International BankingAta Bertay
GFDR Lead, Research Department
Miriam BruhnSenior Economist, Research Department
http://www.worldbank.org/financialdevelopment
GLOBAL FINANCIAL DEVELOPMENT REPORT 2016/2017
• Aconceptualframeworkforunderstandinginternationalbanking
• Introductionanddiscussionofdatasources
• Stylizedfactsonthecurrentstateofinternationalbanking
• Conclusionsandupcomingpolicychallenges
Introduction ConceptualFramework DataStylizedFactsConclusions
Outlineofthepresentation
ABriefHistoricalPerspectiveonInternationalBanking
• Earlybanksfromthe15th centuryItaliancity-statesandtheir“foreign”branchnetworks
• EmergenceofGermanmerchantbanksinthe16th centuryfinancingtrade,industryandforeignsovereignsbyraisingfundsfromthemoneymarketsinAntwerp
• Dutchbanksandearlyexamplesofsyndicatedloansandsecuritiesunderwritinginthe17th and18th centuries
• Thefirstwaveofglobalization(late19th century)andtheriseofmodernglobalbanksinthe20th century
Introduction ConceptualFramework DataStylizedFactsConclusions
DefinitionsforUnderstandingInternationalBanking
• Internationalvs.Foreignbanks• Globalvs.Regionalbanks
• Homevs.Hostcountries• Subsidiariesvs.Branches
Introduction ConceptualFrameworkDataStylizedFactsConclusions
AConceptualFramework:Basics• Banksprovidemanyimportantfunctionsthatfacilitateeconomicactivity(Levine,1997)• Resourceallocation• Diversificationofrisks• Mobilizingandpoolingsavings• Exertingcorporategovernance• Facilitatingtheexchangeofgoodsandservices
• Banksexpandtheiractivitiesintoothercountriestofurtherdiversifyrisk,torealizehigherprofitmargins,andtoachieveeconomiesofscale (CullandMartinezPeria,2010)
• Internationalbankingflowsinteractwithothertypesofflows(e.g.FDI,deepeninglocalcapitalmarkets)
Introduction ConceptualFrameworkDataStylizedFactsConclusions
AConceptualFramework:Bankbusinessmodels
• Inamulti-countrysettingsomedegreeoffinancialintegrationisbeneficial–despiteinformationorregulationrelatedcosts
• Importantdifferencescomparedtoothertypesofcapitalflows,suchasdebtandequityinvestments,duetouniquebankbusinessmodel• Reduceinformationasymmetriesthroughscreeningandmonitoring• Heavilyregulatedmainlyatnationallevel–limitedcross-bordercoordination• Supportedbyfinancialsafetynet(e.g.depositinsurance,lenderoflastresort)
• Home/hostcountryandbankcharacteristicsaffectingcostsandbenefitsofcross-borderbanking(especiallyeconomicgrowth-stabilitytrade-off)
Introduction ConceptualFrameworkDataStylizedFactsConclusions
InternationalBankingandEconomicDevelopment
• Entrybyforeignbanks=>additional(human)capital,technologiesetc.=>increasedcompetitioninthebankingindustry,moreefficientresourceallocation,andbetteraccesstofinance
• Institutionalenvironmentiscritical• Poorinformationinfrastructureandcontractenforcement=>cherrypicking =>loweraccesstofinance• Laxregulation/supervision=>highrisktaking=>bankingcrisis
• Recentempiricalevidenceonforeignbankpresenceoneconomicgrowth,entrepreneurshipandinequality
Introduction ConceptualFrameworkDataStylizedFactsConclusions
InternationalBankingandFinancialStability
• Internationalbankingasarisk-sharingscheme
• Ideally,stabilizingthelocalcreditsupplyinalocalcrisis
• Butifhostcountryfinancialsystemsarenotcapableofhandlingsuchflows=>fuelcreditboomsendingupinbusts
• Theglobalfinancialcrisisrevealedanumberofcountryandbankcharacteristicsaffectingshiftsininternationalbanking• Culturalandinstitutionaldistance• Legalandregulatoryframework• Cross-bordervs.brickandmortar• Modeofentry(e.g.greenfieldvs.M&A)• Fundingstructures
Introduction ConceptualFrameworkDataStylizedFactsConclusions
WhatDataCanBeUsed?
