UK banks are pulling back from lending overseas at a faster rate than banks in any other country as they focus increasingly on the domestic market, according to a Bank of England policymaker.
Kristin Forbes, a member of the Bank’s interest-rate setting monetary policy committee, said “home bias” had increased since the crisis, with the UK playing a leading role in the “deglobalisation” of the banking system.
Speaking at Queen Mary University in London, she said: “The contraction in UK international lending and borrowing is larger – on an absolute basis – than for any other country for which data is available. In other words, the decline in bank flows into and out of the UK has contributed more to the global decline in banking flows than any other country.”
Forbes said that UK cross-border financial exposure has fallen by 23% since its peak, and is currently back at its late 2007 levels.
She said that the deals struck when banks were bailed out during the height of the crisis were possibly contributing to a decline in international banking flows, with governments urging a focus on domestic lending.
In 2011, following the government’s 2008 bailout of Royal Bank of Scotland, George Osborne said: “We believe RBS’s future is as a major UK bank, with the majority of its business in the UK and in personal, SME [small and medium-sized enterprises] and corporate banking. Investment banking will continue to support RBS’s corporate lending business but RBS will make further significant reductions in the investment bank, scaling back riskier activities that are heavy users of capital or funding.”
Forbes said that other possible reasons for a retrenchment in international banking flows included weaker balance sheets in the wake of the financial crisis – meaning vulnerable banks brought money home from abroad and reduced foreign lending – and weaker demand for loans as companies and individuals got their own finances in order.
A less globalised banking system could increase the UK’s vulnerability to domestic shocks, but decrease the threat of contagion from shocks overseas, she said.
“Although a deglobalised banking system may increase the correlation between domestic lending and domestic shocks, it could simultaneously reduce the correlation with foreign shocks,” she said.
“The reduction in cross-border exposure, especially when combined with the lower levels of leverage and stronger balance sheets, should substantially increase the resilience of UK banks to foreign shocks.”
Forbes also said a reduction in international banking flows could also make it more difficult to fund the UK’s current account deficit - which arises from Britain importing more than it exports.
She said: “A reduction in international bank flows could make it more difficult, and possibly even more expensive, for the UK to fund its current account deficit.”
Another possible impact of funding shortfalls created by reduced banking flows was a rise in shadow banking - which includes hedge funds and private equity lending - Forbes said, as alternative financing sources were sought. Shadow banking assets rose to a record $75tn last year, equivalent to about half of the global banking system.
