Local deposits make cross border banks resilient: BIS
Banks that finance their operations abroad with wholesale, cross-border or cross-currency funding are amplifying credit crunches, while those relying on local deposits remain a more stable provider of loans, economists at the Bank for International Settlements said.
Those banks whose foreign subsidiaries lent money raised from local savers and companies shrank their balance sheets less than those relying on "noncore" funding, the researchers said in a report released on Sunday. The analysis is based on data covering $24.4 trillion of foreign assets of banks in 17 parent and 38 host countries, collected by the BIS, the record-keeper of the world's central banks.
"Local claims backed by local funding made balance sheets more resilient, even after accounting for systematic differences between host countries and banking systems," researchers Patrick McGuire and Goetz von Peter of the BIS wrote. "By contrast, affiliates shrank more sharply if they had relied pre-crisis on non-core sources of funding, in the form of interbank, foreign currency and cross-border funding."
The findings add to similar studies by the BIS showing the benefits of simple consumer banking. While the new research shows basic banking is better for economies at large, previous studies by the lender found that it's also more profitable for shareholders.
In addition to the funding mix, the economic health of the parent banks was also an important factor determining how big the deleveraging in host countries became, the researchers said. Problems at home together with a weak refinancing structure abroad helped promote contagion. "Banks with larger credit losses and non-core funding spread credit contractions across many host countries," according to the report. "This complements other evidence in the literature that global banks can have a stabilizing or destabilizing effect on the economies they operate in, depending on the nature of the shocks they face."
Moreover, BIS said that recent worries over China's economy, oil and commodity prices and some European banks had come as fundamental shifts take place in the global economy.
International bank-to-bank lending is contracting for the first time in two years, the use of dollar-denominated debt to drive growth in emerging markets has ground to a halt on a strengthening of the currency that has also served to send U.S. companies rushing to borrow in euros.
At the same time, world growth remains subdued, overall debt continues to rise and negative interest rates in large parts of Europe and Japan suggest that some leading central banks are running low on ammunition to quell market volatility that could pose a threat to the global economy.
"The latest turbulence has hammered home the message that central banks have been overburdened for far too long postcrisis," the head of the BIS monetary and economics department, Claudio Borio, said in its first quarterly report of the year.
"Market participants have taken notice. And their confidence in central banks' healing powers has -- probably for the first time -- been faltering. Policymakers, too, would do well to take notice." The comments dovetailed with concerns about the potential side-effects of negative interest rates, which are effectively a charge on commercial banks' spare cash. A study in the BIS report showed the different ways negative rates were being implemented by the likes of Sweden, Denmark, Switzerland, Japan and the European Central Bank, which is expected to go even deeper into negative territory on Thursday.
Evidence from Switzerland showed that banks there had not introduced negative rates on customers' savings but had instead increased costs on loans such as mortgages to curb losses.