In this column, we discuss the last explanation.
Government intervention may affect the depth of banking globalisation. On the asset side of a bank’s balance sheet, a disproportionate decrease in cross-border lending following nationalisation constitutes prima facie proof a negative effect on banking globalisation, known as ‘financial protectionism’ by Rose and Wieladek (2014). Within government support, banks were often asked to improve domestic lending. 2 That’s, the ‘home bias’ exhibited by many (see Cerutti and Claessens 2014, Cerutti et al. 2014, De Haas and Van Horen 2012, Giannetti and Laeven 2012, Presbetero et al. 2014, Forbes et al. 2016) will be exacerbated if the lender received a big public intervention, due to natural preference of a regulator or government towards domestic lending. Furthermore, this effect will be a lot more pronounced in an emergency, especially when there exists a market meltdown as banks face competing demands from regulators and funding constraints (Cerutti and Claessens 2014).
However the ‘depth’ effect do not need to impact only the asset side of the total amount sheet. In an emergency, nationalised banks are also perceived to be the safest home for deposits, because they are owned and backed by the federal government. Unsurprisingly, Berger and Roman (2015) find that the united states Troubled Assets Relief Program (TARP) gave participating institutions a competitive advantage in raising deposits, due to the fact those banks were perceived to be safer. Similarly, Acharya and Mora (2015) document a ‘flight to safety’ effect showing that previously liquidity-constrained banks experienced a rise in deposits following a introduction of TARP. This shows that government intervention may skew bank liabilities toward domestic deposits.
Large banks usually lend and borrow in lots of different foreign countries. The asset mix across countries differs by bank, often based on the particular regional or industrial expertise of the lender. For instance, Standard Chartered is a big UK bank whose lending is primarily centered on Asia, and Santander, a Spanish bank with substantial operations in Latin America, is currently the third largest mortgage company in the united kingdom. If the authorities impose national political preferences on nationalised banks, resulting in a decrease in lending to a specific group of countries, then nationalised banks from different countries could have increasingly divergent asset portfolios. However, nationalised banks from the same country will be expected to have significantly more similar asset portfolios. Does the info support this notion?
Are these effects persistent? US banks offer an insight. Unlike banks far away that received public support through the global financial meltdown, most American banks have finally repaid the funds they received through Troubled Assets Relief Program. Bias against foreign lending could either persist or disappear following Troubled Assets Relief Program exit.
In a recently available paper, (Kleymenova et al. 2016), we offer empirical evidence along these three dimensions. Using UK data, we document that following nationalisation, non-British banks allocate their lending from the united kingdom and increase their external funding (depth). Furthermore, banks’ cross-country asset allocations converge following nationalisation (breadth). Finally, using US Troubled Assets Relief Program data we show these effects may not persist following the intervention is unwound (persistence).
The depth effect: British bank assets and liabilities
Given the current presence of a lot of domestic and foreign banks that take part in significant cross-border lending, the united kingdom banking system can be an ideal spot to investigate whether government interventions affected lending and funding (depth) of banks operating in the united kingdom. Using quarterly data from the lender of England, we document a permanent aftereffect of foreign bank nationalisation as a reduction in the mixture of foreign assets altogether assets by around 15%. That is an economically significant amount, much like those of Rose and Wieladek (2014), and is in keeping with the hypothesis that government intervention reduces banking globalisation as external lending is scale back a lot more than domestic lending. However, we usually do not observe the same aftereffect of nationalisation on British banks. That’s, not all governments appear to act the same upon bank nationalisation.
On the liabilities side we find similar results. Whenever a foreign bank is nationalised, it does increase the fraction of its foreign liabilities by around 14%, almost a similar as the upsurge in foreign assets. Not merely do nationalised foreign banks tilt their lending practices from the UK; in addition they tilt their borrowing away, also to an identical degree.
These email address details are not mechanically implied by those on the asset side. While, within an accounting sense, total assets have to equal total liabilities plus shareholders’ equity, there may be stark differences in the composition because assets in a single country could be financed with liabilities from another. In the current presence of time effects, our results on the liabilities side could be interpreted as reflecting a bank’s demand for UK versus foreign deposits. In times of uncertainty, nationalised banks, essentially by definition, supply the safest home for deposits. A growth in foreign nationalised bank preference for foreign, instead of British, deposits is therefore in keeping with the theory that government interventions may have a detrimental effect on banking globalisation. We also look for a smaller (but statistically significant) aftereffect of foreign capital injections on foreign funding.
