Decline in cross-border lending has made banking safer: IMF

A reduction in cross-border lending by European banks since the global financial crisis has made international banking safer, according to new research from the International Monetary Fund (IMF).

Cross-border lending declined to 51 per cent of banks’ foreign claims from 57 per cent in 2007, the fund said in its semi-annual Global Financial Stability Report, released Wednesday

The study shows that many international banks have shifted away from cross-border lending and are now more reliant on lending by foreign affiliates. It said this has had a positive impact on the stability of financial systems in many host countries because cross-border lending compounds adverse domestic and global shocks to a nation’s economy.

“Countries with higher exposure to cross-border lending experience a more significant reduction of credit growth during both domestic and global financial crises. Local lending by foreign affiliates, however, behaves differently,” the IMF said.

“Local lending by foreign banks is less sensitive to global shocks than are cross-lending and portfolio inflows in general. Moreover, lending by foreign-owned subsidiaries, especially when their parents are well capitalised and less dependent on non-deposit funding sources, can help stabilise credit growth in the face of adverse foreign shocks,” it added.

The decline in cross-border lending by banks has been accompanied by a surge in international nonfinancial corporate bond issuances, according to the fund.

The IMF report said that tighter regulations and a need to clean up balance sheets were the primary reasons why many financial institutions - particularly in the euro zone - had cut back on international lending.

Although it's hard to put exact figures on the causes, stricter regulations and supervision appear to be roughly half responsible for the changing landscape," said Gaston Gelos, head of the IMF's global financial stability analysis division

The IMF said that the retrenchment from cross-border lending has led to an expansion of more regionally-focused banks, particularly in Asia and Africa.

The report said that since local lending by affiliates is shown to be safer and more resilient than cross-border lending, policies that encourage this are helpful. It added that policies which foster international co=operation on cross-border resolution mechanisms to limit the risks associated with the failure of international banks should also be encouraged.

Additional reporting: Bloomberg