Banking’s New Frontier – The Quest For Borderless Networks: Jan Schildbach

By: Jan Schildbach   Date: 26 August 2011

About The Author

Jan Schildbach

Banking analyst at Deutsche Bank Research covering European banking structures & trends in the

Jan Schildbach, EconomyWatch Contributor

 

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In the aftermath of the global financial crisis, many expected Western banks to abandon their foreign interests and refocus on their domestic markets. Yet today, the presence of foreign banks in local markets is much greater overall than it was a few years ago. According to a new report by Deutsche Bank Research, banks’ cross-border business – direct or via branches or subsidiaries – has now broadly stabilized. As such, the outlook for cross-border banking is positive.

Banking’s New Frontier – The Quest For Borderless Networks: Jan Schildbach

Bridging the Divide: Increasingly, Banks are Crossing Borders in order to Connect With New Customers
Photo Credit: paul (dex)

FRANKFURT – At the height of the financial crisis in 2008-2009, it seemed as if Western banks would pull up their foreign stakes and go home, leaving financial markets much more fragmented along national lines. But, as a new report by Deutsche Bank Research shows, banks’ cross-border business – direct or via branches or subsidiaries – has now broadly stabilized.

During the crisis, the level of banking activity fell particularly strongly in capital-intensive areas such as traditional lending to the private sector. The effect was especially pronounced in lending to non-financial companies, whereas lending to households – an area with traditionally lower internationalization – remained more robust.

In part, the decline was due to increased holdings of foreign public debt relative to private debt. Prior to the crisis, banks had often been net sellers of foreign government bonds, but they significantly increased their purchases during 2008-2009. With the onset of the European sovereign-debt crisis in 2010, banks’ appetite for public debt fell again.

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In contrast to lending activities, banks’ commitment to foreign markets has remained virtually unaffected with respect to purely intermediary activities such as investment banking and asset management. Interbank relationships, as well as investment-banking operations, are already highly international. The deep cross-border links between financial institutions and the activity of globally active investment banks only took a brief hit from the crisis. By contrast, the importance of foreign markets for asset managers remains very limited and has not changed significantly since 2007.

Despite the recent setback, banks’ presence in foreign markets today is much greater overall than it was a few years ago. One reason is that revenue growth usually goes hand-in-hand with macroeconomic growth, which increasingly is found in emerging-market countries, rather than in many banks’ mature Western home markets. Moreover, private and public-sector debt levels tend to be much lower in the emerging economies.

At the same time, geographically diversified institutions outperformed even during the recent global crisis, because they were less vulnerable to downturns in individual regions. And, at least until a certain stage of growth, economies of scale and scope beckon, with expansion abroad often the only way to increase size, given already-saturated domestic markets.

Of course, integrated financial markets also benefit banks’ clients by enabling institutions to provide broader and higher-quality financial services at lower prices. Furthermore, strong international financial partners are indispensable to multinational corporations, which often need global cash management or support for large-scale transactions.

Given these advantages, the pace of internationalization has been swift. As recently as 2001, Europe’s top 20 banks still generated more than half of their revenues at home. By 2010, this share had fallen by 10 percentage points, to 42 percent – a remarkable decline that was interrupted only briefly by the financial crisis.


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