This IIF staff paper evaluates the benefits as well as the associated risks of cross-border banking, with a focus on its implications for the macroeconomy and financial stability. In previous research, the IIF has shown that financial markets are experiencing increasing levels of fragmentation. Fragmentation undermines some of the progress that has been made in strengthening the resilience of the global financial system and reduces economic growth and job creation. It is therefore important and timely to re-examine the benefits and risks of cross-border banking.
Some regulators are concerned that international banking may be inherently more complex and harder to regulate than domestic banking, and a potential source of systemic risk. The complexity and risks of cross-border banking need to be understood and managed effectively. However, if these are properly managed, there is ample evidence over a long time period that the efficiency, resilience, economic and financial stability implications of cross-border banking provide significant net benefits in host and home jurisdictions alike. Specifically, cross-border banking supports international activity and capital flows, diversifies the competitive landscape in national banking systems, strengthens the resilience of banking groups through asset and liability diversification, increases economic resilience to local shocks and expands options for bank recovery and resolution.
The paper suggests several policy measures that the FSB and/or individual G20 members could take to reduce fragmentation and maximize the net benefits of cross-border banking. It is necessary to take stock and measure the degree and impact of market fragmentation over time. Further enhancing regulatory and supervisory cooperation will be key to many solutions; the paper suggests some specific ways of doing so in a credible and transparent way.
This is a follow-up to an IIF staff paper published in January 2019 on “Market Fragmentation and the Need for Regulatory Cooperation” and an IIF letter published in July 2019 to the G20, FSB and IOSCO regarding Market Fragmentation.