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The future of global banking

Loan losses in the home markets of large international banks are leading to credit contraction in global operations
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First Published: Wed, Dec 12 2012. 02 39 PM IST
Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint
Updated: Wed, Dec 12 2012. 04 16 PM IST
Citibank announced this month that it would cut 11,000 jobs worldwide in a bid to reduce costs. What is interesting is that a majority of the job losses will be in its global operations. Not only will the American bank be trimming its operations in countries such as Brazil, South Korea and Hungary but it also plans to shut shop in places such as Pakistan and Turkey. The Indian operations seemed to have been spared the axe.
Citibank is not alone in shrinking the size of its global operations, but what it is doing deserves to be watched because it has been one of the role models for financial globalization. Other large banks such as the Royal Bank of Scotland have also tried to withdraw from emerging markets after the financial crisis.
However, it is not just a question of individual banks. There have been larger forces at play. The Bank for International Settlements in Basel has put out new data in its latest quarterly review that bank lending across international borders has contracted since 2011. East Europe has been one of the biggest losers as banks from richer neighbours pulled money out to buy government debt issued by core members of the euro area.
The Free Exchange blog has quite correctly described this as reverse contagion. Earlier financial crises in places such as Latin America or East Asia saw Western banks lose piles of money that eventually restricted their ability to make loans in their home markets. What is happening now is a mirror image: loan losses in home markets are leading to credit contraction in global operations.
Is the high noon for global banks drawing to an end? Will lending activity be more localized in the future? It is hard to say right now. But recent developments have shown two things. One, even the smartest global banks have failed to manage large balance sheets spread across the world. Two, there is a home bias because of which countries in which the large banks are based get preferential treatment when a crisis strikes.
It is not our case that global banks are not needed. A global economy needs global finance. But it is the details that matter. One such detail is regulatory. Indian banking policy has tried to encourage global banks to operate in India through subsidiaries with their own capital, rather than as mere branches. It is a sensible goal, because it improves national oversight in a world prone to global contagion risks.
How will global banks evolve as they try to survive?
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First Published: Wed, Dec 12 2012. 02 39 PM IST
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