VoxEU Column International Finance

Global banking: Fragmenting or going through structural changes?

The Global Financial Crisis has triggered a reduction in cross-border bank lending. This column uses evidence from an updated bank ownership database to show that global banking is not becoming more fragmented. It is rather going through structural transformations. Banks from countries hit by crises are reducing their foreign presence, while banks from emerging and developing markets are stepping into the void. 

What is the concern?

In the wake of the Global Financial Crisis many commentators have suggested that global financial integration has gone into reverse (e.g., The Economist 2013,  Financial Times 2014). The debate has mainly focused on the collapse in cross-border bank flows (e.g., Milesi-Ferretti and Tille 2011, Reinhardt and Riddiough 2014), the behaviour of (large) European and American banks, and the fragmentation of financial markets in the Eurozone (e.g., ECB 2014, Beck 2012,  Beck 2014). Sure, American and European banks were the main vehicles through which financial integration increased before the Crisis and the ones most affected by it. And the need to restore balance sheets and profitability and to meet stiffer capital requirements and other regulatory changes have indeed incentivised many of these banks to reduce their international operations. But focusing only on banks from these regions does no longer provide a complete picture of the global banking landscape.

Some of the confusion is about actual facts. While the collapse in cross-border bank lending and other capital flows is well documented using BIS and other data sources, developments in foreign bank presence are not. In a recent paper we tried to correct this by updating and extending our database of foreign bank presence around the world (see Claessens and Van Horen 2014b). The new database covers ownership information and changes therein of more than 5,498 banks active in 138 host countries for the period 1995-2013. It is therefore well suited to study how the crisis has affected global banking in terms of ‘brick and mortar’ foreign operations.

What was the situation before the Global Financial Crisis?

Before the Crisis, many banks expanded their presence abroad resulting in the number of foreign banks rising from 784 in 1995 to 1,301 in 2007 (Figure 1). As the number of domestic banks decreased over the same period, reflecting consolidation driven by technological changes and deregulation as well as the occurrence of crises, the share of foreign banks increased substantially, from 19% in 1995 to 32% in 2007. By 2007 foreign banks were holding some 13% of all banking assets.

Figure 1. The increase in foreign bank presence has levelled off after 2008

There was much variation, however, across host and home countries. Before the Crisis, foreign banks’ presence grew much less in OECD countries than in other countries, with market shares in 2007 of 23 and 12% in terms of number and asset shares, respectively, versus 35 and 16% in emerging markets and 43 and 24% in developing countries. Among the non-OECD-countries, those in Eastern Europe and Central Asia, Latin America, and Sub Saharan Africa had especially high foreign bank presence.

While in 2007 parent banks from OECD countries owned 67% of all foreign banks and controlled 94% of all foreign assets, they were not the only ones expanding internationally. A substantial and growing number of foreign banks came from emerging markets (259) and developing countries (93), with banks headquartered in Eastern Europe and Central Asia (85) and Sub Saharan Africa (79) the most active foreign investors, with some having become important regional players. Still, while substantial in numbers, these banks tend to be (very) small, representing only 4% of all foreign assets as of 2007 (see further Claessens and van Horen 2012).

What happened after the Crisis?

Not surprisingly, foreign bank ownership has been changing since the wake of the Crisis. Only about one-fifth as many foreign banks entered after the Crisis compared to the peak year just before the Crisis (Figure 2). As exits remained similar, overall net entry became negative, i.e., there was some retrenchment in foreign bank presence. As the number of domestic banks declined as well, the aggregate market share of foreign banks in numbers remained at about 35% as of end 2013. The asset share declined, however, as domestic banks grew their balance sheets faster than foreign banks did, in part as many parent banks saw their balance sheets impaired. Yet, foreign banks still account for some 11% of global bank assets as of end 2012, down only slightly from its peak of 13% in 2007.

Figure 2. New entries of foreign banks declined, while exits remain stable

These aggregate developments hide some important variations and differences, however, both among host and even more so among home countries, reflecting shifts in global economic and financial powers. While in 66 host countries foreign bank presence declined, in 48 countries it actually increased (Figure 3). And although the number of foreign banks declined, much activity has been in the intensive margin as many banks were sold to other foreign parents. After a continued rise until 2008, the number of foreign banks from high-income countries has started to decline, from 948 in 2008 to 814 in 2013, mostly on account of a retrenchment by crisis-affected Western European banks.

Figure 3. While in many markets foreign bank presence declined, in others it increased

On the other hand, banks from emerging markets and developing countries continued their pre-crisis growth and further increased their presence (Figure 4). Currently these banks own 441 foreign banks, representing 8% of all foreign assets, a doubling of their share as of 2007. As these banks tend to invest mainly in their own geographical regions, global banking now both encompasses a larger variety of players and at the same time is more regional, with the average intraregional share increasing by some five percentage points.

