Developing countries can benefit enormously from the growth of international banking, but only if they put in place the right institutional, legal and regulatory structures.
These would include better cross-frontier co-operation among banking supervisors and legal rights to property and to the enforcement of contracts.
This is the view of a World Bank report. The pre-eminent global development institution has called this major piece of work “bankers without borders”.
Taking the place, in part, of the credit they previously supplied has been an increase in activity involving banks in the developing world, so-called South-South lending.
“The full causes and implications of these changes are not yet completely understood,” says the report, adding: “International bankingcan have important benefits for development by improving efficiency and risk sharing, but benefits do not accrue unless the institutional environment is developed and the right policies are adopted.”
In a foreword to this important addition to World Bank publications, the bank’s President Jim Yong Kim summed up the changes brought about by the credit crunch and subsequent Great Recession. “During the decade prior to the 2007-2009 global financial crisis, banking activities across national borders increased dramatically. In many cases, the trend brought benefits, including additional capital, liquidity, and technological improvements.”
The bank’s position, said Dr Kim, was that developing countries ought to be supported “in reaping the benefits of international banking while also minimising the risks to financial stability”.
Opportunities and costs
The report opens by commenting that the key to rapid economic growth, shared prosperity and reduced poverty was a mixture of three factors: international economic and financial integration, sound policies at the national level and effective international co-operation.
Cross-border banking, it says, can contribute to faster growth and greater economic welfare in two ways. First, as noted by Dr Kim, by bringing capital and expertise that will lead to a more competitive banking system in the host country and, second, by allowing for risk sharing and diversification, smoothing out the effects of domestic shocks.
However, the bank adds: “International banking may also lead to costs. Risk sharing will inevitably expose host countries to systemic risks from time to time.” Underlining the point, the report says: “Risk sharing also has a downside. International banks that export risks will also import them.
“Perhaps no sector than banking better illustrates the both the potential benefits and perils of deeper international integration.”
Now, that very integration has stalled and been partly reversed. “Multi-national banks from developed countries – ‘the North’ – have scaled back their international operations, coinciding with a general backlash against globalisation.”
In part, this cutting back on credit to developing countries reflects tougher regulation in the banks’ home nations, with increased capital requirements meaning there is less available to lend. This, in turn, has raised the question of the extent to which developing countries “should trust international banks with the local provision of their financial services, given that they may retrench and lead to a significant erosion of skills and services?”