Financial Crises and Cross-Border Banking

Published in Journal of International Money and Finance
Sustainable Banking

The surge in cross-border banking prior to global financial crises took place not only in the interbank market but also in the retail market, e.g. between banks and their private customers abroad. In this study, Stefanie Kleimeier and her co-authors Harald Sander and Sylvia Heuchemer utilize confidential data to estimate for the first time the effects of banking, currency and twin crises on the geography of cross-border deposits and loans. They show that each crisis type has its own specific effects, that these effects themselves lead to sustained increases in cross-border banking, and that they are different for cross-border loans and deposits, respectively. In particular, we complement the traditional bank point of view with the new customer point of view. While crisis-affected banks have been found to reduce domestic as well as cross-border lending, we show that crises also have the effect of increasing cross-border banking, when driven from the side of the customers, living in countries affected by crises and searching for safe havens and reliable lenders abroad. By focusing on crises in customer countries, this study can indirectly shed light on the international activities of banks in countries that themselves are not experiencing a crisis. Therefore, it can be demonstrated that while crises reduce financial globalization for the affected banks they can simultaneously increase globalization for unaffected banks who respond to customer demand, thus changing the geography of global retail banking.

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