- Banks' units abroad funded wholesale contracted more in crisis
- Global bank business models relevant for credit resilience
Banks that finance their operations abroad with wholesale, cross-border or cross-currency funding are amplifying credit crunches, while those relying on local deposits remain a more stable provider of loans, economists at the Bank for International Settlements said.
Those banks whose foreign subsidiaries lent money raised from local savers and companies shrank their balance sheets less than those relying on “non-core” funding, the researchers said in a report released on Sunday. The analysis is based on data covering $24.4 trillion of foreign assets of banks in 17 parent and 38 host countries, collected by the BIS, the record-keeper of the world’s central banks.
“Local claims backed by local funding made balance sheets more resilient, even after accounting for systematic differences between host countries and banking systems,” researchers Patrick McGuire and Goetz von Peter of the BIS wrote. “By contrast, affiliates shrank more sharply if they had relied pre-crisis on non-core sources of funding, in the form of interbank, foreign currency and cross-border funding.”
The findings add to similar studies by the BIS showing the benefits of simple consumer banking. While the new research shows basic banking is better for economies at large, previous studies by the lender found that it’s also more profitable for shareholders.
In addition to the funding mix, the economic health of the parent banks was also an important factor determining how big the deleveraging in host countries became, the researchers said. Problems at home together with a weak refinancing structure abroad helped promote contagion.
“Banks with larger credit losses and non-core funding spread credit contractions across many host countries,” according to the report. “This complements other evidence in the literature that global banks can have a stabilizing or destabilizing effect on the economies they operate in, depending on the nature of the shocks they face.”