The Global Banking Network: What is Behind the Increasing Regionalization Trend?

Abstract

This paper analyses the nature of the increasing regionalization process in global banking. Despite the large decline in aggregate cross-border banking lending volumes, some parts of the global banking network are currently more interlinked regionally than before the Global Financial Crisis. After developing a simple theoretical model capturing banks' internationalization decisions, our estimation shows that this regionalization trend is present even after controlling for traditional gravitational variables (e.g. distance, language, legal system, etc.), especially among lenders in EMs and non-core banking systems, such as Australia, Canada, Hong Kong, and Singapore. Moreover, this regionalization trend was present before the GFC, but it has increased since then, and it seems to be associated with regulatory variables and the opportunities created by the retrenchment of several European lenders.

Cross-border Banking and the Circumvention of Macroprudential and Capital Control Measures

“…We embed our gravity equation in the two-step empirical framework proposed by Cerutti and Zhou (2018). Originally used by Helpman, Melitz and Rubinstein (2008) in the context of estimating trade flows, we derive the same expression from a model of heterogenous banks making decisions to expand internationally through direct cross-border lending and/or local affiliate lending.…”

“…Adding additional bilateral linkages, such as colonial relation dummy, does not change our quantitative results. Finally, we follow Helpman, Melitz and Rubinstein (2008), Buch, Koch and Koetter (2014) and Cerutti and Zhou (2018) to develop instruments ζ i jt in the first stage. For direct cross-border lending, we construct a synthetic indicator of banks' overhead cost to total assets, assigning value one only if both the lender and the borrower have above-median costs.…”

“…This parameter intuitively controls for the fraction of banks lending direct cross-border. Following Helpman, Melitz and Rubinstein (2008), Cerutti and Zhou (2018) show that w CB i j can be estimated from ln{exp[δ (z CB i j + η CB i j )] − 1}. z CB i j and η CB i j in the expression are derived from a Probit equation.…”

“…As in Houston, Lin, and Ma (2012), we use the dataset from Barth, Caprio and Levine (2013) to proxy for the intensity of bank supervision and restrictions on non-core bank activities. Adopting the empirical strategy of Cerutti and Zhou (2018), which builds on Helpman, Melitz and Rubinstein (2008) and Fillat et al (2018), we use a gravity equation derived from a model of heterogeneous banks extending international lending, in order to capture banks' selection into cross-border lending based on productivity differentials. This framework deals with empty bilateral banking relationships, particularly present in the case of banking exposure through local affiliates, that may introduce selection bias when estimated using conventional techniques such as ordinary least squares on a log-linear gravity equation of crossborder banking flows.…”

“…Similarly, Ongena, Popov and Udell (2013) study a sample of bank-firm lending of emerging Europe, and find that a lower bank lending standard is associated with tighter restrictions on bank activities and higher minimum capital requirement in domestic markets. As the Global Financial Crisis prompts the emergence of a stricter worldwide regulatory environment, recent literature suggests that banks expand their lending to regional partners with more restrictions on bank activities (Claessens andvan Horen, 2015, Cerutti andZhou, 2018).…”