Cross-border Bank Credit And Global Financial Stability

The concept of ‘global liquidity’ has played a part in some of the more contentious international policy debates in recent years. Nevertheless, the G20 has made the analysis of global liquidity a key policy priority. Similarly, the Committee on the Global Financial System (CGFS) (a central bank forum for the monitoring and examination of financial markets and systems) has also considered global liquidity in its work. It has distinguished between two types of global liquidity: (i) official liquidity, which is created by central banks, and can be accessed cross-border via instruments such as foreign exchange reserves and swap lines between central banks; and (ii) private sector liquidity, which is typically created by the cross-border operations of commercial banks and other financial institutions.(2) This article looks in more detail at one aspect of private liquidity: cross-border credit provided by banks.

The prudent expansion of cross-border credit can have considerable long-run benefits. It can help to diversify the available sources of borrowing and lending in an economy. To the extent that this reduces the concentration of banks’ and non-banks’ exposures to domestic shocks, it might reduce the volatility of domestic lending and the vulnerability of domestic banks.(3) And cross-border banking tends to increase competition in the domestic banking market, which may also be beneficial for financial stability.(4) These advantages help explain the structural trend towards greater global banking integration seen in recent decades.

Nevertheless, cross-border bank flows can also give rise to financial stability risks through increasing the vulnerabilities of domestic banks and non-banks to external shocks. Rather than attempting to assess the overall costs and benefits of cross-border banking, this article focuses on the role that it can play in the build-up of risks that come to fruition in times of stress, and the policy responses to prevent or mitigate such a scenario. This article focuses on the most recent crisis period. It is worth noting, however, that booms and busts in international bank lending have been a feature of many previous crises, for example, the Latin American debt crisis of the early 1980s and the East Asian crisis in 1997–98.(5)

  • (1) The authors would like to thank Shaheen Bhikhu and Jack Grigg for their help in producing this article.
  • (2) See CGFS (2011) for a more detailed discussion of the different types of global liquidity.
  • (3) The term ‘non-banks’ is used here to cover the household, government and financial and non-financial corporate sectors.
  • (4) See, for instance, the discussion in Chapter 2 of Allen et al(2011).
  • (5) See, for example, Sachs and Huizinga (1987) and IMF (2009), respectively.
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