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
Andrew K Rose, Tomasz Wieladek 29 May 2011
During the global crisis governments made substantial interventions in financial markets, particularly in the banking sector. This column argues that one unintended consequence of bank nationalisations has been to reduce cross-border lending. After nationalisation, foreign banks reduced British lending as a share of total lending by about 11 percentage points and increased interest rates to UK residents by 70 basis points. This suggests foreign nationalised banks have engaged in financial protectionism.
The “Great Recession” which engulfed the world in 2008-09 is frequently compared to the Great Depression of the early 1930s. Many economists blame trade protectionism for deepening, spreading, and/or lengthening the Great Depression, especially given the dramatic decline in trade during the Great Recession (Eichengreen and O’Rourke 2010).
Global crisis International finance International trade
financial regulation, global crisis, protectionism, Cross-border lending
Running for the exit: International banks and crisis transmission
Ralph De Haas, Neeltje van Horen 13 February 2011
Cross-border bank lending fell dramatically during the global crisis, but lending to some countries declined far more severely than to others. Recreating the monthly lending flows of the 118 largest international banks, this column finds that banks with head offices farther away from their customers are less reliable funding sources during a crisis, suggesting that the nationality of foreign banks matters.
In the wake of the 2007-2009 economic crisis, the virtues and vices of financial globalisation are being re-evaluated. Financial linkages between countries, in particular in the form of bank lending, have been singled out as a key channel of international crisis transmission. The IMF and the G20 have identified the volatility of cross-border capital flows as a priority related to the reform of the global financial system.
Global crisis International finance
capital markets, financial regulation, Cross-border lending