Overview

Successful international integration, supported by sound national policy and effective international cooperation,
has underpinned most experiences of rapid growth, shared prosperity, and reduced poverty.
Perhaps no sector than banking better illustrates both the potential benefi ts and perils of deeper international integration. International banks—banks that do business outside the country where they are headquartered—
are often considered important contributors to sustainable fi nancial development, by promoting economic growth. The decade before the 2007–09 global fi nancial crisis was characterized by a signifi cant increase in fi nancial
globalization, particularly for banking institutions, which coincided with increases in bank size to unprecedented levels (Claessens 2016; Demirgüç-Kunt, Evanoff, and Kaufman 2016). These changes were manifested
in both a rise in cross-border lending and a growing participation of foreign banks around the world as they became an integral part of fi nancial systems, especially in developing countries.
International banking activities may contribute to faster growth, greater welfare, and enduring stability in two important ways: fi rst, by bringing much-needed capital, expertise, and new technologies, thereby leading to more
competitive banking systems; and second, by enabling risk sharing and diversifi cation, thereby smoothing out the effects of domestic shocks (Claessens, Demirgüç-Kunt, and Huizinga 2001; Cull and Martínez Pería 2010;
Goldberg, Dages, and Kinney 2000). Depending on the conditions, however, international banking may also lead to costs. Risk sharing will inevitably expose host countries to systemic risks from time to time; and more recently,
international banks have been criticized for playing a role in the transmission of shocks across borders during the global fi nancial crisis (De Haas and van Lelyveld 2014). Crossborder bank fl ows also play a crucial role in
transmitting global liquidity to local fi nancial systems, and international banking may promote destabilizing boom-bust cycles in poor institutional environments (Borio, McCauley, and McGuire 2011; Bruno and Shin 2015a).
In the wake of the global fi nancial crisis, the globalization trend has been partially reversed, as multinational banks from developed countries—“the North”—have scaled back their international operations, coinciding with a general backlash against globalization.
While banks based in high-income countries drove exits, developing country banks continued their international expansion, accounting for the bulk of new entry into foreign markets. Cross-border bank claims and syndicated loans also saw signifi cant retrenchments, but “South–South” transactions—from developing countries to other developing
countries—started growing, starting to replace the leading role of “North–South” transactions in the aftermath of the global fi nancial crisis. This greater South–South activity has also coincided with regionalization,
both in the roster of foreign banks in many host countries and in cross-border fl ows.
The full causes and implications of these changes are not yet completely understood.
Postcrisis supervisory and regulatory reforms intended to enhance bank balance sheets and fi nancial stability, such as more stringent capital requirements for banks and macroprudential regulations, have been at least partially
responsible for these changes, affecting the supply of credit. During the crisis, banks also reduced lending as demand for external fi nancing abroad declined, and sovereign and other risks increased. In addition, the crisis
highlighted the need for greater cooperation in resolving troubled banks with multinational
operations and a more explicit ex ante understanding of the associated burden sharing.
More generally, the regionalization of international banking is prompting countries to contemplate regional regulatory and supervisory approaches.
Given these developments, international banking has attracted heightened interest from policy makers, researchers, and other fi nancial sector stakeholders. The global fi nancial crisis has certainly led to a reevaluation of the potential
benefi ts and costs of bank globalization because many observers perceive global banks to have been mainly responsible for the transmission of shocks across borders during the recent fi nancial crisis (Demirgüç-Kunt, Evanoff,and Kaufman 2016). Concerns about the effects of international banking—in particular,
global systemically important banks(G-SIBs), which are deemed to be too big and interconnected to fail—have been voiced by the Financial Stability Board (FSB), the G-20, and policy makers around the world.
The Global Financial Development Report 2017/2018: Bankers without Borders seeks to contribute to this debate on the benefi ts and costs of inter national banks and provide evidence-based policy advice.