Deglobalisation in banking? Or rather: Cyclical deleveraging of European banks with their foreign claims, while other regions have been expanding their international activities.
In June 2017, the Bank for International Settlements published a Working Paper on financial deglobalisation in banking. The main results of this research article will be briefly summarised and discussed in the following.
Parallels in international trade and international banking
As the global financial crisis started to unfold in 2007 nobody could predict the effects on international trade and international finance. But what we know now is: Since 2008 international trade has no longer been growing faster than global gross domestic product (GDP). It is more or less stagnating at about 60% of GDP, at its pre-crisis level. Among other far-reaching consequences, this might trouble the strategy of trade-led economic growth. And concerning future development, it is still unclear whether trade deglobalisation is cyclical or secular.
In the same time period also banks´ cross-border claims stopped rising faster than GDP. Quite the contrary, the ratio decreased dramatically by more than 20 percentage points: By the end of 2016, banks´ cross-border claims accounted for less than 40% of global GDP, down from below 60% end 2007 – while they had undergone rapid growth in the 15 years before, starting from below 30% at the beginning of the 1990s. The decline since 2007 has led to the hypothesis of financial deglobalisation, a broad-based retreat in international lending, as a phenomenon of our post-crisis world.
But things seem to be more complicated than they look at first sight. So it is important to analyse where and why cross-border bank assets have shrunk so massively over the past years, in order to get a more accurate picture.
Locational versus consolidated view
The widely used measures of cross-border bank assets which led to the figures above are of a “locational” nature. This means, they are collected on the basis of the location of the creditor bank. What is an appropriate approach for investigating macroeconomic aggregates (e.g. employment and value added), has certain drawbacks for carrying out globalisation analyses of bank activities – drawbacks like double-counting some positions while not counting other relevant positions.
In order to overcome these limitations and to get more detailed insights into financial (de)globalisation trends, the BIS research article uses information contained in the BIS international banking statistics. The latter provides data according to the nationality of ownership (so to say, a “consolidated” view). The objects of investigation are multinational banks aggregated by the country of headquarters. This implies that geographical borders are ignored and the focus is on the groups of firms, classified by nationality. Foreign claims of 29 banking systems are analysed in that way. The consolidated view does not include intragroup positions. In summary, due to the complex structure of multinational banks, it is more important to know by whom instead of where the banking business is conducted to answer the questions we are here interested in.
Retreat of European banks
How do things look like from this new angle?
Between 2007 and 2016 banks´ consolidated foreign claims in total decreased by 20% of global GDP. Let us remember, locational figures on cross-border claims also shrank by (somewhat more than) 20% – so no dramatic difference between the two approaches at the aggregate level. But the study authors emphasise that it is a coincidence which makes the different consolidation effects more or less offset each other at the aggregate level.
We now want to proceed with the specific insights that can be gained from the consolidated perspective. By contemplating the massive drop in banks´ foreign claims since 2007 from this new point of view, it becomes clear that it is not as much a financial deglobalisation as a retrenchment of European banks, what has been going on over the last decade. Therefore, the process is more regional than global in nature. To make things more concrete we take a closer look at the development of consolidated foreign claims for European versus non-European banking systems: Since 2008 most European banking systems (with the exception of Spain) have reduced their foreign claims. German banks’ foreign claims, e.g., peaked at approximately 8% of GDP in 2007, while they dropped to about 3% in 2016, British from 7% to 4%, Swiss from 5% to 2%, etc. Between 2007 and 2016 euro area, UK and Swiss banks altogether accounted for a foreign claims decrease of enormous USD 9.5 trillion, what implies a reduction of 42% over that period.
Partly counterbalanced by other countries´ expansion
Over the same period non-European banking systems have considerably expanded their foreign positions. Japan, e.g., almost doubled its consolidated foreign claims ratio from above 3% to over 5% of GDP. So did (to a different extent) US, Canadian, Australian and emerging market banks. The largest increase in terms of absolute level change was observed for the group of “Other Advanced Economies” (consisting of countries like Japan, Canada, Australia, etc.), namely a rise in consolidated foreign bank claims of about USD 2.5 trillion. The most dramatic growth rate, however, was witnessed for the group of “Emerging Market Economies” (referring to countries as Brazil, India, Mexico, etc.) and lies around 100%.
It is worth mentioning that mainland China is not included in the consolidated figures stated above, because it only recently started reporting those statistics required for the BIS analysis we are talking about. But as we know, Chinese banks are very active in global banking markets and foreign claim figures will look different once Chinese banks will be covered.
In spite of the international expansion of other countries´ banking systems, which has been going on simultaneously to the retreat of European banks, they could not make up for the European cutbacks. The reason therefore lies in the large portion euro area and other European banking systems had in the total amount of foreign claims (more than 70% in 2007, a share that fell to about 50% in 2016).
Driving forces behind
As a consequence of the global financial crisis many large banks in many countries have undergone a significant deleveraging process over the last years. The strategies to do so and to raise capital ratios, though, differed between European and non-European banking systems. While large non-European banks strengthened their capital ratios primarily by raising equity through retained earnings and equity issuance (to an extent even enabling them to further increase assets), European banks (euro area, UK and Swiss) were the only global group which opted for shrinking assets as part of its deleveraging strategy. As the authors of the BIS article put it on p. 10 of their work: “… European banks did not raise enough capital to achieve the 5-percentage point improvement in their weighted capital ratio without shedding assets.”
Furthermore, European banks did not retrench their assets equally across countries but displayed a home bias – this means, as a tendency, protecting the home market while reducing foreign claims (or weighting them lower). If we compare Japan to Switzerland, e.g., we see that both banking systems have increased their domestic claims since 2013 by about 20%. Japan, however, has also expanded its foreign claims by around 20%, whereas Switzerland has shed over 10% of its foreign claims. The home bias does not hold for Spain and the Netherlands, which both decreased domestic claims while even increasing foreign claims. And in case of Italy, increases of both categories were of similar size. It should be mentioned that, due to data availability reasons, evidence for the home bias results is limited to the years from 2013 on.
The drop in banks´ aggregate foreign claims in the wake of the global financial crisis reflects asset retrenchment pursued by European banks rather than a broad financial deglobalisation – other countries´ banking systems continued expanding their international activities over the same time period. And it is assumed to be a cyclical phenomenon driven by European deleveraging efforts, not a secular trend.
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