Friday, July 7, 2017
Author: David Schwartz J.D. CPA
On June 30, 2017, the Bank For International Settlements (BIS) published the results of a study examining trends in bank deglobalization since the financial crisis. Prompted by data indicating a decline in cross-border activity by banks, the BIS launched a study to determine whether the data support the hypothesis that the largest global banks have truly scaled back their cross-border activity since 2007, or whether it might be an indicator of some other trend.
Based on extensive analysis of banking data from the 1990s to the present, the paper finds that the decline in cross-border banking since 2007 does not represent a broad-based retreat in international lending (i.e., “financial deglobalization”). Rather, the paper’s authors are able to demonstrate convincingly that "what appears to be a global shrinkage of international banking is confined to European banks, which uniquely responded to credit losses after 2007 by shedding assets abroad – in particular, reducing lending – to restore capital ratios.”
The paper’s authors are able to support their hypothesis by examining bank data through a different lens than the traditional balance-of-payments metric. Instead, they have organized international banking data by the nationality of ownership to provide a clearer view of international financial integration. The data still reveals a decline of cross-border bank assets from a peak near 60% of global GDP in 2007 to less than 40% in recent quarters. But, outside of the European banking sector, other banking systems -- notably the Japanese, Canadian, and U.S. banking sectors — have expanded, rather than contracted, their global footprints since 2007.
Using this global dataset of banks’ affiliates (branches and subsidiaries), the report’s authors are able to demonstrate that "the who (nationality) accounts for more of the peak-to-trough shrinkage of foreign claims than does the where (locational factors)." These findings suggest that the contraction in global lending can be interpreted as cyclical deleveraging of European banks’ large overseas operations, rather than broad-based financial deglobalization.
The full text of the report is available via: http://www.bis.org/publ/work650.pdf