Cross-Border Banking in Europe: Implications for Financial Stability and Macroeconomic Policies
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London, Centre for Economic Policy Research, 2011
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ALLEN, Franklin, BECK, Thorsten Harald Leopold, CARLETTI, Elena, LANE, Philip R., SCHOENMAKER, Dirk, WAGNER, Wolf, Cross-Border Banking in Europe: Implications for Financial Stability and Macroeconomic Policies, London, Centre for Economic Policy Research, 2011 - https://hdl.handle.net/1814/20202
Abstract
Understanding the role of banks in cross-border finance has become an urgent priority. Cross-border banks have played a central role in the dynamics of the global crisis of 2007-2009. First, European banks had a surprisingly large exposure to the US securitised asset markets, which arose to a significant extent through global banks acting either on the buying or selling side in these markets. Second, the breakdown in credit and asset markets was an international phenomenon, with cross-border linkages suffering disproportionately due to greater information problems vis-à-vis cross-border counterparties and the differences in regulatory regimes. Third, currency mismatches in funding became evident, with European banks suffering a dollar shortage that ultimately required resolution through a major currency swap initiative among the main central banks. Fourth, the provision of fiscal support for distressed banks was especially problematic in relation to cross-border activities. The rescue of multi-country banks, such as Dexia and Fortis, required the governments involved to devise ad hoc, ex-post burden-sharing agreements. In relation to emerging Europe, there were also fears that the policies of home-country governments might encourage parent banks to fail to support the operations of affiliates. This report analyses key aspects of cross-border banking, takes a European focus and derives policy recommendations based on them. Chapter 1 of the report first documents the evolution of cross-border banking in Europe in the two decades prior to the crisis. We then turn to the role cross-border banking played during the crisis of 2007-2009, with a key focus on whether crossborder activities have exacerbated the crisis or helped to mitigate it. We also analyse the regulatory response to cross-border problems in the crisis.
Table of Contents
Acknowledgements vii
Acronyms and abbreviations viii
Foreword ix
Executive Summary 1
1. Cross-Border Banking in Europe: From Boom to Bust 17
1.1 The growth of cross-border banking – trends and determinants 18
1.2 Cross-border banking flows during the crisis 34
1.3 The challenges of supervisors in the light of cross-border failures 40
1.4 Conclusions 44
2. Cross-Border Banking and Financial Stability 47
2.1 Benefits of cross-border banking 47
2.2 Costs of cross-border banking 50
2.3 Implications for stability-enhancing cross-border banking 53
2.4 Measuring the balance of cross-border banking 57
2.5 Empirical results 63
2.6 Conclusions 71
3. Macroeconomic Aspects of Cross-Border Banking 73
3.1 Inflation targeting 74
3.2 Sources and transmission mechanisms of systemic risk 76
3.3 Conclusions 90
4. Policy Implications 91
4.1. The need for European solutions 91
4.2. Macro-prudential and macroeconomic policies 92
4.3. Resolution policies 100
4.4 Summary of recommendations 105
References 109
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This book is produced as part of the CEPR project ‘Politics, Economics and Global Governance: The European Dimensions’ (PEGGED) funded by the European Commission under its Seventh Framework Programme for Research (Collaborative Project) Contract no. 217559.