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The Impact of the Global Financial Crisis on Banking Globalization

Abstract

Although cross-border lending has fallen sharply since the crisis, foreign bank presence—that is, “brick-and-mortar” operations—declined much less. While OECD banks reduced their presence (though they still control 89 percent of foreign banks’ assets), non-OECD banks more than doubled theirs. Banks from countries facing systemic crises exited (more distant) markets and curtailed their subsidiaries’ growth. Banks were more likely to sell smaller, more recent investments and enter closer and more important trading partners, shunning crisis and euro area countries. Lending locally grew more than cross-border claims did, but related to different factors. Altogether, the paper shows that global banking is not becoming more fragmented, but rather going through some important structural transformations with a greater variety of players and a more regional focus.

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Notes

  1. For example, “Financial Fragmentation: Too Much of a Good Thing?” The Economist, October 12, 2013.

  2. The original database covers the period 1995–2009.

  3. See Claessens and Van Horen (2013) for a review of the literature on the impact of foreign banks during tranquil and crisis times.

  4. Although in basic theoretical models financial globalization should enhance international risk sharing, reduce consumption volatility, and foster economic growth, in practice effects are found to be less clear-cut. Kose and others (2010) show that before the financial crisis, risk sharing typically increased somewhat for advanced countries—consistent with their greater levels of financial openness—but did not noticeably affect emerging market and developing countries. Although financial globalization did not increase macroeconomic volatility or crisis frequency in countries with well-developed financial systems and a relatively high degree of institutional quality, it did increase volatility for countries that failed to meet these preconditions or thresholds. The link between financial globalization and economic growth is also found to be complex. Although foreign direct investment and other nondebt-creating flows are found to be positively associated with long-run growth, the impact of debt flows seems to depend on the strength of a country’s policies and institutions.

  5. The data, in the original database and this update, were manually collected using many sources. These include, but are not limited to, (parent) bank websites and annual reports, banking regulatory agency/central bank websites, reports on corporate governance, local stock exchanges, SEC Form F-20, newspaper articles, and country experts.

  6. Information on mergers and acquisitions was mostly obtained from banks’ individual websites. Although the database does not provide a specific indicator for the occurrence of a merger or acquisition, where relevant (detailed) information is often provided in accompanying notes.

  7. We exclude the holding company if the bank itself is also reporting as a separate entity to Bankscope; if this is not the case, we keep the holding company.

  8. If the exact year of establishment could not be determined, but additional information indicated that the bank was in operation prior to 1995 (for example, the presence of financial statements), we code 1500 as the fictive year of establishment. In terms of exit, we use in general the year the bank became inactive in Bankscope as the moment of exit, but cross-checked this information when necessary.

  9. For domestic banks, we do not make a distinction between private and state-owned.

  10. Over time, identifying home countries and tracing ownership information becomes more complicated since more banks raise equity through public capital markets offerings, resulting in more dispersed ownership structures with many anonymous shareholders with no controlling stakes. We therefore only consider block shareholdings when determining the country of ownership. Note that while most often the case, these foreign block owners need not be banks.

  11. The bias of not covering branches in terms of (changes in) the structure of global banking is not obvious (see Fiechter and others, 2011, for an analysis of the choice of subsidiaries vs. branches; Schoenmaker, 2013, for an analysis of (changes) in the relative share of subsidiaries and branches in the EU; and Fáykiss, Grosz, and Szigel, 2013, for a case study of factors driving conversion from subsidiaries to branches in Hungary after the global financial crisis).

  12. While included in the database, we exclude from all further analyses eight offshore host countries (Antigua and Barbuda, Bahrain, Barbados, Cyprus, Mauritius, Panama, Seychelles and Singapore) and 13 offshore home countries (Andorra, Bahamas, Bahrain, Barbados, Bermuda, Cayman Islands, Cyprus, Liechtenstein, Mauritius, Netherlands Antilles, Panama, Singapore and British Virgin Islands) as foreign investments in and by banks from these countries are likely driven by specific considerations. Furthermore, Taiwan is excluded as balance sheet information is mostly unavailable for its banks. Together, this reduces the number of banks active in 2013 from 3,853 to 3,613.

  13. Balance sheet information in the current Bankscope database is very limited before 2005, making it impossible to provide reliable estimates of the asset share of foreign banks for earlier periods.

  14. The OECD group only includes the core OECD countries, and the non-OECD group includes all other countries. As such, current OECD countries like Hungary, Czech Republic, Korea, Poland, Slovakia, and Slovenia are included in the non-OECD group.

  15. To provide a meaningful comparison of the changes in the asset shares of foreign banks, we only include banks that have asset information for both years. Banks that are only active in 2007 or 2013 are also included, provided that asset information is available for all the years the bank is active. Countries in which less than 60 percent of the banks are covered this way are excluded from the sample altogether.

  16. As in the previous section, we exclude all home and host countries that are offshore centers. In addition, in this and the next section, we also exclude all host countries in which less than 60 percent of the banks have asset information available in 2007.

  17. As we conduct this analysis at the bank level instead of the host country or bilateral level, we focus on changes between 2007 and 2012 and not 2013 as a larger share of banks has balance sheet information available in 2012 as compared with 2013.

