GLOBAL FINANCIAL DEVELOPMENT REPORT 216/217 International Banking Ata Bertay GFDR Lead, Research Department Miriam Bruhn Senior Economist, Research Department http://www.worldbank.org/financialdevelopment
Outline of the presentation A conceptual framework for understanding international banking Introduction and discussion of data sources Stylized facts on the current state of international banking Conclusions and upcoming policy challenges
A Brief Historical Perspective on International Banking Early banks from the 15 th century Italian city-states and their foreign branch networks Emergence of German merchant banks in the 16 th century financing trade, industry and foreign sovereigns by raising funds from the money markets in Antwerp Dutch banks and early examples of syndicated loans and securities underwriting in the 17 th and 18 th centuries The first wave of globalization (late 19 th century) and the rise of modern global banks in the 2 th century
Definitions for Understanding International Banking International vs. Foreign banks Global vs. Regional banks Home vs. Host countries Subsidiaries vs. Branches
A Conceptual Framework: Basics Banks provide many important functions that facilitate economic activity (Levine, 1997) Resource allocation Diversification of risks Mobilizing and pooling savings Exerting corporate governance Facilitating the exchange of goods and services Banks expand their activities into other countries to further diversify risk, to realize higher profit margins, and to achieve economies of scale (Cull and Martinez Peria, 21) International banking flows interact with other types of flows (e.g. FDI, deepening local capital markets)
A Conceptual Framework: Bank business models In a multi-country setting some degree of financial integration is beneficial despite information or regulation related costs Important differences compared to other types of capital flows, such as debt and equity investments, due to unique bank business model Reduce information asymmetries through screening and monitoring Heavily regulated mainly at national level limited cross-border coordination Supported by financial safety net (e.g. deposit insurance, lender of last resort) Home/host country and bank characteristics affecting costs and benefits of cross-border banking (especially economic growthstability trade-off)
International Banking and Economic Development Entry by foreign banks => additional (human) capital, technologies etc. => increased competition in the banking industry, more efficient resource allocation, and better access to finance Institutional environment is critical Poor information infrastructure and contract enforcement => cherry picking => lower access to finance Lax regulation/supervision => high risk taking => banking crisis Recent empirical evidence on foreign bank presence on economic growth, entrepreneurship and inequality
International Banking and Financial Stability International banking as a risk-sharing scheme Ideally, stabilizing the local credit supply in a local crisis But if host country financial systems are not capable of handling such flows => fuel credit booms ending up in busts The global financial crisis revealed a number of country and bank characteristics affecting shifts in international banking Cultural and institutional distance Legal and regulatory framework Cross-border vs. brick and mortar Mode of entry (e.g. greenfield vs. M&A) Funding structures
What Data Can Be Used? Aggregate data on international banking flows: BIS Banking Statistics collecting data from national authorities from BIS reporting countries Bank-level data not publicly available (except G-SIBs assessment forms) Bank-level data on ownership: Bankscope, SNL, Fitch etc. Claessens and van Horen (215) Loan-level data: SDC Platinum and Dealogic Global Bonds and Syndicated Loans Databases (FinDebt) for quarterly volume of syndicated loans
What Constitutes a Foreign Bank Claim? Source: Cerutti, Claessens, and McGuire (212) A financial claim extended to a nonresident counterparty For example, loans and deposits in other banks, debt securities, and other residual claims Counterparties and risk transfer Consolidated Banking Statistics vs. Locational Banking Statistics
Foreign Claims by Banks in Counterparty Economies 35 3 25 US$, trillions 2 15 1 5 Developing High income Source: Consolidated Banking Statistics (Immediate Risk Basis), Bank for International Settlements (BIS) Notes: Foreign claims = outstanding cross-border loans + local loans by foreignowned banks; breakdown into developing and high income is by host country
Lending by foreign banks remains an important source of credit 7 % of private credit by deposit money banks 6 5 4 3 2 1 EAP ECA LAC MNA SAS SSA 25 28 211 214 Source: Consolidated Banking Statistics (Ultimate Risk Basis), BIS, and International Financial Statistics, International Monetary Fund Notes: Foreign claims on nonbank private sector as a percentage of private credit (country-level average by region)
