin, in return for a minority stake and a seat on the board. At its peak, the investment was worth $2 billion, some of which Goldman has now pocketed by selling down its stake. With hindsight, it looks like easy money. But Richard Gnodde, the head of Goldman Sachs in Asia, tells it differently: “At the time, the risks looked significant. When we made our investment in Kookmin in early 1999, there was a lot of heated debate about it.”

The International Finance Corporation (IFC), the private-sector arm of the World Bank, gets credit not just for helping restore confidence by investing in South Korea's financial system, but also for helping spread best international practice—a case of profiting while doing good. The IFC had helped found Hana Bank and Korea Long-Term Credit Bank two decades before the crisis, but in view of the country's economic progress it had sold up and moved on some time ago. When the crisis took hold, the South Korean government asked the IFC to come back and help with these two institutions.

The IFC not only put $50m into Hana Bank and $25m into Korea Long-Term Credit Bank, but also arranged a rigorous programme of technical assistance: recovering bad loans, setting up loan-classification and management systems, improving information technology. Regulators saw what was happening at these two institutions, says Javed Hamid, head of the IFC's East Asia and Pacific operations, and adopted it as a model for the rest of the banking system. Korea Long-Term Credit Bank was subsequently taken over, in much better shape, by Kookmin Bank.

Now that the regulatory and business climate in South Korea has become more predictable, multinational commercial banks and insurers are tying up with local banks. This summer, the principle of bancassurance (allowing banks and insurers to own each other and cross-sell their products) is to be permitted for the first time. Kookmin's head, Kim Jung-tae, explains his bank's strategy: “Here at Kookmin, we intend to deliver the financial products of sophisticated countries through our branch network: insurance, mutual funds and savings products.” One such supplier will be ING, a Dutch insurer, which already has a stake in Kookmin.

The big multinational banks may not yet dominate the landscape in Asia, as they did in Argentina, and indeed they may never do so (other than in their home bases, such as HSBC in Hong Kong). Yet their relative advantages will become stronger. They can offer new products at lower cost because they can sell them through more distribution channels than can domestic Asian banks. Crucially, they have built huge processing centres that help keep down the cost of acquiring and servicing additional customers around the world. HSBC has centres in Hyderabad, Bangalore and Guangzhou. Standard Chartered claims huge efficiency gains from its new hubs in Chennai and Kuala Lumpur, with a hub in China to follow. “It's not the Korean banks that keep me awake at night,” says Mr Kim of Kookmin Bank, “it's the international giants.”