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Cross-border banking: Balkanization – once started – can be difficult to stop

Barclays analysts point out that in Europe, where at least 20 banks have assets equivalent to home-country GDP and many banks are so international that at least half those assets are outside the home country, balkanization is likely to continue to add to deleveraging pressures on banks.

Many banks run overseas operations with relatively aggressive loan-to-deposit ratios and if they can’t bridge those funding gaps in the dysfunctional interbank markets or in the nervous wholesale markets and if regulators also prevent inter-group funding transfers, then this could add a further constraint on the availability of bank lending in Europe. That is a problem in a region where banks are responsible for over 70% of credit provision to corporates. Analysing a sample of 24 of the largest banks in Europe, Barclays finds that they all have a funding deficit in some of the countries they operate in and that the aggregate deposit funding deficit can be measured anywhere from €75 billion to €175 billion at each at the top dozen most exposed large banks.

Rising cross-border activity was a common theme across the European banking sector up to 2008. Since then, it has gone into reverse.

The Barclays analysts report that: "Worryingly, balkanization – once started – can be difficult to stop. If a regulator thinks that foreign regulators will limit cross-border balance-sheet transfers from international banks, they may be more likely to become more defensive themselves to prevent the capital/funding of ‘their’ banks getting trapped abroad." They add: "If banks are being forced to reduce cross-border activities (ie, balkanization) both globally and within Europe, this clearly calls into question the viability of multi-geography business models."

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