Government intervention reduces banking globalisation

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).