The two faces of cross-border banking flows: An investigation into the links between global risk, arms-length funding, and internal capital markets
Dennis Reinhardt, Steven Riddiough 07 May 2014
Cross-border funding between banks collapsed following the bankruptcy of Lehman Brothers, but the withdrawal of funding was not uniform across countries. This column argues that the composition of cross-border bank-to-bank funding can help to explain why. Interbank funding between unrelated banks is particularly vulnerable to global shocks, but intragroup funding between related banks can act as a stabilising force, particularly for advanced economies with a high share of global parent banks. Policymakers should look at disaggregated cross-border bank-to-bank flows, as doing otherwise could result in a misleading assessment of financial stability risks.
Following the collapse of Lehman Brothers in September 2008, global risk spiked and the world witnessed a collapse in cross-border funding between banks. On closer inspection, however, not all countries’ banking systems experienced a withdrawal of cross-border finance. In fact, a number actually enjoyed an inflow of funding from banks overseas (Figure 1).
Figure 1 Cross-border bank-to-bank flows following the collapse of Lehman Brothers
Financial markets International finance
financial stability, banking, Wholesale funding, interbank lending, Cross-border lending, cross-border banking
How important was the worldwide use of wholesale funds for the international transmission of the US subprime crisis?
Claudio Raddatz 15 March 2010
How did a seemingly small shock to the US financial markets manage to spread so far, so quickly? This column argues that the heavy reliance on short-term wholesale funding is to blame. It follows that the discussions of regulatory reform should focus on the risks associated with the liability structure of banks.
The global scale of the financial crisis begs the question: How could a shock to a seemingly small segment of the US financial market spread so far, so quickly? Although trade links with the US have undoubtedly played a role (Levchenko et al. 2009), the timing of some of the events strongly suggests that the first route of transmission was through the web of international finance. Take the bank run on Northern Rock in September 2007, this took place only one month after the beginning of the crisis in the US and when the US economy had not yet started to shrink.
financial regulation, global crisis, Wholesale funding