Cross-border lending has contracted since the credit crisis broke out. Nevertheless, lending provided by local affiliates of foreign banks remained important. However, there are changes in the ownership of foreign banks:banks from a larger variety of countries now operate foreign affiliates, and the regional focus has increased.
Banks from OECD countries – western countries, for short – still account for the lion's share of local lending by foreign banks, but the crisis has markedly reduced their share in lending. Many banks based in western countries decided to no longer open new affiliates abroad. Moreover, a number of them took a beating during the crisis, prompting them to sell off foreign subsidiaries and branches. In doing so, they chose to withdraw from peripheral countries, which are more remote, both in a literal and in a figurative sense, placing their focus more on the core countries and the new "rising stars" in emerging markets.
Advance of new players
At the same time, banks from emerging markets have claimed a greater role in the international arena. With the resources to capitalise on opportunities and they headed out to acquire foreign banks, mainly in their own regions,doubling their share in foreign banking assets from 4% to 8% between 2007 and 2012. As a result, they now account for a larger proportion of local lending by foreign banks. This is not immediately visible in the Amsterdam Zuidas district and other western financial hubs, as banks in emerging economies predominantly operate in their own regions, where they have a comparative advantage in terms of local knowledge. Two examples that illustrate this are Russian Sberbank, which took over Austrian-based Volksbank's Central and Eastern European subsidiaries, and Colombian Banco Davivienda, which bought the Central-American subsidiaries of UK-based HSBC.
Trends like these have made global banking more regional, which can have benefits. Cross-border coordination is easier at a regional level, as is shown by the European banking union, which combines regulation, supervision and resolution. Conversely, however, regionalisation may also make the banking system more sensitive to shocks, as globally operating banks see their options for diversification decrease, and it may be an impediment to efficient asset allocation. It is unclear whether the pros of stronger regional focus outweigh the cons.
The road ahead
The advance of banks from emerging markets reflects their growing importance in the world economy, so the abovementioned trends are expected to continue. This requires adequate supervision, both on activities undertaken by domestic banks abroad and on those of foreign banks' subsidiaries active inside those countries’ borders. Furthermore, it is important that policymakers from those countries participate actively in international debates on regulation, such as Basel III. At present, too little is known about the role which banks from emerging economies play and their impact on lending and financial stability. Further research is needed to provide better insights into the role of these new players as these fledglings spread their wings to take part in the global financial system.