Global Financial Development Report 2017 / 2018:
Bankers without Borders

Chapter 3

Cross-Border Lending by International Banks

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KEY MESSAGES

  •  Banks have globalized in part through their cross-border lending activity, which doubled from 2001 to 2014 and has become a substantial part of international capital transactions. The stock of cross-border bank claims around the world in 2012 was larger than that of cross-border portfolio holdings, as well as that of foreign direct investment.
South–South Lending Connections
GFDR-2018-Map-3.1.png
Source: Broner and others 2017.
Note: The maps show only the connections between South economies. The lines in each map represent the active connections—that is, the country pairs for which the stock or the flow is positive. For syndicated loans, the lines in each map represent any connection that was positive during at least one year of the period analyzed. The North comprises the G-7 economies and 15 other Western European economies. The South comprises the economies not included in the North. Offshore financial centers are excluded from the sample.
  • Whereas Japan, the United States, and Western Europe have historically accounted for most cross-border banking activity, economies in the “South” (mainly developing countries) have been gaining ground since the early 1990s.
Direction of Cross-Border Bank Lending, Selected Years
GFDR-2018-Figure-3.2.png
South-South transactions grew particularly fast and that most of these transactions are within regions.
Source: Broner and others 2017.
Note: This figure shows the value of the stocks of cross-border bank claims scaled by worldwide cross-border bank claims and the value of flows of syndicated loans scaled by worldwide syndicated loans. Data are aggregated for all economies within a source region to all economies within a receiver region. For cross-border bank claims, end-of-the-year statistics are shown. For syndicated loans, the statistics are calculated year by year and then averaged over time. The North comprises the G-7 economies and 15 other Western European economies. The South comprises the economies not included in the North. Offshore financial centers are excluded from the sample.
  • The growing participation of the South in global financial transactions has allowed these economies to not only diversify their investments but also obtain financing from abroad, complementing domestic markets and widening their available funding choices.
Evolution of Cross-Border Syndicated Loan Flows by Partner Economy, 1996–2014
GFDR-2018-Figure-3.6.png
Source: Broner and others 2017.
Note: This figure shows the evolution of the value of syndicated loan flows over time by type of connection. Old connections are represented by the total value of country-pair links that were established during the period 1996–2001, and new connections are represented by those that were established later. By definition, these were no new connections in the years 1996–2001. The North comprises the G-7 economies and 15 other Western European economies. The South comprises the economies not included in the North. Offshore financial centers are excluded from the sample.
  • As part of the risk-sharing arrangement, cross-border banking also tends to act as a transmission mechanism for external shocks. This tendency was observed during the global financial crisis when cross-border bank flows collapsed after having risen during the early 2000s. Because the largest global banks were mostly located in high-income countries hit by the global financial crisis, the shock to their balance sheets affected both their domestic and cross-border activities, spilling over to developing countries.
Total Amount Raised in Syndicated Loan Markets by High-Income and Developing Countries, 1991–2014
GFDR-2018-Figure-3.8
Source: SDC Platinum.
Note: This figure displays the aggregate amount raised per year in syndicated loan markets by high-income (panel a) and developing (panel b) countries. It also shows (right axis) the share of the total volume lent in the form of cross-border loans. Only nonfinancial sector issues are included.
  • Firms reacted to the decline in the supply of cross-border banking activity during the global financial crisis by switching to different sources of financing.
    • In high-income and developing countries, firms moved toward bond markets.
Composition of Debt Issuance over Time, 2003–14
GFDR-2018-Figure-3.10.png
Source: SDC Platinum.
Note: This figure displays the share of funds raised through corporate bond and syndicated loan markets over the total amount raised in debt markets by high-income (panel A) and developing countries (panel B).
  • In developing countries, firms also switched to domestic banks
Volume and Composition of Loan Issuance over Time, 2003–14
GFDR-2018-Figure-3.9.png
Source: SDC Platinum.
Note: This figure displays the aggregate amount raised per year in domestic and cross-border syndicated loan markets by high-income and developing countries.
  • Because of these switches, global financial activity during the crisis declined to less than the collapse in cross-border loans. The change in debt composition then continued during the postcrisis period.
    • The postcrisis period has also been characterized by the emergence of a broad set of tech-driven nonfinancial companies acting in parallel with traditional banking services. These so-called fintech companies have been adding solutions to different segments of the banking value chain such as payments, cross-border transfers (e.g., remittances), and savings vehicles. Although the new players are ramping up competition and pushing digital transformation in the global financial sector, to date the level of disruption seems low and their services appear highly complementary to the ones provided by the more established banking sector.
    The Remittances Market, 2011–16
    GFDR-2018-Figure-3.12.png
    Source: Remittance Prices World Wide (database), World Bank. See http://remittanceprices.worldbank.org.
    Note: Panel a shows the average total cost (as a percentage of the remittance) of sending $200 internationally; panel b shows the banks’ market share of the remittances market; and panel c shows the average speed of transaction by different methods of sending remittances for the period 2011–16. MTO = money transfer operator