Drivers of structural change in cross-border banking since the global financial crisis

doi:10.1016/j.jimonfin.2014.11.012

Journal of International Money and Finance

Volume 52, April 2015, Pages 32-59

https://doi.org/10.1016/j.jimonfin.2014.11.012 Get rights and content

Highlights

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We study the effect of policy-related drivers of cross-border lending since the GFC.
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We use data on bilateral bank claims for 46 countries between 2005 and 2012.
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Expansive monetary policy has a positive effect on cross-border lending.
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Changes in regulatory policy are important drivers of bilateral bank claims.
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Arbitrage in bank capital regulation reduces bilateral lending in the euro area.

Abstract

The paper analyzes the effects of changes to regulatory policy and to monetary policy on cross-border bank lending since the global financial crisis. Cross-border bank lending has decreased, and the home bias in the credit portfolio of banks has risen sharply, especially among banks in the euro area. Our results suggest that expansionary monetary policy in the source countries – as measured by the change in reserves held at central banks – has encouraged cross-border lending, both in euro area and non-euro area countries. Regarding regulatory policy, increases in financial supervisory power or independencve of the supervisory authorities have encouraged credit outflows from source countries. The findings thus underline the importance of regulatory arbitrage as a driver of cross-border bank flows since the global financial crisis. However, in the euro area, arbitrage in capital stringency was linked to lower cross-border lending since the crisis.

Section snippets

Motivation

After a period of continuously rising cross-border financial claims, the 2007–08 global financial crisis (henceforth: GFC) led to a partial reversal of international capital flows. The retrenchment has been particularly pronounced for cross-border bank lending, as banks have withdrawn from foreign markets. Total cross-border bank claims have significantly decreased in response to the GFC and did not resume the pre-crisis upward trend since then.

Some of the retrenchment in cross-border banking

Push and pull factors of changes in cross-border bank claims

The goal of this paper is to study potential drivers of structural change in cross-border bank claims since the GFC. In the following, we will concentrate on the role of changes in policy variables for cross-border bank claims that have been discussed recently.

First, structural changes in cross-border lending may be due to changes in financial regulation. A priori, the effect of stricter regulatory requirements in source and/or destination countries of cross-border credit is not clear. On the

Empirical methodology

In order to analyze the effects of changes in banking regulation and monetary policy, we estimate, in a first step, a cross-sectional model with the dependent variable being the change in bilateral cross-border credit between the post- and the pre-crisis period. This allows us to answer the question whether policy changes have affected the adjustment of international bank lending since the crisis. We also differentiate between the effects of regulation and monetary policy in the euro area and

Regression results

Having data on changes in bilateral cross-border lending, banking regulation and monetary policy outcomes at hand, we address the question of how changes in regulatory and monetary policy have affected cross-border credit since the crisis.

Summary

The goal of this paper has been to analyze the importance of policy-related drivers of adjustments in cross-border bank credit and bilateral credit home bias since the global financial crisis. Our main results are summarized as follows.

First, source countries which have experienced larger increases in financial supervisory power or supervisory independence between the post and the pre-crisis period have extended more credit abroad. By contrast, increasing capital stringency in the source

Acknowledgments

The authors thank participants at the JIMF-USC-Conference on “Financial adjustment in the aftermath of the global crisis 2008–9: New global order?”, and in particular Mark Spiegel and the editors, for very helpful comments and suggestions. Hanna Schwank provided very valuable research assistance.

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View full text

Drivers of structural change in cross-border banking since the global financial crisis

Highlights

Abstract

Section snippets

Motivation

Push and pull factors of changes in cross-border bank claims

Empirical methodology

Regression results

Summary

Acknowledgments

J. Financ. Econ.

J. Int. Econ.

J. Dev. Econ.

J. Int. Money Finance

J. Financ. Econ.

J. Int. Econ.

J. Dev. Econ.

Cross-border Banking in Europe: Implications for Financial Stability and Macroeconomic Policies

Insecurity and the pattern of trade: an empirical investigation

Rev. Econ. Stat.

BIS Quarterly Review

Bank Regulations Are Changing: for Better or Worse?

Bank regulation and supervision in 180 countries from 1999 to 2011

J. Financ. Econ. Policy

A new database on financial development and structure

World Bank Econ. Rev.

Financial institutions and markets across countries and over time: the updated financial development and structure database

World Bank Econ. Rev.

Monitoring the financial system

Cross-border Banking, Bank Market Structures and Market Power: Theory and Cross-country Evidence

The Ideal Loan and the Patterns of Cross-border Bank Lending