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


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)


AConceptualFramework:Bankbusinessmodels

• Inamulti-countrysettingsomedegreeoffinancialintegrationisbeneficial–despiteinformationorregulationrelatedcosts

• Importantdifferencescomparedtoothertypesofcapitalflows,suchasdebtandequityinvestments,duetouniquebankbusinessmodel• Reduceinformationasymmetriesthroughscreeningandmonitoring• Heavilyregulatedmainlyatnationallevel–limitedcross-bordercoordination• Supportedbyfinancialsafetynet(e.g.depositinsurance,lenderoflastresort)

• Home/hostcountryandbankcharacteristicsaffectingcostsandbenefitsofcross-borderbanking(especiallyeconomicgrowth-stabilitytrade-off)


InternationalBankingandEconomicDevelopment

• Entrybyforeignbanks=>additional(human)capital,technologiesetc.=>increasedcompetitioninthebankingindustry,moreefficientresourceallocation,andbetteraccesstofinance

• Institutionalenvironmentiscritical• Poorinformationinfrastructureandcontractenforcement=>cherrypicking =>loweraccesstofinance• Laxregulation/supervision=>highrisktaking=>bankingcrisis

• Recentempiricalevidenceonforeignbankpresenceoneconomicgrowth,entrepreneurshipandinequality


InternationalBankingandFinancialStability

• Internationalbankingasarisk-sharingscheme

• Ideally,stabilizingthelocalcreditsupplyinalocalcrisis

• Butifhostcountryfinancialsystemsarenotcapableofhandlingsuchflows=>fuelcreditboomsendingupinbusts

• Theglobalfinancialcrisisrevealedanumberofcountryandbankcharacteristicsaffectingshiftsininternationalbanking• Culturalandinstitutionaldistance• Legalandregulatoryframework• Cross-bordervs.brickandmortar• Modeofentry(e.g.greenfieldvs.M&A)• Fundingstructures


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)


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)


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)


0

100

200

300

400

500

600

700

800US$,billions

Syndicatedloans Bonds

Cross-BordervsLocalClaimsbyCounterpartyEconomies

Source:ConsolidatedBankStatistics(UltimateRiskBasis),BISNotes:Breakdownintodevelopingandhighincomeisbyhostcountry


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


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


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


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


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


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


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


Assetsoftop5banks,%

ofG

DP

Foreign Domestic

Restrictionsonforeignbankentryhaveincreased

Source:Barth,Caprio,andLevine(2013)

Percentageofcountrieswithrestrictionsonforeignbankentrythrough…


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)


ConclusionsandPolicyImplications

• Internationalbankingremainsimportantaftertheglobalfinancialcrisis• Competitionandimprovedtheefficiencyofthefinancialsystem• Risk-sharingtosmoothdownturnsinhomeandhostcountries

• Acountry’sexperiencewithinternationalbanksdependsonitsinstitutionalandregulatoryenvironment

• Newdevelopmentsposeadditionalchallengestoregulators• Riseofsouth-southbanking• Increaseinbanksize• Newtechnologies


ForeignBankPresencethroughSubsidiaries(%ofAssets)

Source:ClaessensandVanHoren(2015)

0

10

20

30

40

50

60

70


%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




[3] Local claimin Country B

Local claimin Country B



[4] Country Bon Country C

Country Aon Country C



[5] Country Aon Country C

Country A on 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

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

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