The International Monetary Fund thinks international banking has become more stable since the financial crisis. But it depends on how global banks lend money to host countries abroad.
Despite a slowing of cross-border lending by international banks, their foreign affiliates have instead stepped up to the plate, making local financial systems more stable, the International Monetary Fund said on Wednesday.
The IMF’s latest Global Financial Stability Report analyzed how economic crises could be exacerbated by sharp changes in global banks’ lending policies.
International banks were lending more from their subsidiaries inside recipient or “host” countries, benefiting countries that were vulnerable to sharp swings in capital flows during economic downturns, the IMF said.
“While cross-border banking linkages tend to aggravate the effects of adverse domestic and global shocks on credit in host countries, local lending can play a stabilizing role during domestic crises,” the IMF said in a statement.
Look for funding where you are
The US-based international organization said policies should be implemented by countries on the receiving end of international capital flows.
“Governments can enhance the resilience to financial shocks by encouraging the subsidiaries of global banks to rely more on local funding sources,” the IMF said.
But host countries also need to keep their doors open to cross-border loans, the bank stressed.
The report noted that Europeans have mostly driven subsidiary-based lending in other countries, while Japanese banks relied more heavily on cross-border business.
On April 15, the IMF is expected to release more details from its Global Financial Stability Report.