GLOBAL FINANCIAL DEVELOPMENT REPORT …pubdocs.worldbank.org/en/960011509974144571/GFDR... · • Emergence of German merchant banks in the 16th century ... • Banks provide many

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

20

25

30

35US$,trillions

Developing Highincome

Lendingbyforeignbanksremainsanimportantsourceofcredit

Source:ConsolidatedBankingStatistics(UltimateRiskBasis),BIS,andInternationalFinancialStatistics,InternationalMonetaryFundNotes:Foreignclaimsonnonbankprivatesectorasapercentageofprivatecredit(country-levelaveragebyregion)

Introduction ConceptualFramework DataStylizedFacts Conclusions

0

10

20

30

40

50

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

4

6

8

10

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

2

4

6

8

10

12

14

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)

LocalClaimsbyHostRegions

Source:ConsolidatedBankStatistics(UltimateRiskBasis),BIS

Introduction ConceptualFramework DataStylizedFacts Conclusions

0

2

4

6

8

10

12

14

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

5

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

0

20

40

60

80

100

120

140

160

180

'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

[1]

[2]

[3]

[4]

[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