Deglobalization of Banking: The World is Getting Smaller

40 Pages Posted: 25 Sep 2014

See all articles by Caroline Van Rijckeghem

Caroline Van Rijckeghem

Istanbul Analytics

Beatrice Weder di Mauro

Graduate Institute Geneva, IHEID; Graduate Institute Geneva, IHEID

Date Written: September 2014

Abstract

Banks have been running for home. We investigate the pattern of this increasing home bias in the wake of the financial crisis and explore possible explanations. We estimate the strength of the flight home effect as the change in domestic credit extended by domestic banks that cannot be accounted for by recipient or lender effects. We find evidence of flight home for almost all banking systems with the notable exception of the US and Japan. In periods of calm, reversals of the home bias are small. The result is cumulative renationalization, with domestic lending growing on average 25% more than foreign lending during 2008-12. Sales and acquisitions of banks contributed to the home bias and the flight home was strong at the intensive margin as well. Deterioration of bank soundness explains some but not all of the effect, e.g. Germany and Switzerland had a strong flight home notwithstanding improving bank soundness during the eurocrisis. We also find evidence of the vicious circle between banks and sovereign balance sheets: sovereign stress paired with banking stress contributed to the renationalization of banking.

Keywords: deglobalization, financial protectionism, international banking system

JEL Classification: E52, F34, G21

Suggested Citation

Van Rijckeghem, Caroline and Weder di Mauro, Beatrice and Weder di Mauro, Beatrice, Deglobalization of Banking: The World is Getting Smaller (September 2014). CEPR Discussion Paper No. DP10139, Available at SSRN: https://ssrn.com/abstract=2501622

Caroline Van Rijckeghem (Contact Author)

Istanbul Analytics ( email )

Istanbul
Turkey

Beatrice Weder di Mauro

Graduate Institute Geneva, IHEID ( email )

Geneva Avenue de la Paix 11A
Geneva, 1202
Switzerland
1211 (Fax)

Graduate Institute Geneva, IHEID ( email )

Chemin Eugene Rigot 2
Geneva, 1211
Switzerland

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