Cross-Border Banking in Europe

What's Next?

F. Allen, T.H.L. Beck, E. Carletti, P. Lane, D. Schoenmaker, W.B. Wagner

Research output: Book/ReportBookScientific

Abstract

Understanding the role of banks in cross-border finance has become an urgent priority. Cross-border banks have played a central role in the dynamics of the global crisis of 2007-2009. First, European banks had a surprisingly large exposure to the US securitised asset markets, which arose to a significant extent through global banks acting either on the buying or selling side in these markets. Second, the breakdown in credit and asset markets was an international phenomenon, with cross-border linkages suffering disproportionately due to greater information problems vis-à-vis cross-border counterparties and the differences in regulatory regimes. Third, currency mismatches in funding became evident, with European banks suffering a dollar shortage that ultimately required resolution through a major currency swap initiative among the main central banks. Fourth, the provision of fiscal support for distressed banks was especially problematic in relation to cross-border activities. The rescue of multi-country banks, such as Dexia and Fortis, required the governments involved to devise ad hoc, ex-post burden-sharing agreements. In relation to emerging Europe, there were also fears that the policies of home-country governments might encourage parent banks to fail to support the operations of affiliates. This report analyses key aspects of cross-border banking, takes a European focus and derives policy recommendations based on them. Chapter 1 of the report first documents the evolution of cross-border banking in Europe in the two decades prior to the crisis. We then turn to the role cross-border banking played during the crisis of 2007-2009, with a key focus on whether crossborder activities have exacerbated the crisis or helped to mitigate it. We also analyse the regulatory response to cross-border problems in the crisis.
Original languageEnglish
Place of PublicationLondon
PublisherCEPR
Number of pages130
ISBN (Print)9781907142369
Publication statusPublished - 2011

Fingerprint

Cross-border
Banking
Asset markets
European banks
Government
Ad hoc
Finance
Breakdown
Shortage
Credit markets
Fiscal
Currency swap
Central bank
Global crisis
Funding
Linkage
Burden sharing
Home country
Regulatory regime
Currency mismatch

Cite this

Allen, F., Beck, T. H. L., Carletti, E., Lane, P., Schoenmaker, D., & Wagner, W. B. (2011). Cross-Border Banking in Europe: What's Next? London: CEPR.
Allen, F. ; Beck, T.H.L. ; Carletti, E. ; Lane, P. ; Schoenmaker, D. ; Wagner, W.B. / Cross-Border Banking in Europe : What's Next?. London : CEPR, 2011. 130 p.
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Allen, F, Beck, THL, Carletti, E, Lane, P, Schoenmaker, D & Wagner, WB 2011, Cross-Border Banking in Europe: What's Next? CEPR, London.

Cross-Border Banking in Europe : What's Next? / Allen, F.; Beck, T.H.L.; Carletti, E.; Lane, P.; Schoenmaker, D.; Wagner, W.B.

London : CEPR, 2011. 130 p.

Research output: Book/ReportBookScientific

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N2 - Understanding the role of banks in cross-border finance has become an urgent priority. Cross-border banks have played a central role in the dynamics of the global crisis of 2007-2009. First, European banks had a surprisingly large exposure to the US securitised asset markets, which arose to a significant extent through global banks acting either on the buying or selling side in these markets. Second, the breakdown in credit and asset markets was an international phenomenon, with cross-border linkages suffering disproportionately due to greater information problems vis-à-vis cross-border counterparties and the differences in regulatory regimes. Third, currency mismatches in funding became evident, with European banks suffering a dollar shortage that ultimately required resolution through a major currency swap initiative among the main central banks. Fourth, the provision of fiscal support for distressed banks was especially problematic in relation to cross-border activities. The rescue of multi-country banks, such as Dexia and Fortis, required the governments involved to devise ad hoc, ex-post burden-sharing agreements. In relation to emerging Europe, there were also fears that the policies of home-country governments might encourage parent banks to fail to support the operations of affiliates. This report analyses key aspects of cross-border banking, takes a European focus and derives policy recommendations based on them. Chapter 1 of the report first documents the evolution of cross-border banking in Europe in the two decades prior to the crisis. We then turn to the role cross-border banking played during the crisis of 2007-2009, with a key focus on whether crossborder activities have exacerbated the crisis or helped to mitigate it. We also analyse the regulatory response to cross-border problems in the crisis.

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Allen F, Beck THL, Carletti E, Lane P, Schoenmaker D, Wagner WB. Cross-Border Banking in Europe: What's Next? London: CEPR, 2011. 130 p.