Drivers of structural change in cross-border banking since the global financial crisis

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractThe paper analyzes the effects of changes to regulatory policy and to monetary policy on crossborder bank lending since the global financial crisis. Cross-border bank lending has decreased, and the home bias in the credit portfolio of banks has risen sharply, especially among banks in the euro area. Our results suggest that expansionary monetary policy in the source countries -as measured by the change in reserves held at central banks -has encouraged cross-border lending, both in euro area and non-euro area countries. Regarding regulatory policy, increases in financial supervisory power or independence of the supervisory authorities have encouraged credit outflows from source countries. The findings thus underline the importance of regulatory arbitrage as a driver of crossborder bank flows since the global financial crisis. However, in the euro area, arbitrage in capital stringency was linked to lower cross-border lending since the crisis. We study the determinants of the structural changes in cross-border banking in the aftermath of the GFC. In particular, we are interested in the importance of specific push and pull factors that have been recently discussed, namely adjustments in banking regulation and the role of monetary policy in advanced countries.In a second step, we ask how the home bias in the credit portfolio of banking systems has been affected by changes in regulatory and monetary policy since the crisis. The analysis of the home bias is a complementary analysis as it takes a different perspective on the same question of the drivers of cross-border banking. Using the bilateral home bias between country pairs as the dependent variable allows us to take the portfolio decision of banks more directly into account. That is, it allows us to 2 investigate how changes to regulatory policy and monetary policy have influenced the decision of banks to invest in a particular country compared to the home country and third countries.As discussed in previous studies, differences in banking regulation may be important push or pull factors for cross-border bank claims (e.g. Houston, Lin and Ma, 2012), and hence for credit home bias. If regulatory conditions differ across countries, banks may be attracted by regions offering a less restrictive regulatory environment. A factor that could reduce cross-border lending are stricter regulatory requirements that make foreign lending more expensive. Using information o...

Changing Business Models in International Bank Funding

“…The euro area financial turmoil put additional pressure on these banks to intensify their deleveraging, as access to short-and longer-term wholesale funding markets became strained 5. A large body of research has concentrated on explaining the drivers behind the sharp decline in global banking and the increased "home bias" of banks (Bremus and Fratzscher 2015;Caruana and van Rixtel 2012;De Haas and Van Horen 2013;Giannetti andLaeven 2012a, 2012b; Van Rijckeghem and Weder di Mauro 2014).…”

“…Regulatory arbitrage played a key role: tighter regulations in the home country incentivized banks to expand their activities to other less regulated countries (Bremus and Fratzscher 2015;Fidrmuc and Hainz 2013;Houston, Lin, and Ma 2012;Ongena, Popov, and Udell 2013). Regulatory arbitrage played a key role: tighter regulations in the home country incentivized banks to expand their activities to other less regulated countries (Bremus and Fratzscher 2015;Fidrmuc and Hainz 2013;Houston, Lin, and Ma 2012;Ongena, Popov, and Udell 2013).…”

“…1. Regulatory arbitrage played a key role: tighter regulations in the home country incentivized banks to expand their activities to other less regulated countries (Bremus and Fratzscher 2015;Fidrmuc and Hainz 2013;Houston, Lin, and Ma 2012;Ongena, Popov, and Udell 2013). Macroeconomic and financial conditions were important drivers as well.…”

“…Macroeconomic and financial conditions were important drivers as well. Global banking developed because of profit opportunities in destination countries, interest rate differentials, and search for yield (Blank and Buch 2010;Bremus and Fratzscher 2015; The rapid advance of global banking has also had important repercussions for funding and liquidity management at the institutions involved. Financial globalization has allowed banks to tap funding sources across borders, allowing them to diversify away from traditional funding sources to international interbank markets (Fender and McGuire 2010).…”

The Role of Regulatory Arbitrage in U.S. Banks' International Flows: Bank‐level Evidence

“…Ichiue and Lambert () study the country‐level banking statistics and find that the tightening of home country capital and bank regulations after the crisis reduce banking systems' cross‐border lending flows more than host country rules, while host‐country affiliate lending aggregates are less affected. Bremus and Fratzscher () show that more independent home and host country supervisory authorities encourage cross‐border lending outflows after the crisis. Reinhardt and Sowerbutts's () work suggests that banks increase their (home country regulated) branch lending flows in stricter‐regulated hosts, as they gain competitive advantage over locally regulated host country banks.…”