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
What happened to US interbank lending in the financial crisis?
Gara Afonso, Anna Kovner, Antoinette Schoar 26 April 2010
Many commentators have argued that interbank lending froze following the collapse of Lehman Brothers. This column presents evidence from the fed funds market that, while rates spiked and loan terms became more sensitive to borrower risk, mean borrowing amounts remained stable on aggregate. It seems likely that the market did not expand to meet additional demand for funds.
Borrowing in the interbank market is the most immediate source of bank liquidity and, aggregate activity in the market can therefore be an important indicator of the functioning of the banking market. Problems in this market can lead to insufficient bank liquidity and thus to inadequate allocation of capital and risk sharing between banks. In addition, the (overnight) interbank rate, known as the fed funds rate in the US, is the main mechanism through which US monetary policy is channelled.
Financial markets Global crisis
global crisis, interbank lending, Lehman Brothers