Since the global financial crisis of 2007, international banking has attracted heightened interest from policy makers, researchers, and other financial sector stakeholders. Perhaps no sector of the economy better illustrates the potential benefits—but also the perils—of deeper integration than banking. Before the crisis, international banks (banks that do business outside of the country they are headquartered in) were generally considered to be an important contributor to financial development as well as economic growth. This belief coincided with a significant increase in financial globalization in the decade prior to the crisis, particularly for banking institutions.
In the wake of the crisis, however, many blamed global banks for the transmission of shocks across countries and started questioning their benefits. The Financial Stability Board (FSB), the G-20, and policy makers around the world have all voiced concerns about the effects of international banking. Global systemically important banks (G-SIBs) have been one of the prime targets of criticism since they are seen as both too big and too interconnected to fail.
Research shows international banking may contribute to faster growth and stability in two important ways: first, by making available much needed capital, expertise, and new technologies which make domestic financial systems more competitive; and second, by enabling risk-sharing and diversification, thereby smoothing out the effects of domestic shocks.
But international banking is not without risks and there are some long-standing policy concerns. For example: to what extent should developing countries trust international banks with the provision of their local financial services, especially when international banks may face pressures from their home countries to retrench resulting in an erosion of local skills and services? Should developing country authorities be especially cautious in their approach to admitting international banks from other developing countries? Is lack of experience or insufficient home-country prudential regulation and supervision a concern, or is it offset by the region-specific knowledge that gives these banks better potential to provide banking services in developing countries? Does allowing foreign banks to have a larger market share run the risk of simultaneously reducing access to and increasing the price of banking services for small and medium enterprises (SMEs) and lower-income households? Finally, how is technology—especially in the form of Fintech firms that work globally and across borders through digital products—likely to influence international banking?
These are some of the questions we will be addressing in our 2017/18 Global Financial Development Report on International Banking. We aim to synthesize all the research evidence, look at emerging trends after the crisis, and provide policy guidance on a range of issues that developing countries face.
This blog post is part of a series by the Asian Development Bank and Thinking Machines Data Science, Inc.