Global banking: Fragmenting or going through structural changes?
Stijn Claessens, Neeltje van Horen 06 December 2014
The Global Financial Crisis has triggered a reduction in cross-border bank lending. This column uses evidence from an updated bank ownership database to show that global banking is not becoming more fragmented. It is rather going through structural transformations. Banks from countries hit by crises are reducing their foreign presence, while banks from emerging and developing markets are stepping into the void.
What is the concern?
In the wake of the Global Financial Crisis many commentators have suggested that global financial integration has gone into reverse (e.g., The Economist 2013, Financial Times 2014). The debate has mainly focused on the collapse in cross-border bank flows (e.g., Milesi-Ferretti and Tille 2011, Reinhardt and Riddiough 2014), the behaviour of (large) European and American banks, and the fragmentation of financial markets in the Eurozone (e.g., ECB 2014, Beck 2012, Beck 2014).
global banking, cross-border banking, structural changes in banking
Regulating capital flows at both ends
Atish R Ghosh, Mahvash Saeed Qureshi, Naotaka Sugawara 30 October 2014
Capital flows to emerging markets have been very volatile since the global financial crisis. This has kindled debates on whether – and how – to better manage cross-border capital flows. In this column, the authors examine the role of capital account restrictions in both source and recipient countries in taming destabilising capital flows. The results indicate that capital account restrictions at either end can significantly lower the volume of cross-border flows.
The boom-bust cycles in cross-border capital flows during and after the Global Financial Crisis have kindled debates on the management of capital flows to emerging markets. While most of the literature has focused on the policy options of recipient countries (e.g., Ostry et al. 2010, 2011, IMF 2011), some recent studies and policy papers call for a more coordinated approach to regulating these flows by acting at both the source and recipient country ends (e.g., Ostry et al. 2012, IMF 2012, Brunnermeier et al. 2012). The idea is not new.
International finance Monetary policy
capital account restrictions, cross-border banking, capital flows, source and recipient countries
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
Who is to blame for the credit crunch: foreign ownership or foreign funding?
Erik Feyen, Raquel Letelier, Inessa Love, Samuel Munzele Maimbo, Roberto Rocha 15 March 2014
Eastern Europe was hit especially hard by the credit crunch during the global financial crisis. This column presents new evidence suggesting that reliance on foreign funding was more important than foreign bank ownership per se in exacerbating the post-crisis credit contraction. These findings point to the need to put more emphasis on the discussion of bank business models, regulatory standards, and supervisory arrangements.
From boom to crunch
Although most developing countries around the world experienced a severe contraction of bank credit during the recent global financial crisis, the Eastern Europe and Central Asia (ECA) region was disproportionately hit after it had experienced very high credit growth (Figure 1).
Figure 1. Banking system trends in ECA
Financial markets Global crisis International finance
Credit crunch, global financial crisis, banking, Eastern Europe, cross-border banking, credit growth, Central Asia
A new eReport: Excessive risk-taking by banks
Richard Baldwin 30 March 2012
Risk-taking by banks played a critical role in the global crisis and Eurozone crisis. This column introduces a new eReport that focuses on four aspects of excessive risk-taking by banks, highlighting the causes and the cures. The eReport applies the best available theory and data, bringing together the main insights and views that have emerged from the crisis.
For many, the global crisis was caused by the interlinked fragilities that arose in the banking and financial sectors; these themselves were created by mindless deregulation and permissive monetary policy. By the late 2000s, the system was so precarious that shocks from many directions could have triggered the economic conflagration we witnessed.
Global crisis Global economy Microeconomic regulation
risk-taking, cross-border banking, macroprudential regulation
Home bias and the credit crunch: Evidence from Italy
Andrea F Presbitero, Gregory F Udell, Alberto Zazzaro 12 February 2012
Understanding credit crunches is a major concern for policymakers. This column suggests that the severity of a credit crunch in a specific area depends on the hierarchical structure of the banks operating in that credit market. It explores the Italian case and shows that, in the months following the collapse of Lehman Brothers, banks retracted disproportionally from markets that are more distant from their headquarters.
The management of the Eurozone sovereign debt crisis will have significant effects on the stability of national banking systems, as argued in some recent Vox columns (Acharya et al 2011, Wyplosz 2011). The interaction between the debt crisis and banking risk will likely affect bank capital positions and might also affect bank liquidity and the fragility of the interbank markets.
Italy, Credit crunch, banks, cross-border banking
Foreign banks and the global financial crisis: Investment and lending behaviour
Stijn Claessens, Neeltje van Horen 31 January 2012
How did foreign banks adjust their investment and lending decisions during the global financial crisis? This column uses a new and comprehensive database to show that the crisis dramatically halted foreign direct investment in banking and that foreign banks often cut back on lending more than their domestic competitors. While exits have so far been limited, this is likely to change in the coming years.
Foreign banks have in many countries become important sources of financial intermediation. Given this importance, understanding the impact of the financial crisis on foreign-bank behaviour is important. Questions being asked include:
Global crisis International finance
investment, global crisis, foreign banks, cross-border banking
Foreign banks: Trends and impact on financial development
Stijn Claessens, Neeltje van Horen 28 January 2012
Foreign banks on domestic soil have always been controversial. This column presents a newly collected, comprehensive database on bank ownership for 137 countries over the period 1995–2009. It shows that current market shares of foreign banks average 20% in OECD countries and 50% elsewhere. In developing countries, however, foreign bank presence is correlated with less private credit.
Although interrupted by the recent financial crisis, the past two decades have seen an unprecedented degree of globalisation, especially in financial services. Cross-border bank and other capital flows have increased dramatically. Many banks have ventured abroad and established a presence in other countries. This has happened among EU countries (Allen et al 2011), but especially in emerging markets and developing countries.
Development International finance
development, foreign banks, cross-border banking
Coordinating bank-failure costs and financial stability
Iman van Lelyveld, Marco Spaltro 27 October 2011
The dissent brewing throughout Europe hinges on the question of whether the financial burdens of the Eurozone crisis should be shared between weak and strong. This column presents a new paper arguing that the wealthier, more stable economies don’t have much choice.
During the financial crisis, failure or distress of cross-border firms has been met by ad hoc coordinated solutions (eg Fortis and Dexia) or national solutions (eg UK and US banks). However, economic theory (such as Freixas 2003) shows that ‘improvised coordination’ is inefficient as it leads to a general under-provision of the public good (ie financial stability). The European Financial Stability Facility (EFSF) for the Eurozone (EZ) constitutes the first example instead of an ex ante burden-sharing agreement.
Europe's nations and regions Global crisis International finance
financial stability, Eurozone crisis, cross-border banking, burden-sharing, bank resolution
The future of cross-border banking
Dirk Schoenmaker 25 October 2011
Responses to the financial crisis have largely been along national lines. Governments rescued banks headquartered within their borders, and supervisors are requiring banks to match their assets and liabilities at a national level. This column says stable cross-border banking is incompatible with national financial supervision, which means the European banking market needs European authorities.
International trade and multinational business operations have traditionally been facilitated by international banks. The client-pull hypothesis (Grosse and Goldberg 1991) argues that a bank’s international clientele provide an incentive for internationalisation by that bank, since the financial system of the foreign country might lack the sophistication desired by the bank’s clientele.
decoupling, cross-border banking