Euro Area (Cross-Border?) Banking
36 Pages Posted: 16 Jan 2015 Last revised: 21 Jan 2015
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Euro Area (Cross-Border?) Banking
Date Written: September 2014
Abstract
This paper presents stylized facts of the segmentation of the Euro Area (EA) banking system and investigates cross-border banking dynamics. Results show that the determinants of cross-border banking change substantially over-time: (i) in the pre-crisis period of financial integration the physical distance and the financial distance between countries were the main drivers; (ii) during the global financial crisis banks reduced the concentration in their foreign claims portfolio and retrenched from the more externally vulnerable countries but kept on investing in the still profitable countries with a sound fiscal position; and (iii) during the EA sovereign tensions, while portfolio diversification and the pull-back from externally vulnerable countries continued, foreign claims were also driven by the deteriorating sovereign conditions, the bank-sovereign link, and opportunities for flight-to-quality. During the crisis the structure of banks’ international organization also mattered as banks retrench more when they do not operate through foreign branches and subsidiaries.
Keywords: Euro Area, Cross-border banking, Foreign claims, Financial stability
JEL Classification: F36, G01, G21
Suggested Citation: Suggested Citation