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The Dark and the Bright Side of Global Banking: A (Somewhat) Cautionary Tale from Emerging Europe

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Abstract

This paper reviews the literature on the benefits and risks of global banking, with a focus on emerging Europe. It argues that while the potential destabilising impact of global banks was well understood before the recent financial crisis, the sheer magnitude of this impact in the case of systemically relevant foreign bank subsidiaries was under-appreciated. A second lesson from the crisis is that banks’ funding structure, in particular the use of short-term wholesale funding, matters as much for lending stability as does their ownership structure.

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Notes

  1. See EBRD (2009, Chapter 3) and Gill and Raiser (2012, Chapter 3) for empirical evidence.

  2. In developed countries, foreign banks are generally less efficient than domestic banks as the advantages of incumbent banks tend to dominate those of new entrants (Claessens et al., 2001).

  3. See De Haas and Van Horen (2012, 2013) for evidence on the rapid decline in cross-border lending during the 2008–2009 crisis, in particular by distant and relatively inexperienced international lenders.

  4. Barba Navaretti et al. (2010) argue that multinational banks were a stabilising force as they displayed a stable loan-to-deposit ratio. Their analysis is limited to the years 2007–2008, while much of the credit crunch took place in 2008–2009.

  5. As part of the Vienna Initiative various multinational banks signed country-specific commitment letters in which they pledged to maintain exposures and to provide subsidiaries with adequate funding.

  6. See Ivashina and Scharfstein (2010) and Cornett et al. (2011) for the United States; Yorulmazer and Goldsmith-Pinkham (2010) for the United Kingdom; Iyer et al. (2014) for Portugal; and Rocholl et al. (2011) for Germany.

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  1. EBRD, One Exchange Square, London, EC2A 2JN, UK

    Ralph De Haas

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De Haas, R. The Dark and the Bright Side of Global Banking: A (Somewhat) Cautionary Tale from Emerging Europe. Comp Econ Stud 56, 271–282 (2014). https://doi.org/10.1057/ces.2014.3

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