GLOBAL FINANCIAL DEVELOPMENT REPORT 2016/2017

International Banking
Ata Bertay
GFDR Lead, Research Department
Miriam Bruhn
Senior Economist, Research Department
http://www.worldbank.org/financialdevelopment
Introduction Conceptual Framework Data Stylized Facts Conclusions

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

Introduction Conceptual Framework Data Stylized Facts Conclusions

A Brief Historical Perspective on International Banking

• Early banks from the 15th century Italian city-states and their
“foreign” branch networks

• Emergence of German merchant banks in the 16th 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 17th and 18th centuries

• The first wave of globalization (late 19th century) and the rise of
modern global banks in the 20th century
Introduction Conceptual Framework Data Stylized Facts Conclusions

Definitions for Understanding International Banking

• International vs. Foreign banks • Home vs. Host countries

• Global vs. Regional banks • Subsidiaries vs. Branches
Introduction Conceptual Framework Data Stylized Facts Conclusions

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, 2010)

• International banking flows interact with other types of flows

(e.g. FDI, deepening local capital markets)
Introduction Conceptual Framework Data Stylized Facts Conclusions

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 growth-
stability trade-off)
Introduction Conceptual Framework Data Stylized Facts Conclusions

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
Introduction Conceptual Framework Data Stylized Facts Conclusions

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
Introduction Conceptual Framework Data Stylized Facts Conclusions

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 (2015)
• Loan-level data:
• SDC Platinum and Dealogic
• Global Bonds and Syndicated Loans Databases (FinDebt) for
quarterly volume of syndicated loans
Introduction Conceptual Framework Data Stylized Facts Conclusions

What Constitutes a Foreign Bank Claim?

Source: Cerutti, Claessens, and McGuire (2012)

• 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
Introduction Conceptual Framework Data Stylized Facts Conclusions

Foreign Claims by Banks in Counterparty Economies

35

30

25
US$, trillions

20

15

10

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 foreign-
owned banks; breakdown into developing and high income is by host country
Introduction Conceptual Framework Data Stylized Facts Conclusions

Lending by foreign banks remains an important source of credit

% of private credit by deposit money banks 70

60

50

40

30

20

10

0
EAP ECA LAC MNA SAS SSA

2005 2008 2011 2014

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)
Introduction Conceptual Framework Data Stylized Facts Conclusions

Foreign claims mostly fund the nonbank private sector

80

70

60

50
% of GDP

40

30

20

10

0
2005 2008 2011 2014 2005 2008 2011 2014
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)
Introduction Conceptual Framework Data Stylized Facts Conclusions

Cross-border lending is sizeable compared to bond issuances

800

700

600

500
US$, billions

400

300

200

100

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)
Introduction Conceptual Framework Data Stylized Facts Conclusions

Cross-Border vs Local Claims by Counterparty

Economies
16 4.0

14 3.5

12 3.0

10 2.5
US$, trillions

US$, trillions
8 2.0

6 1.5

4 1.0

2 0.5

0 0.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Cross-border, high income Local, high income

Cross-border, developing (right axis) Local, developing (right axis)

Source: Consolidated Bank Statistics (Ultimate Risk Basis), BIS

Notes: Breakdown into developing and high income is by host country
Introduction Conceptual Framework Data Stylized Facts Conclusions

Cross-Border Claims by Host Regions

800 16

700 14

600 12

500 10

US$, trillions
US$, billions

400 8

300 6

200 4

100 2

0 0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

EAP ECA LAC MNA SAS SSA HIC-OECD (right axis)

Source: Consolidated Bank Statistics (Ultimate Risk Basis), BIS

Introduction Conceptual Framework Data Stylized Facts Conclusions

Local Claims by Host Regions

800 16

700 14

600 12

500 10

US$, trillions
US$, billions

400 8

300 6

200 4

100 2

0 0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

EAP ECA LAC MNA SAS SSA HIC-OECD (right axis)

Source: Consolidated Bank Statistics (Ultimate Risk Basis), BIS

Introduction Conceptual Framework Data Stylized Facts Conclusions

Foreign Bank Presence through Subsidiaries (% of Banks)

70

60

50

40
% of banks

30

20

10

0
EAP ECA LAC MNA SAS SSA HIC-OECD

1997 2001 2005 2009 2013

Source: Claessens and Van Horen (2015)

Notes: Percentage of banks that is majority foreign owned
Introduction Conceptual Framework Data Stylized Facts Conclusions

The Rise of South-South Banking (Bank Ownership)

100
6 7 8 9 13 16
90
14 15
19
80 20
25
Cumulative share, % of banks

23
70

60

50

40 81 78 73 70
30 62 61

20

10

0
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Domestic Foreign, high income Foreign, developing

Source: Claessens and Van Horen (2015)

Notes: Percentage of banks that is majority owned by domestic vs foreign entities
Introduction Conceptual Framework Data Stylized Facts Conclusions

The Rise of South-South Banking (Foreign Claims)

350 35

300 30

250 25

US$, trillions
US$, billions

200 20

150 15

100 10

50 5

0 0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

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
Introduction Conceptual Framework Data Stylized Facts Conclusions

Some international banks have become very large

Assets of top five banks relative to GDP
180

160
Assets of top 5 banks, % of GDP

140

120

100

80

60

40

20

0
'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

Foreign Domestic

Source: Bankscope and World Development Indicators

Introduction Conceptual Framework Data Stylized Facts Conclusions

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

30 30

25 25

20 20
Percent

Percent
15 15

10 10

5 5

0 0
Acquisition Subsidiary Branch Joint Acquisition Subsidiary Branch Joint
venture venture

2003 2007 2011 2003 2007 2011

Source: Barth, Caprio, and Levine (2013)

Introduction Conceptual Framework Data Stylized Facts Conclusions

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. 2015)
Introduction Conceptual Framework Data Stylized Facts Conclusions

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)
70

60

50
% of total bank assets

40

30

20

10

0
EAP ECA LAC MNA SAS SSA HIC-OECD

2005 2009 2013

Source: Claessens and Van Horen (2015)

Foreign Bank Claims by BIS International Banking Statistics
Example Transactions

Transactions Lending Banks Borrowing Counterparties

[1] Bank #1 headquarter in Country A Bank #1 subsidiary in Country B
[2] Bank #1 headquarter in Country A Firm in Country B
[3] Bank #1 subsidiary in Country B Firm in Country B
[4] Bank #1 subsidiary in Country B Firm in Country C
Bank #1 headquarter in Country A;
[5] Firm in Country C
risk transferred to Bank #2 in Country D
Reported Foreign Claims
Transactions LBS/R LBS/N CBS/IC CBS/UR
Country A Country A Not reported Not reported
[1]
on Country B on Country B (intragroup position) (intragroup position)
Country A Country A Country A Country A
[2]
on Country B on Country B on Country B on Country B
Local claim Local claim Country A Country A
[3]
in Country B in Country B on Country B on Country B
Country B Country A Country A Country A
[4]
on Country C on Country C on Country C on Country C
Country A Country A Country A Country A
[5]
on Country C on Country C on Country C on Country D

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