Figure 4. Diverging trends between high-income countries and emerging markets and developing countries

Examining the underlying determinants of these changes shows that countries hit by a systemic crisis at home are less represented abroad today, and host countries growing slower saw their local foreign banks’ assets grow less. Also those home-host combinations representing far flung and relatively small investments saw more retrenchment, while parent banks with relatively large foreign bank presence in a particular country before the Crisis grew their balance sheets less. Conversely, entry was greater in host countries that were faster growing and closer to home. Many of these changes relate to the growing importance of foreign banks coming from emerging markets and developing countries.

Comparing developments in foreign bank local lending to those in direct cross-border banking claims shows that local lending declined less during the Crisis than cross-border claims did, suggesting that foreign bank presence has been a relative source of stability. The entry of new banks from emerging markets and developing countries with relatively stronger balance sheets and greater willingness to expand credit has also mitigated declines in local lending in many markets. And while there are some common drivers, in general, the retrenchment witnessed in cross-border lending is quite distinct from foreign banks’ local activity.

Policy implications

As the Crisis has accelerated some structural transformations in foreign bank investment activities, important policy issues arise.

  • First, the rising importance of banks from emerging markets and developing countries through foreign presence (as shown) and very likely (although not verifiable with existing data) through cross-border lending is a natural development, reflecting their growing roles in the world economy and global financial markets.

At the same time, it becomes imperative that policymakers from these countries are active participants in international deliberations about financial reforms, such as Basel III and international resolution modalities, so as to assure that reform models suit their (changing) circumstances. These countries will also need to adequately perform in their role as home regulator and supervisor of foreign branches and local subsidiaries, including by making sure that their banks are adequately capitalised and weak banks are quickly restructured and resolved. In addition, more work is needed to better assess the financial stability implications of investments undertaken by different types of foreign banks. Furthermore, data coverage has to expand to adequately gauge developments in global banking, including whether there is indeed a general retrenchment in cross-border lending or whether new players are filling the gap left by retreating banks. Currently BIS data only cover a few emerging markets and developing countries as creditor countries, thus missing out what are likely growing lending among emerging markets and developing countries as well as lending from these countries to BIS-reporting countries themselves.

  • Second, with global banking becoming more regional, international coordination could on one hand become easier to achieve, with the European banking union a prime example of the potential for improved regional coordination in all dimensions – entry, regulation, supervision, and resolution.

At the same time, regionalisation may not allow for the best banking technology and know-how to be employed in every market. Furthermore, it could make the global banking system more prone to shocks, as diversification will be more limited and some newly emerging players may be less capitalised. More regional-based financial regulation and supervision could also lead to policies and actions that amount to financial repression, ring-fencing and fragmentation, with possible adverse consequences on risk-sharing and the efficiency of resource allocation. As such, better understandings of both the drivers of banking system regionalisation (and possibly related fragmentation) and the pros and cons of more regionalisation are of the utmost relevance.

Authors' note: This column is based on the paper, Claessens and Van Horen 2015, and the database accompanying that paper is available online at http://www.dnb.nl/en/onderzoek-2/databases/bank.jsp. The views expressed here are those of the authors and do not necessarily represent those of the Federal Reserve Board, DNB or any of the institutions with which they have been affiliated.


Beck, T (2012), “Banking union for Europe – risks and challenges”, VoxEU.org, 16 October

Beck, T (2014), “After AQR and stress tests – where next for banking in the Eurozone?”, VoxEU.org, 10 November

Claessens, S and N van Horen (2012), “Foreign Banks: Trends and Impact on Financial Development”, VoxEU.org, 28 January.

Claessens, S and N van Horen (2014a), “Foreign Banks: Trends and Impact”, Journal of Money Credit and Banking, 46(1), 295-326.

Claessens, S and N van Horen, 2015, “The Impact of the Global Financial Crisis on Banking Globalization”, forthcoming IMF Economic Review, also IMF Working paper 14/197.

ECB (2014), “Financial Integration in Europe”, April, Frankfurt.

Financial times (2014), “Big banks giving up on their global ambitions,”  19 October 19.

Lane, P R and G M Milesi-Ferretti (2012), “External Adjustment and the Global Crisis” Journal of International Economics, 88(2), 252-265.

Milesi‐Ferretti, G M and C Tille (2011), “The Great Retrenchment: International Capital Flows During the Global Financial Crisis,” Economic Policy, 26(66), 285-342.

Reinhardt, D and S Riddiough (2014), “The two faces of cross-border banking flows: An investigation into the links between global risk, arms-length funding, and internal capital markets”, VoxEU.org, 7 May.

The Economist (2013), “Financial fragmentation: Too much of a good thing”, The Economist, 12 October. 

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