Jonathon Adams Kane lores
Jonathon Adams-Kane
Economist, International Finance and Macroeconomics Research
Capital Flows and Systemic Risk
Dr. Jonathon Adams-Kane is a research economist with the international finance and macroeconomics team at the Milken Institute. His research is mainly on international capital flows and financial stability, with a focus on analyzing structural changes in the international financial system, how crises spread among countries through international banking, and...
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Anatomy of a Reshuffling, Part I: Snapshots of Global Banking

By: Jonathon Adams-Kane
December 12, 2016

Many big global banks, especially European banks, are not as big or as global as they once were. Possible explanations for this include regulatory changes; shareholder pressure; slowdowns in world trade and emerging-market growth; stronger competition from local banks; and the fact that big banks were overleveraged (and overly reliant on wholesale dollar funding) leading up to the financial crisis.

I will not attempt to sort through potential explanations here but instead will take a closer look at exactly what it is that we are trying to explain. Focusing on the international activities of European banks, in particular, this analysis relies on snapshots of data from 2006 and 2016 to address the following questions: Have bank groups based in certain countries retrenched more than others? And have they cut back in some foreign markets more than others?

This post draws on the new report, “Cross-Border Investment in Europe: From Macro to Financial Data,” prepared as part of the Milken Institute’s International Finance and Macroeconomics Research program on capital flows and financial stability. The report was released at the Institute’s London Summit and discussed during a private roundtable on European financial integration.

European banks have reduced, in aggregate, their share of international banking globally and in Europe, but the data show a highly uneven distribution of the cutback across counterparty regions. The reduction has not been concentrated in the banks’ far-flung offices as one might imagine, but rather in developed Europe itself and in the United States.

As illustrated in the figure, from the first quarter of 2006 to the first quarter of 2016 European banks’ combined share of global foreign bank claims (including British and Swiss bank groups along with those based in the euro area) fell from 76 percent to 56 percent. Over this period, their share of claims on developed Europe fell from 79 percent to 65 percent, while claims on developing Europe held steady at around 90 percent.

Foreign bank claims by nationality of bank group

foreign banks 

Sources: Adams-Kane, Lopez and Wilhelmus (2016); underlying data from the BIS Consolidated Banking Statistics on an immediate borrower basis.
Notes: Italian banks have significant foreign claims, especially on developing Europe, where they are about equal to those of France or Austria (as of Q1 2016). However, Italy’s data broken down by counterparty region for periods prior to 2013 are not publicly available except as part of the euro area aggregate. In the figure Italy is included in the residual euro area group. Borrower country groups follow BIS classifications at the time of writing.

This unevenness is even starker in the underlying absolute numbers. Over this period, European banks decreased their foreign claims within developed Europe from €6.4 trillion to €5.7 trillion. Their claims on the U.S. have been reduced from €3.2 trillion to €2.3 trillion (in terms of dollars this was a change from $3.9 trillion to $2.7 trillion). At the same time, European banks almost doubled their claims on developing countries from €1.3 trillion to €2.5 trillion.

There was also a reshuffling based on nationality, with bank groups based in Germany, the UK, Switzerland and the Netherlands losing share, and those based in France and Spain holding steady or gaining. Meanwhile, U.S. and Japanese bank groups have filled much of the void left by the general retreat of European banks, both globally and in Europe.

The reshuffling is driven by the sale of subsidiary banks as well as the contraction or expansion of international activity by individual banks. For example, when the Belgian financial group Fortis was broken up after the financial crisis hit, its Belgian banking operations were acquired by the French group BNP Paribas.

Overall, the data show that the retreat from foreign markets has been highly heterogeneous both in terms of headquarter and counterparty country. Whatever the causes, the story is clearly more complex than embattled global banks being forced to slash their positions around the world. Any attempt at an explanation should take this heterogeneity into account.

Update (Dec. 19, 2016): Part II of this blog mini-series explores the evolution of the reshuffling of global banking over the last decade in more detail.

 Read the Report