World's banks are less global, more local than in '08, IMF says

[NEW YORK] Banks are making fewer loans across national borders since the 2008 crisis, as European lenders scale back global ambitions and regulators encourage domestic financing, according to the International Monetary Fund.

Cross-border lending declined to 51 per cent of banks' foreign claims from 57 per cent in 2007, the IMF said in its semi-annual Global Financial Stability Report released on Wednesday. Local currency loans extended through affiliates abroad have remained little changed, the IMF's data show.

The multinational banking model, which replaces cross- border loans with domestic finance provided by locally funded subsidiaries, can make the financial system safer by protecting countries from the shocks caused by sudden capital withdrawals, the IMF said. It can also make global capital allocation less efficient, the report added.

"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 US, UK and Switzerland have enacted rules since the crisis to create barriers between local subsidiaries and parent companies in an effort to insulate domestic lenders from global shocks.

The retrenchment of eurozone banks was the biggest contributor to the trend observed since the crisis, according to the report.

While US and UK banks' overseas claims dropped initially, they have partially recovered. Asian banks, led by Chinese and Japanese firms, have expanded abroad, the report found.

The European Central Bank became the supervisor of the euro region's 130 biggest lenders in November as part of an effort to encourage more cross-border financing. Eurozone banks' loans to countries outside of the currency bloc have fallen much more than within, the IMF found.

BLOOMBERG