EBA欧洲银行-2_V.-Herzberg2C20P.-McQuade-Financial-Stability-Policy-Note_International-bank-flows-and-bank-business-models-since-the-crisis_17页_2mb

Financial Stability Notes Summary

Core Content

This policy note examines the changes in international bank flows and bank business models in the euro area since the global financial crisis. It highlights how these changes have impacted financial stability and the effectiveness of cross-border risk sharing. The authors argue that while regulatory reforms have strengthened the euro area banking system, they have also led to a more conservative and domestically oriented banking sector.

Main Points

1. Decline in International Capital Flows

• International capital flows, especially cross-border bank flows, have declined significantly since the global financial crisis.
• The decline was not uniform across regions, with European banks playing a central role in this retrenchment.
• By 2016, global cross-border banking positions had contracted by approximately 15% compared to 2008, with European banks being the primary drivers.
• The share of euro area-based banks in global cross-border bank claims fell from 36% in 2008 to below 30% in 2016.
• The reduction in cross-border interbank lending has been more pronounced than that of intragroup lending.

2. Changes in Bank Business Models

• Euro area banks have become more domestically oriented, smaller, less trading-oriented, and more deposit-funded.
• The decline in non-interest income is a major factor in the post-crisis drop in bank profitability.
• The cost-to-income ratio has remained relatively stable, indicating limited progress in cost efficiency.
• The shift to more stable funding sources, such as deposits and intragroup funding, has been driven by regulatory reforms like the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR).

3. Impact of Regulatory Reforms

• Regulatory reforms have improved bank resilience and resolvability.
• These reforms have discouraged certain riskier business models and fostered more conservative ones.
• The increased reliance on domestic funding and reduced use of wholesale funding have contributed to the decline in cross-border activities.
• The LCR requires banks to hold high-quality liquid assets (HQLA), which has increased the need for local liquidity.

4. Implications for Risk Sharing and Banking Union

• Cross-border banking has not contributed effectively to risk sharing during the European sovereign debt crisis.
• A more integrated banking union could help break adverse feedback loops between banks and sovereigns.
• The authors suggest that a common resolution mechanism and a European Deposit Guarantee Scheme would reduce the need for national approaches.
• However, the current trend shows that cross-border risk sharing remains limited, and reforms are still needed to enhance its role in the European banking union.

Key Information

• Domestic orientation: Euro area banks are now more focused on domestic markets and less involved in cross-border activities.
• Size and complexity: Banks have become smaller and less complex, which may limit economies of scale.
• Funding sources: There has been a shift from wholesale funding to more stable deposit funding.
• Regulatory influence: Micro- and macro-prudential regulations have played a role in shaping bank business models and reducing cross-border flows.
• Liquidity requirements: The LCR has increased the need for banks to hold high-quality liquid assets, which affects their ability to manage liquidity across borders.
• Intragroup flows: These have become a more robust form of banking integration compared to short-term cross-border wholesale lending.
• Risk sharing limitations: Despite the goals of banking union, cross-border risk sharing remains limited, and further reforms are necessary.

Conclusion

The post-crisis reforms have led to a more resilient but less integrated euro area banking system. While conservative business models offer financial stability benefits, they may also reduce the potential for cross-border risk sharing. To enable banks to play a greater role as shock absorbers in the European banking union, further European-level reforms, such as a common resolution mechanism and a European Deposit Guarantee Scheme, are needed. Additionally, reducing institutional fragmentation would make the creation of European banks more feasible.