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 II: The Shifting Landscape of Global Banking

By: Jonathon Adams-Kane
December 19, 2016

Over the last decade or so, there has been a dramatic reshuffling of global banking. This period spans the culmination of a boom in international banking that led up to the global financial crisis, the shock of the crisis itself, and adjustments — still ongoing — to the shock and to the drawn out European sovereign debt crisis which followed. At the same time, there were major regulatory changes which some say have impacted European banks disproportionately; a global economic slowdown that began in high income countries and moved to developing countries; and a reduction in global trade and capital flows.

Part I of this two-part blog mini-series presented snapshots (from 2006 and 2016) of major countries’ bank groups’ foreign claims on the world, on developed Europe, and on developing Europe, to show that the general retrenchment of European banks varied greatly by counterparty region and by bank group nationality. That post drew directly from 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.

In this follow-up post, additional breakdowns of the data are presented to build a more comprehensive picture of which countries’ bank groups scaled back their foreign claims, by how much, when and where. The objective is not to disentangle the causes of the reshuffling, but merely to describe it. The following figure shows total foreign bank claims, decomposed both by borrower region and by bank nationality (defined by the location of group headquarters).

Foreign bank claims worldwide, by borrower region and bank group nationality

banks 1

Sources: BIS Consolidated Banking Statistics on an immediate borrower basis; author’s calculations.

Notes: Data are quarterly, from 2000 quarter 1 to 2016 quarter 1. Borrower country groups follow BIS classifications at the time of writing. Every borrower country with data falls into one of the seven groups.

One noticeable pattern in the data is that the most significant reductions in international activity have been by euro area and British banks. Perhaps more surprising is how heterogeneous these cutbacks are between borrower regions. While euro area banks’ claims within the euro area, the U.S., and other high-income countries have been dramatically reduced, their claims on developing countries have held relatively steady.[1] These are concentrated in developing Europe, where euro area banks’ claims are approximately equal to their claims on the rest of the developing world combined. The region where their claims have been maintained the most robustly, however, is Latin America; this is the only part of the world other than developing Europe where euro area banks have come close to maintaining their pre-crisis levels of claims relative to those of their non-euro area competitors.

Much of the void has been filled by bank groups based in the U.S. and Japan, and also (on aggregate) those based in the residual group of BIS-reporting economies other than the U.S., Japan, the UK, and those in the euro area.[2] The main banking centers in this residual group are (in descending order of foreign claims) Switzerland, Canada, Sweden, Singapore, Taiwan and South Korea.[3] Swiss bank groups’ total foreign claims fell substantially over the last decade, from about $2.1 trillion in Q1 2006 to $1.5 trillion in Q1 2016. However, over this period the foreign claims of the others in this group have grown. Most notably, Canadian bank groups’ total foreign claims more than doubled from roughly $520 billion to $1.3 trillion. Swedish and Singaporean bank groups increased their total foreign claims by roughly $300 billion each over this period.

The broad international retrenching of European banks in comparison with those based in other major economies is consistent with the idea that they have been hit especially hard by regulatory reforms. However, the data presented here show that this retrenchment has been highly heterogeneous in terms of counterparty location globally (as well as in terms of specific European bank group nationality, as shown in Part I). Any attempt to identify the driving forces behind the broad reshuffling of international banking should include a serious consideration of these detailed breakdowns. 

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[1] It is worth noting that the totals depicted have all been converted into U.S. dollars for comparison, but the currency composition of the underlying claims varies significantly between bank group nationalities. The euro tended to appreciate against the dollar leading up to the global financial crisis and then to depreciate, and this exaggerates the boom-and-bust picture of euro area banks’ foreign claims (particularly intra-euro area claims) since many of these are denominated in euros. Our recent report mentioned above explores this measurement issue, illustrating the problem with a figure which depicts European banks’ total foreign claims measured in euros, together with the same series in measured in dollars, and the exchange rate.

[2] As mentioned in Part I, the reshuffling of global banking has been driven by the sale of subsidiary banks as well as the contraction or expansion of international activity by individual banks. For example , the acquisition by the British bank group Barclays of the South African bank Absa in 2005 clearly shows up in the figure depicting total UK (and aggregate non-euro area) claims on developing Africa and the Middle East.

[3] Some notable countries which do not yet have publicly available BIS Consolidated Banking Statistics are China and Russia, as well as Hong Kong. However, on Dec. 11, 2016, BIS Locational Banking Statistics for China and Russia became available for the first time.