International banks have slowed cross-border lending since the financial crisis, but their local affiliates are filling the gap in a positive sign for greater financial stability, the IMF said Wednesday. The slowdown in cross-border lending since 2008, especially by European banks, has in part been replaced by a surge from Asian banks, the International Monetary Fund said in a new report.
But global banks are also lending more from their subsidiaries inside recipient or "host" countries.
And that is likely good for countries that are vulnerable to sharp swings in capital flows in economic downturns, the IMF said.
"Cross-border lending is a particularly volatile form of cross-border capital flows," said Gaston Gelos of the IMF's Monetary and Capital Markets Department.
"Around domestic crises, foreign-owned affiliates tend to reduce their credit less than domestic banks."
The study suggests that countries on the receiving end of international capital flows would do well to encourage more local branches of foreign banks.
The study, from the IMF's latest Global Financial Stability Report, addresses how economic crises can be exacerbated by sharp changes in lending policy by global banks. In a domestic crisis, domestic banks will sharply tighten lending, constricting economic activity. The same happens with loans from outside the country, the IMF said. But foreign bank branches within a country, the study says, cinch up their loan books less quickly and tightly, effectively taking a larger role in supporting growth.
Both cross-border lending and the number of international banks subsidiaries in recipient or "host" countries have declined since the 2008 crisis, the IMF noted.
Banks, especially those in Europe, have retrenched in order to strengthen their capital foundations and meet tougher requirements from regulators.
But the proportion of their global loan business from foreign subsidiaries has grown.
"Domestic credit is less affected during times of global stress in countries that are home to banks with large international operations," the study said.
"A high reliance of subsidiaries on domestic deposits for their funding is also found to help stabilise lending during both domestic and global stress."
The IMF stressed that host countries need to keep the doors open to cross-border loans. However, it added, "foreign banks operating locally rather than through cross-border transactions tend to contract credit much less following domestic shocks in host countries."
The report noted that the Europeans, especially French and Spanish banks, are leaders in operating subsidiaries in other countries, while Japanese banks, for example, engage more heavily in cross-border business.
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