The breadth effect – overseas assets
Banks’ foreign assets tend to be spread across many countries. It really is natural to ask if banks’ portfolios are more alike upon nationalisation, reflecting the policy preferences of the federal government. We ask whether nationalised banks’ cross-country portfolio mixes converge in the wake of nationalisation. We interpret convergence as proof government intervention that limits the breadth of banking globalisation.
Using a way of measuring similarity of banks’ assets, we document that if two banks from different countries are nationalised, the similarity of their cross-country portfolio mixes falls by a big and statistically significant amount. Specifically, we find that the similarity of assets is approximately halved when both banks are nationalised. More strikingly, we find that the similarity of a set of banks’ cross-country portfolio mixes rises significantly when the nationalised banks are from the same country.
These email address details are consistent with the theory that the external lending preferences of banks from the same country converge after both are nationalised because authorities impose their lending preferences on nationalised institutions. Overall, the decrease in the breadth of financial globalisation may very well be associated with a rise in systemic risk since banks have less diversified portfolios, a troubling consequence of bank nationalisation. 4
How persistent is financial protectionism – the Troubled Assets Relief Program
To measure the durability of the effects, we compare the growth of cross-border lending upon TARP entry and exit. TARP Program is an all natural setting to examine persistence, since unlike recent bank nationalisations, many banks have exited Troubled Assets Relief Program. We find some evidence that banks appeared to discriminate against foreign lending after entry into TARP, but addititionally there is evidence (albeit weaker) that was reversed upon TARP exit. That’s, the consequences of large public interventions appear to dissipate following the intervention is finished. These effects are small, although not trivial. A counterfactual exercise shows that aggregate US foreign lending could have been 3.3% higher in the lack of TARP (see Figure 1). This shows that once public interventions are unwound globally, growth rates in cross-border bank lending may go back to those observed prior to the crisis.
Figure 1 . Aggregate foreign lending around TARP (US dollars, billion)
Government ownership isn’t the only possible friction or reason cross-border bank lending has remained stagnant because the 2007-2009 crisis (Forbes 2014). In this column, we discuss and show that government ownership could possibly be a significant friction inhibiting cross-border bank activity in both UK and the united states. We provide some evidence these effects might wear off following the interventions are unwound. If the same mechanism pertains to other countries all over the world, and if government intervention is definitely a significant friction, then global banking intermediation may rebound once more, once banks are privatised[AK1] .
Acharya, V and N Mora (2015), “AN EMERGENCY of Banks as Liquidity Providers,” Journal of Finance 70, 1-43.
Berger, A and R A Roman (2015), “Did TARP Banks Get Competitive Advantages?”, Journal of Financial and Quantitative Analysis 50: 1199-1236.
Bank for International Settlements (BIS) (2014), 84th Annual Report, 2013/14.
Cerutti, E and S Claessens (2014), “THE FANTASTIC Cross-Border Bank Deleveraging: Supply Constraints and Intra-Group Frictions”, IMF Working Paper WP/14/180.
Cerutti, E, S Claessens, and L Ratnovski (2014), “Global Liquidity and Drivers of Cross-Border Bank Flows”, IMF Working Paper WP/14/69.
De Haas, R and N Van Horen (2012), "International Shock Transmission following the Lehman Brothers Collapse: Evidence from Syndicated Lending", American Economic Review 102: 231-37.
Forbes, K (2014), “Financial ‘deglobalization’?: capital flows, banks and the Beatles”, speech at Queen Mary University of London.
Forbes, K J, D Reinhardt, and T Wieladek (2016), “The Spillovers, Interactions, and (Un)Intended Consequences of Monetary and Regulatory Policies”, MIT Sloan Research Paper, No. 5163-16, February.
Giannetti, M and L Laeven (2012), “The Flight Home Effect: Evidence from the Syndicated Loan Market during Financial Crises”, Journal for Financial Economics 104: 23-43.
Kleymenova, A, A K Rose and T Wieladek (2016), “Does Government Intervention Affect Banking Globalization?”, CEPR Discussion Paper No. DP11108.
Rose, A K and T Wieladek (2014), “Financial Protectionism? First Evidence”, Journal of Finance 69: 2127-2149.
World Bank (2009), “Global Development Finance. Charting a worldwide Recovery,” Washington, DC.
1 The April 2015 Global Financial Stability Report provides proof financial fragmentation and links it to tighter cross-border regulation, especially because of European bank retrenchment, see chapter 2 of the Report.
2 For instance, French banks in receipt of government support pledged to improve lending domestically by three to 4%, and the Dutch bank ING announced that it could lend 25 billion euros to Dutch businesses and households within receiving government assistance (World Bank, 2009). Similarly, the united states Troubled Assets Relief Program specifically stated that among its objectives was to improve domestic lending.
3 We thank Takeo Hoshi for pointing this out to us.