Balkanisation of bank lending has made recipient countries safer, says IMF

The decrease in international bank lending since the financial crisis has made markets in recipient countries safer, the International Monetary Fund argues in its upcoming financial stability flagship report.

The number of direct cross-border bank loans has shrunk since 2008, due primarily to weaker balance sheets and tougher regulations, according to the IMF. At the same time, lending through foreign branches and subsidiaries has remained stable.

This relative shift to "local lending through affiliates has a positive effect on the financial stability of host countries", the fund notes in a ‘teaser' chapter from the Global Financial Stability Report, released today.

The IMF says lending through branches and subsidiaries helps shield host countries from external shocks, which are often transmitted through the drying-up of foreign funding.

In addition, unlike with direct loans – both retail and wholesale – host countries are usually able to restrict foreign banks from withdrawing liquidity from their subsidiaries, the IMF notes.

"Around domestic crises, foreign-owned affiliates tend to reduce their credit less than domestic banks," said Gaston Gelos, chief of the global financial stability analysis division at the IMF.

"This is particularly true if the parent bank of the subsidiary is well-capitalised and has stable funding sources."

The IMF, which also notes cross-border lending "would likely have contracted more without such accommodative" monetary policies, says governments can shield themselves against shocks by encouraging the subsidiaries of global banks to rely more on local funding sources.

"Since local lending by affiliates is shown to be safer and more resilient, policies that encourage such types of lending are helpful," the fund notes, but also adds "progress on the consistent implementation" of regulatory standards and cross-border resolution is needed.

"Since well-capitalised parent banks also contribute to the financial stability in the host country, the recent financial reforms aimed at strengthening global banks' capital buffers help promote financial stability around the world," said Gelos.