Multinational Banks' Deleveraging in the Crisis Driven by Pre-Crisis Characteristics and Behavior

35 Pages Posted: 21 Jun 2016

Date Written: 2015

Abstract

After the collapse of Lehman Brothers, a rapid and far-reaching shrinkage of international banks' assets with a focus on foreign claims took place. For the largest 67 German banking groups, we find that both their characteristics and behavior in the pre-crisis episode had repercussions for the crisis period. Above all, prior non-traditional banking activities - proxied by the relevance of securities and noninterest income - resulted in balance sheet contraction in the crisis. While, from 2002 to mid-2008, a disproportionately high growth rate in profits to assets is found to be indicative of too much risk taking, both high average income and a strong balance sheet expansion in the pre-crisis period are found to be positive per se. In contrast, a high average income or a strong growth in assets in just the last three and a half years before the outbreak of the crisis put balance sheets during the crisis under adjustment pressure. During the crisis, short-term wholesale funding proved to be a disadvantage, while good capital endowment (core Tier 1 capital to RWA ratio), deposit funding and strong affiliate presence abroad had a stabilizing impact. Most of these variables lose their significance in normal times.

Keywords: banks, deleveraging, foreign assets, financial crisis, pre crisis

JEL Classification: G21, F23, F34

Suggested Citation

Frey, Rainer, Multinational Banks' Deleveraging in the Crisis Driven by Pre-Crisis Characteristics and Behavior (2015). Bundesbank Discussion Paper No. 18/2015, Available at SSRN: https://ssrn.com/abstract=2797043 or http://dx.doi.org/10.2139/ssrn.2797043

Rainer Frey (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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