We’re just making our way through the new BIS quarterly review, but here’s a lovely piece of chart porn that caught our eye:
And here’s what it shows (emphasis ours):
First, capital flows saw a phenomenal reversal in the wake of the recent crisis (lower panels), in particular out of the United States. Up to mid-2007, banks facilitated international capital flows out of Japan and the euro area as well as from Asian financial centres and oil-exporting countries. Banks routed these funds via offices in the United Kingdom and in Caribbean financial centres, ultimately transferring them to borrowers in the United States and in emerging markets. After the start of the crisis, the direction of many of the bilateral flows reversed, in part generated by capital movements back to the United Kingdom, and in part reflecting asset writedowns.
Second, and more important, cross-border banking is very concentrated in a few locations (top panels). That is, a large chunk of the world’s cross-border banking business is booked (or has a counterparty) in the United Kingdom and a few other key banking centres. As McCauley et al (2010) discuss, however, the activity on the ground in these locations can be largely driven by the activity of foreign banks (ie affiliates of foreign-headquartered institutions). Thus, these location-level linkages say little about the actual consolidated exposures of residents of a given country or of the banks that are headquartered there.
That last bit is important.
The paper housing this chart is mostly about the missing data that would be necessary to understanding geographical shocks — or how shocks to specific funding sources might affect borrowers in other countries.
For example:
Many banks, in particular those located in London and the United States, receive an estimated 5–7% (at end-2009) of their dollar funding from residents of oil-exporting states (primarily the Middle East). These same banks also rely on deposits of foreign exchange reserves by central banks in reserve-accumulating countries. Even more significant, banks’ liabilities structures are intimately tied, in complex ways, to offshore financial centres: they book a significant amount of their total liabilities (roughly 15% at end-2009) in their offices in offshore financial centres, and their offices elsewhere report that roughly 14% of their cross-border liabilities have counterparties located in these jurisdictions.
Were any one of these sources of funding to be disrupted in some way, or migrate into a different currency, which banks would be most affected? And how would this affect these banks’ lending to borrowers elsewhere?
Unfortunately, the BIS only has some of the data required to answer these questions, and nobody has aggregated the rest because the collection process is so logistically difficult.
For instance, we have data that can confirm the location of counterparties when they are in the same country as the bank (or an international bank’s foreign office). But we continue to lack any good data on the location of cross-border counterparty positions. Consequently:
As a result, much more is known about the funding sources of banks with decentralised operations (eg Spanish banks), which have a large share of locally booked and funded positions, than of those banks (eg German or Swiss banks) that rely on a more centralised lending and funding model (McCauley et al (2010)).
Related links:
BIS quarterly review – Bank for International Settlements
Beware Luxembourg (it’s contagious) – FT Alphaville