Financial institutions have embarked on a “broad-based retreat” from cross-border activities in the decade since the global financial crisis, according to management consultancy McKinsey & Co.
Reflecting on the past decade for a McKinsey Global Institute podcast, Washington, DC-based partner Susan Lund said there has been a clear change in behaviour from global banks since the downturn.
“In the 10 years since the global financial crisis began, cross-border capital flows have fallen by 65 per cent, from over $12 trillion to just over $4 trillion in 2016,” Ms Lund said. “Half of that decline is coming from a decline in cross-border lending and other types of banking activity.”
The decline is symptomatic of decisions by bank boardrooms to reduce foreign exposure, the management consultant said, retreating to an inward-looking focus on national interests.
“[Global banks are] selling foreign businesses,” she said. “They’re allowing loans to expire without renewing them, and they’re selling different types of foreign assets. Overall, there’s been a broad-based retreat toward more domestic activity.”
The first key driver of the trend has been the need for some institutions – particularly those adversely affected by the GFC – to “rebuild capital and recoup losses”, minimising risks and costs associated with offshore ventures.
The second has been increasing regulatory requirements post-GFC, which have forced a greater focus on domestic compliance.
Speaking on the same podcast, Frankfurt-based MGI partner Eckart Windhagen said the retreat has been particularly advanced among eurozone banks, many of which were bullish on cross-border activity before 2008.
While Western and European banks have retreated, some Asia-Pacific financial institutions – including those domiciled in China – have been expanding their global reach over the past decade, especially in emerging markets such as economies in Africa and Latin America.
However, despite this trend, only 9 per cent of total assets of Chinese banks are held outside of China, the McKinsey partners clarified.
Asked whether the retreat of global banks from cross-border activity spells “the end of financial globalisation”, Mr Windhagen responded emphatically in the negative.
“Financial globalisation is surprisingly robust,” he said.
“Financial markets remain deeply interconnected, but with a different profile.
“The global value of foreign investment as a percentage of GDP has been steady since 2007, at around 180 per cent, and now stands as an absolute figure at more than $130 trillion.”
In Australia, we have seen ANZ retreat from part of its Asia-Pacific expansion strategy and NAB divest from its UK banking assets.