FRANKFURT – At the height of the financial crisis in 2008-2009, it seemed as if Western banks would pull up their foreign stakes and go home, leaving financial markets much more fragmented along national lines. But, as a new report by Deutsche Bank Research shows, banks’ cross-border business – direct or via branches or subsidiaries – has now broadly stabilized.
During the crisis, the level of banking activity fell particularly strongly in capital-intensive areas such as traditional lending to the private sector. The effect was especially pronounced in lending to non-financial companies, whereas lending to households – an area with traditionally lower internationalization – remained more robust.
In part, the decline was due to increased holdings of foreign public debt relative to private debt. Prior to the crisis, banks had often been net sellers of foreign government bonds, but they significantly increased their purchases during 2008-2009. With the onset of the European sovereign-debt crisis in 2010, banks’ appetite for public debt fell again.
In contrast to lending activities, banks’ commitment to foreign markets has remained virtually unaffected with respect to purely intermediary activities such as investment banking and asset management. Interbank relationships, as well as investment-banking operations, are already highly international. The deep cross-border links between financial institutions and the activity of globally active investment banks only took a brief hit from the crisis. By contrast, the importance of foreign markets for asset managers remains very limited and has not changed significantly since 2007.