Foreign claims mostly fund the nonbank private sector % of GDP 8 7 6 5 4 3 2 1 25 28 211 214 25 28 211 214 High income Developing Nonbank private sector Official sector Banks Source: Consolidated Banking Statistics (Ultimate Risk Basis), BIS, and International Financial Statistics, International Monetary Fund Notes: Foreign claims as a percentage of GDP by counterparty sectors (country-level average by income level)
Cross-border lending is sizeable compared to bond issuances US$, billions 8 7 6 5 4 3 2 1 Syndicated loans Bonds Source: Global Syndicated Loan and Bond Database, World Bank Notes: New volume issued each year in developing countries (for cross-border syndicated loans and foreign bonds)
Cross-Border vs Local Claims by Counterparty Economies US$, trillions 16 14 12 1 8 6 4 2 25 26 27 28 29 21 211 212 213 214 215 4. 3.5 3. 2.5 2. 1.5 1..5. US$, trillions Cross-border, high income Cross-border, developing (right axis) Local, high income Local, developing (right axis) Source: Consolidated Bank Statistics (Ultimate Risk Basis), BIS Notes: Breakdown into developing and high income is by host country
Cross-Border Claims by Host Regions 8 16 7 14 6 12 US$, billions 5 4 3 1 8 6 US$, trillions 2 4 1 2 25 26 27 28 29 21 211 212 213 214 215 EAP ECA LAC MNA SAS SSA HIC-OECD (right axis) Source: Consolidated Bank Statistics (Ultimate Risk Basis), BIS
Local Claims by Host Regions 8 16 7 14 6 12 US$, billions 5 4 3 1 8 6 US$, trillions 2 4 1 2 25 26 27 28 29 21 211 212 213 214 215 EAP ECA LAC MNA SAS SSA HIC-OECD (right axis) Source: Consolidated Bank Statistics (Ultimate Risk Basis), BIS
Foreign Bank Presence through Subsidiaries (% of Banks) 7 6 5 % of banks 4 3 2 1 EAP ECA LAC MNA SAS SSA HIC-OECD 1997 21 25 29 213 Source: Claessens and Van Horen (215) Notes: Percentage of banks that is majority foreign owned
The Rise of South-South Banking (Bank Ownership) Cumulative share, % of banks 1 9 8 7 6 5 4 3 2 6 7 8 9 13 16 14 15 19 2 25 23 81 78 73 7 62 61 1 1995 1997 1999 21 23 25 27 29 211 213 Domestic Foreign, high income Foreign, developing Source: Claessens and Van Horen (215) Notes: Percentage of banks that is majority owned by domestic vs foreign entities
The Rise of South-South Banking (Foreign Claims) 35 35 3 3 25 25 US$, billions 2 15 1 2 15 1 US$, trillions 5 5 23 24 25 26 27 28 29 21 211 212 213 214 215 Brazil, India, Mexico, and Turkey High income reporting countries (right axis) Source: Consolidated Bank Statistics (Immediate Risk Basis), BIS Notes: Breakdown into developing and high income is by home country
Some international banks have become very large Assets of top five banks relative to GDP 18 16 Assets of top 5 banks, % of GDP 14 12 1 8 6 4 2 '5 '9 '13 '5 '9 '13 '5 '9 '13 '5 '9 '13 '5 '9 '13 '5 '9 '13 '5 '9 '13 EAP ECA LAC MNA SAS SSA HIC-OECD Foreign Domestic Source: Bankscope and World Development Indicators
Restrictions on foreign bank entry have increased Percentage of countries with restrictions on foreign bank entry through a. High-income countries b. Developing countries 35 35 3 3 25 25 Percent 2 15 Percent 2 15 1 1 5 5 Acquisition Subsidiary Branch Joint venture Acquisition Subsidiary Branch Joint venture 23 27 211 23 27 211 Source: Barth, Caprio, and Levine (213)
New Developments in Global Finance Fintech = technology-enabled financial innovation facilitating new products, services, and business models Currently still small in size, but has growth potential Crowdfunding microloans (kiva.org) Peer-to-peer money transfer services (TransferWise) International Microfinance Institutions (MFIs) Greenfield MFIs with international holding company Access, Advans, BRAC, FINCA, and ProCredit Relative to other African microfinance providers, greenfield MFIs tend to grow faster, improve profitability, and increase lending to women (Cull et al. 215)
Conclusions and Policy Implications International banking remains important after the global financial crisis Competition and improved the efficiency of the financial system Risk-sharing to smooth downturns in home and host countries A country s experience with international banks depends on its institutional and regulatory environment New developments pose additional challenges to regulators Rise of south-south banking Increase in bank size New technologies
Foreign Bank Presence through Subsidiaries (% of Assets) 7 6 % of total bank assets 5 4 3 2 1 EAP ECA LAC MNA SAS SSA HIC-OECD Source: Claessens and Van Horen (215) 25 29 213
Foreign Bank Claims by BIS International Banking Statistics Example Transactions Transactions [1] [2] [3] [4] [5] Lending Banks Bank #1 headquarter in Bank #1 headquarter in Bank #1 subsidiary in Country B Bank #1 subsidiary in Country B Bank #1 headquarter in ; risk transferred to Bank #2 in Country D Reported Foreign Claims Borrowing Counterparties Bank #1 subsidiary in Country B Firm in Country B Firm in Country B Firm in Country C Firm in Country C Transactions LBS/R LBS/N CBS/IC CBS/UR [1] on Country B on Country B Not reported (intragroup position) Not reported (intragroup position) [2] on Country B on Country B on Country B on Country B [3] Local claim in Country B Local claim in Country B on Country B on Country B [4] Country B on Country C on Country C on Country C on Country C [5] on Country C on Country C on Country C on Country D 26