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, 7 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).
Topics: Financial markets, International finance
Tags: banking, cross-border banking, Cross-border lending, financial stability, interbank lending, Wholesale funding
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
Topics: Financial markets, Global crisis, International finance
Tags: banking, Central Asia, Credit crunch, credit growth, cross-border banking, Eastern Europe, global financial crisis
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.
Topics: Global crisis, Global economy, Microeconomic regulation
Tags: cross-border banking, macroprudential regulation, risk-taking
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).
Topics: Financial markets
Tags: banks, Credit crunch, cross-border banking, Italy
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:
Topics: Global crisis, International finance
Tags: cross-border banking, foreign banks, global crisis, investment
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.
Topics: Development, International finance
Tags: cross-border banking, development, foreign banks
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).
Topics: Europe's nations and regions, Global crisis, International finance
Tags: bank resolution, burden-sharing, cross-border banking, Eurozone crisis, financial stability
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.
Topics: International finance
Tags: cross-border banking, decoupling
Cross-Border Banking in Europe: Implications for Financial Stability and Macroeconomic Policies
Thorsten Beck, Wolf Wagner, Philip Lane, Dirk Schoenmaker, Elena Carletti, Franklin Allen, 20 June 2011
This CEPR report argues that policy reforms in micro- and macro-prudential regulation and macroeconomic policies are needed for Europe to reap the important diversification and efficiency benefits from cross-border banking, while reducing the risks stemming from large cross-border banks.
by Franklin Allen, Thorsten Beck, Elena Carletti, Philip R. Lane, Dirk Schoenmaker and Wolf Wagner
Topics: EU policies, Financial markets, Global crisis
Tags: cross-border banking, Europe, macro-prudential regulation, micro-prudential regulation