Abstract
This article discusses two models of global banking, the multinational model and the international model. The global financial crisis demonstrated the greater resilience of the multinational model to strains in the wholesale funding markets. This article reviews long-term trend in global banking toward multinational banking and how the global financial crisis reinforced this trend. In addition, this article discusses regulatory and supervisory changes since the crisis that require liquidity to be held in particular jurisdictions, and affiliates to be operating subsidiaries rather than branches. Regulators in major jurisdictions are showing welcome resistance to the natural temptation to tilt the scale toward multinational banking.
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Notes
The subject of this article is often referred to as fragmentation of international banking. This term is often used in a very specific way with regard to euro area financial markets to mean, for instance, the sharp decline in cross-border transactions and positions in the interbank market. This article discusses more general aspects of financial fragmentation.
There was also a secular rise in the share of local claims in all currencies. Local claims refer to claims booked by foreign offices vis-à-vis residents of the host country. Foreign claims sum all cross-border claims and local claims booked in offices outside the bank’s home country.
The trend is not evident in claims on emerging markets, where low interest rates in the major currencies have spurred foreign currency borrowing into 2013. See He and McCauley (2013).
According to Duxbury and Forelle (2013), ‘As it became clearer that Landesbanki’s assets would cover most, if not all, of the balance, the impact of the dispute [between the UK and Netherlands, on one side, and Iceland, on the other] faded’. They report that the court of the European Free Trade Association ruled that the relevant EU directive ‘does not lay down an obligation on the State and its authorities to ensure compensation if a deposit-guarantee scheme is unable to cope with its obligation in the event of a systemic crisis’.
Defenders of the UK policy would point to the role of a Cyprus bank’s UK subsidiary in the so-called ‘British solution’ of a Cyprus bank’s UK branch deposits (Bank of England, 2013).
But Tarullo (2012) also raised questions about the treatment of branches and agencies of foreign banks in the United States, which in the past have raised funds from US money market funds and onlent the funds to affiliates abroad. They will be subject to ‘certain additional measures’, especially regarding liquidity. See below.
Tarullo (2012) included: ‘Foreign banks as a group moved from a position of receiving funding from their parents on a net basis in 1999 to providing significant funding to non-US affiliates by the mid-2000s – more than $700 billion on a net basis by 2008 … . There should also be liquidity standards for foreign bank branch and agency networks in the United States, although they may be less stringent, in recognition of the integration of branches and agencies into the global bank as a whole’. In fact, by late 2012, the position of non-US banks’ branches in the United States had swung around from a net due from affiliates outside the United States to a net due to such affiliates. This resulted from an FDIC levy on short-term wholesale liabilities enacted in Dodd-Frank that applied to US-chartered banks, but not to non-US banks branches in the United States. The competitive dynamics of this could shift banking assets away from US-chartered banks, including subsidiaries of foreign banks, to non-US banks’ branches. See Kreicher et al. (2013) and McCauley and McGuire (2014).
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Acknowledgements
The author thanks Bill Coen, Ben Cohen, Pat McGuire and Goetz von Peter for discussion. Views expressed are those of the author and not necessarily those of the Bank for International Settlements.
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McCauley, R. De-internationalizing Global Banking?. Comp Econ Stud 56, 257–270 (2014). https://doi.org/10.1057/ces.2014.9
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DOI: https://doi.org/10.1057/ces.2014.9