International banking now safer than before crisis, says IMF

Apr 10, 2015

Banks now rely more on lending by foreign affiliates than on cross-border lending.

Global financial systems are now safer than before the financial crisis, according to a new report from the International Monetary Fund (IMF).

It said international banks now rely relatively more on lending by foreign affiliates than on cross-border lending.

Countries with higher exposure to cross-border lending experience a more significant reduction of credit growth during both domestic and global financial crises. Local lending by foreign affiliates, however, behaves differently, said the IMF.

In the case of cross border lending, loans are made directly from headquarters to firms or other banks in another country.

With foreign affiliates, branches or subsidiaries controlled by the banking group lend to residents of the country where they are located.

While cross-border banking linkages tend to aggravate the effects of adverse domestic and global shocks on credit in host countries, local lending can play a stabilising role during domestic crises, according to the report.

"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."ADNFCR-2976-ID-801783057-ADNFCR