•Aggregatedataoninternationalbankingflows:• BISBankingStatistics–collectingdatafromnationalauthoritiesfromBISreportingcountries• Bank-leveldatanotpubliclyavailable(exceptG-SIBsassessmentforms)
•Bank-leveldataonownership:• Bankscope,SNL,Fitchetc.• Claessens andvanHoren (2015)
• Loan-leveldata:• SDCPlatinumandDealogic• GlobalBondsandSyndicatedLoansDatabases(FinDebt)forquarterlyvolumeofsyndicatedloans
Introduction ConceptualFramework Data StylizedFactsConclusions
WhatConstitutesaForeignBankClaim?
• Afinancialclaimextendedtoanonresidentcounterparty• Forexample,loansanddepositsinotherbanks,debtsecurities,andotherresidualclaims• Counterpartiesandrisktransfer• ConsolidatedBankingStatisticsvs.LocationalBankingStatistics
Introduction ConceptualFramework Data StylizedFactsConclusions
Source:Cerutti,Claessens,and McGuire (2012)
ForeignClaimsbyBanksinCounterpartyEconomies
Source:ConsolidatedBankingStatistics(ImmediateRiskBasis),BankforInternationalSettlements(BIS)Notes:Foreignclaims=outstandingcross-borderloans+localloansbyforeign-ownedbanks;breakdownintodevelopingandhighincomeisbyhostcountry
Introduction ConceptualFramework DataStylizedFacts Conclusions
0
5
10
15
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35US$,trillions
Developing Highincome
Lendingbyforeignbanksremainsanimportantsourceofcredit
Source:ConsolidatedBankingStatistics(UltimateRiskBasis),BIS,andInternationalFinancialStatistics,InternationalMonetaryFundNotes:Foreignclaimsonnonbankprivatesectorasapercentageofprivatecredit(country-levelaveragebyregion)
Introduction ConceptualFramework DataStylizedFacts Conclusions
0
10
20
30
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60
70
EAP ECA LAC MNA SAS SSA
%ofp
rivatecreditbydepositmoneybanks
2005 2008 2011 2014
Foreignclaimsmostlyfundthenonbankprivatesector
Source:ConsolidatedBankingStatistics(UltimateRiskBasis),BIS,andInternationalFinancialStatistics,InternationalMonetaryFundNotes:ForeignclaimsasapercentageofGDPbycounterpartysectors(country-levelaveragebyincomelevel)
Introduction ConceptualFramework DataStylizedFacts Conclusions
0
10
20
30
40
50
60
70
80
2005 2008 2011 2014 2005 2008 2011 2014
Highincome Developing
%ofG
DP
Nonbankprivatesector Officialsector Banks
Cross-borderlendingissizeablecomparedtobondissuances
Source:GlobalSyndicatedLoanandBondDatabase,WorldBankNotes:Newvolumeissuedeachyearindevelopingcountries(forcross-bordersyndicatedloansandforeignbonds)
Introduction ConceptualFramework DataStylizedFacts Conclusions
0
100
200
300
400
500
600
700
800US$,billions
Syndicatedloans Bonds
Cross-BordervsLocalClaimsbyCounterpartyEconomies
Source:ConsolidatedBankStatistics(UltimateRiskBasis),BISNotes:Breakdownintodevelopingandhighincomeisbyhostcountry
Introduction ConceptualFramework DataStylizedFacts Conclusions
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
0
2
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6
8
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12
14
16
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
US$,trillions
US$,trillions
Cross-border,highincome Local,highincome
Cross-border,developing(rightaxis) Local,developing(rightaxis)
Cross-BorderClaimsbyHostRegions
Source:ConsolidatedBankStatistics(UltimateRiskBasis),BIS
Introduction ConceptualFramework DataStylizedFacts Conclusions
0
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6
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14
16
0
100
200
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400
500
600
700
800
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
US$,trillions
US$,billions
EAP ECA LAC MNA SAS SSA HIC-OECD (rightaxis)
LocalClaimsbyHostRegions
Source:ConsolidatedBankStatistics(UltimateRiskBasis),BIS
Introduction ConceptualFramework DataStylizedFacts Conclusions
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4
6
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16
0
100
200
300
400
500
600
700
800
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
US$,trillions
US$,billions
EAP ECA LAC MNA SAS SSA HIC-OECD (rightaxis)
ForeignBankPresencethroughSubsidiaries(%ofBanks)
Source:ClaessensandVanHoren(2015)Notes:Percentageofbanksthatismajorityforeignowned
Introduction ConceptualFramework DataStylizedFacts Conclusions
