Cross-Border Retail Banking in Times of Financial Crises

The surge in cross-border banking prior to the 2007/08 global financial crisis took place not only in the interbank market but also in the retail market, e.g. between banks and their private customers abroad. Cross-border retail banking has gained a substantial share of total international activities but we are just starting to understand its role for globalization and stability. In this study, we assess this less known part of financial globalization and come to several key findings:

First, there exists a clear and distinct geography in international retail banking despite the weightlessness of financial products. Some barriers to retail cross-border banking seem to be natural, e.g. they arise due to cultural differences between bank and customer countries. Other barriers – including currency unions, free trade areas, or trust in institutions - are more transient and can thus provide policy makers with tools to stimulate financial globalization.

Second, retail banking responds to financial crises in a distinctly different manner than wholesale banking. While crises lead to reduced globalization for the affected banks, customers respond in the opposite way, i.e. they engage in more cross-border banking in particular with banks in countries that are unaffected by the crisis. In this way, crises can also lead to more globalization and consequently a return to a more national rather than international banking system – as currently envisioned by some policymakers – may limit diversification benefits and insurance against domestic financial crises. During the 2007/08 global financial crisis, safe havens have however become a very scarce species and such global crises can erode the assumed benefits quickly.

In conclusion, it would be too far-fetched to roll-back cross-border banking. However, our review shows that tax havens often profited excessively. This points to the urgent need to make both, national and global banking markets more crises resistant. Local funding and lending, together with strong and stable financial development and financial regulation is key to achieving this objective. The world does not need tax havens but financial markets that do their job of financing the real economy and offering safe stores of value, if need be with global banking but with a regulation that is at par with market developments and not lagging behind.