July 2019: BIS Quarterly Review – Concentration in cross-border banking

A structural feature of cross-border banking is its high degree of concentration, with a small number of very large bilateral links accounting for the lion’s share of total global cross-border bank credit. The largest links are almost exclusively between advanced economies, while links involving emerging market economies (EMEs) tend to be of smaller size. Concentration in cross-border bank links increased up to the Great Financial Crisis (GFC) and remained high. Overall, it is higher for cross-border interbank credit compared with bank credit to the non-bank sector. While the share of cross-border interbank credit has fallen significantly since the GFC, concentration has remained high for interbank links.

The concentration of cross-border bank linkages is highly relevant for financial spillovers, as the GFC revealed (Ehlers and McGuire (2017), Avdjiev and Takáts (2014), Herrmann and Mihaljek (2013), Borio et al (2011)). In this article, we take a closer look at the size distribution as well as the sectoral composition of cross-border banking links at the country level. Cross-border interbank credit was particularly affected during the GFC (Claessens (2017)), including the model whereby local banks tap cross-border funding from global banks (Bruno and Shin (2014)). Using the BIS locational banking statistics (LBS), we document the pattern of bilateral (country-level) cross-border bank credit (assets) of banks located in one country vis-à-vis bank and non-bank borrowers in another.2

The first section of this article documents the size distribution of cross-border banking links. It then shows that concentration is mainly due to links within advanced economies. The second section looks at the sectoral composition, focusing on the persistently higher concentration in cross-border interbank links relative to links vis-à-vis the non-bank sector.

Link:Concentration in cross-border banking