0
10
20
30
40
50
60
70
EAP ECA LAC MNA SAS SSA HIC-OECD
%ofb
anks
1997 2001 2005 2009 2013
TheRiseofSouth-SouthBanking(BankOwnership)
Source:ClaessensandVanHoren(2015)Notes:Percentageofbanksthatismajorityownedbydomesticvsforeignentities
Introduction ConceptualFramework DataStylizedFacts Conclusions
81 78 73 7062 61
14 15 19 2025 23
6 7 8 9 13 16
0
10
20
30
40
50
60
70
80
90
100
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Cumulativeshare,%ofbanks
Domestic Foreign,highincome Foreign,developing
TheRiseofSouth-SouthBanking(ForeignClaims)
Source:ConsolidatedBankStatistics(ImmediateRiskBasis),BISNotes:Breakdownintodevelopingandhighincomeisbyhomecountry
Introduction ConceptualFramework DataStylizedFacts Conclusions
0
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10
15
20
25
30
35
0
50
100
150
200
250
300
350
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
US$,trillions
US$,billions
Brazil,India,Mexico,andTurkey Highincomereportingcountries(rightaxis)
Someinternationalbankshavebecomeverylarge
Source:Bankscope andWorldDevelopmentIndicators
AssetsoftopfivebanksrelativetoGDP
Introduction ConceptualFramework DataStylizedFacts Conclusions
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'05 '09 '13 '05 '09 '13 '05 '09 '13 '05 '09 '13 '05 '09 '13 '05 '09 '13 '05 '09 '13
EAP ECA LAC MNA SAS SSA HIC-OECD
Assetsoftop5banks,%
ofG
DP
Foreign Domestic
Restrictionsonforeignbankentryhaveincreased
Source:Barth,Caprio,andLevine(2013)
Percentageofcountrieswithrestrictionsonforeignbankentrythrough…
Introduction ConceptualFramework DataStylizedFacts Conclusions
0
5
10
15
20
25
30
35
Acquisition Subsidiary Branch Jointventure
Percent
a.High-income countries
2003 2007 2011
0
5
10
15
20
25
30
35
Acquisition Subsidiary Branch Jointventure
Percent
b.Developingcountries
2003 2007 2011
NewDevelopmentsinGlobalFinance
• Fintech=technology-enabledfinancialinnovationfacilitatingnewproducts,services,andbusinessmodels• Currentlystillsmallinsize,buthasgrowthpotential
• Crowdfundingmicroloans(kiva.org)• Peer-to-peermoneytransferservices(TransferWise)
• InternationalMicrofinanceInstitutions(MFIs)• GreenfieldMFIswithinternationalholdingcompany
• Access,Advans,BRAC,FINCA,andProCredit• RelativetootherAfricanmicrofinanceproviders,greenfieldMFIstendtogrowfaster,improveprofitability,andincreaselendingtowomen(Culletal.2015)
Introduction ConceptualFramework DataStylizedFacts Conclusions
ConclusionsandPolicyImplications
• Internationalbankingremainsimportantaftertheglobalfinancialcrisis• Competitionandimprovedtheefficiencyofthefinancialsystem• Risk-sharingtosmoothdownturnsinhomeandhostcountries
• Acountry’sexperiencewithinternationalbanksdependsonitsinstitutionalandregulatoryenvironment
• Newdevelopmentsposeadditionalchallengestoregulators• Riseofsouth-southbanking• Increaseinbanksize• Newtechnologies
Introduction ConceptualFramework DataStylizedFactsConclusions
ForeignBankPresencethroughSubsidiaries(%ofAssets)
Source:ClaessensandVanHoren(2015)
0
10
20
30
40
50
60
70
EAP ECA LAC MNA SAS SSA HIC-OECD
%oftotalbankassets
2005 2009 2013
26
Transactions
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[2]
[3]
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[5]
Transactions LBS/R LBS/N CBS/IC CBS/UR
[1] Country Aon Country B
Country Aon Country B
Not reported(intragroup position)
Not reported(intragroup position)
[2] Country Aon Country B
Country Aon Country B
Country Aon Country B
Country Aon Country B
[3] Local claimin Country B
Local claimin Country B
Country Aon Country B
Country Aon Country B
[4] Country Bon Country C
Country Aon Country C
Country Aon Country C
Country Aon Country C
[5] Country Aon Country C
Country A on Country C
Country Aon Country C
Country Aon Country D
Bank #1 headquarter in Country A Firm in Country B
Example Transactions
Lending Banks Borrowing Counterparties
Bank #1 headquarter in Country A Bank #1 subsidiary in Country B
Reported Foreign Claims
Bank #1 subsidiary in Country B Firm in Country B
Bank #1 subsidiary in Country B Firm in Country C
Bank #1 headquarter in Country A;risk transferred to Bank #2 in Country D Firm in Country C
ForeignBankClaimsbyBISInternationalBankingStatistics