  18. We dropped outliers at the 1st and 99th percentile. Results are robust to winsorizing instead.

  19. In some cases, more than one bank from the same home country entered the same host country between 2007 and 2012. These cases (17 percent) are considered as one entry.

  20. We only consider as possible host countries those countries with at least one foreign bank present in 2007 and/or 2012 and as possible investors’ only banks from home countries with foreign investment by at least one bank in 2007 and/or 2012.

  21. In one of our robustness tests, we show that results are similar when clustering at both the home and host country levels.

  22. Since income levels in home and host countries are closely related to whether the country experienced a crisis recently or not (correlations of 0.63 and 0.66, respectively), we do not include income level in the regressions. Including the log of GDP per capita in 2007 of the host and home countries, however, does not alter the main regression results.

  23. We also examined whether the impacts of Market share and Young were different if the home country experienced a crisis. As this was not the case, we did not include these interactions in the regressions.

  24. Note that all euro area home countries experienced a banking crisis during the sample period, so the parameter captures an additional crisis effect for these countries.

  25. In addition, the positive correlation might be the result of the entry of a foreign bank facilitating trade as found by Claessens, Hassib, and Van Horen (2015).

  26. Note that these numbers differ somewhat from those provided in Section II. This is due to the smaller subsample of host countries that we use here as we drop those host countries where less than 60 percent of the banks have asset information available.

  27. When excluding these financial centers the parameter becomes insignificant.

  28. We also clustered at the pair level and found results to be robust.

  29. As these are consolidated data, interbank positions are netted out.

  30. Even though we have access to confidential data, in some cases bilateral information is still restricted, at the discretion of the central bank providing the data, to protect the anonymity of their banks. Therefore, while we capture most cross-border lending, some lender-borrower pairs drop out of the sample as cross-border information is missing for 2007, 2012, or both years.

  31. As in Section III, when a foreign bank is active in both 2007 and 2012, we include data on its lending only if balance sheet information is available for both years. For banks only active in 2007 or 2012, lending data are included for the year the bank is active, provided it is available. Countries with less than 60 percent of banks covered this way are excluded from the sample altogether.

  32. Even though four non-OECD countries also report to the BIS, we do not include these in our sample as they only have very limited foreign bank presence and analyzing only OECD creditor/home countries makes for a more homogenous group. The 18 home countries included are: Australia, Austria, Belgium, Canada, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, Portugal, Spain, Sweden, Switzerland, the United Kingdom, and the United States.

  33. Loan growth of all foreign banks is quite close to that of OECD home country only foreign banks (correlation is 0.85). However, in quite a few host countries, where non-OECD banks are important, loan growth by all foreign banks differs substantially from that of OECD home country only banks as non-OECD banks have offset declines in local lending by OECD banks.

  34. Note that formal barriers to foreign entry, as reflected in commitments under the WTO agreement on financial services, have not increased after the crisis (see Claessens and Marchetti, 2013).

  35. Kerl and Niepmann (2014) develop a theoretical model of how banks choose between lending internationally intrabank, interbank, and to foreign firms given among others, impediments to foreign bank operations, with supportive evidence for their model from German bank-level data.

  36. Other recent, promising policy efforts include the adoption of the so-called FSB “Key Attributes of Effective Resolution Regimes for Financial Institutions” and other agreements to set out mechanisms to deal with global systemically important financial institutions that fail across some sets of specific jurisdictions. But much remains to be done here, including on modalities for burden sharing in case of actual failures where a need for government involvement in restructurings arises.

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Additional information

*Stijn Claessens is with the Board of Governors of the Federal Reserve System, University of Amsterdam, and CEPR, and Neeltje van Horen is with De Nederlandsche Bank (DNB) and CEPR. Much of the work for this paper was done while Claessens was at the IMF. The authors would like to thank the editors, the two referees, Allen Berger, Claudia Buch, Eugenio Cerutti, Ralph De Haas, Jeanne Gobat, Luc Laeven, Frederic Lambert, Martin Saldias, and seminar participants at DNB for insightful comments, Tomas Piskacek for extensive help with collecting the data, and Oana Furtuna for excellent research assistance. The database underlying this paper is made available online at http://www.dnb.nl/en/onderzoek-2/databases/bank.jsp. This paper is in part supported by a U.K. Department for International Development research project on macroeconomic policy in low-income countries. Although extensive efforts have been undertaken to cross-check information, we cannot accept responsibility for the accuracy of the final data.

An erratum to this article is available at http://dx.doi.org/10.1057/s41308-017-0034-4.

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Appendix A

Appendix A

See Tables A1, A2 and A3.

Table A1 Percentage of Foreign Banks among Total Banks (by country)
Table A2 Percentage of Foreign Bank Assets among Total Bank Assets (by country)
Table A3 Variable Definitions and Sources

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Claessens, S., van Horen, N. The Impact of the Global Financial Crisis on Banking Globalization. IMF Econ Rev 63, 868–918 (2015). https://doi.org/10.1057/imfer.2015.38

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JEL Classifications

  • F21
  • F23
  • G21