Running Head: INTERNATIONAL BANKING CRISIS 1

International Banking Crisis

Austin R. Nevitt

South Lyon High School

INTERNATIONAL BANKING CRISIS 2

Abstract

Since the economic crisis of 2008, more regulations have been added in the banking sector in an

attempt to help countries rebuild their economies. This benefitted the strong nations, who were

able to fix their issues and restore their economic success. The developing nations, however,

were left behind and are stilling feeling the effect of the crisis today. The international banking

relations that are necessary for globalization hurt the underdeveloped countries who cant deal

with the stronger regulations. New methods helped encourage foreign lending and trade within

the banking world, making it difficult for poorer countries who werent ready for increased

involvement. Foreign banks werent lending out as much money, which slowed the money flow

and made it harder for these nations to build. The powerful economic countries were able to find

more success because they were previously built to rely on international banking for success.
INTERNATIONAL BANKING CRISIS 3

International Banking

In 2008, the entire United States economy was on the brink of destruction. If it werent

for a few major donors, we might have experienced a depression worse than that of the early

1930s. It started off when there was an excess supply in the housing market, and people trying to

flip houses couldnt sell them. Mortgage rates from the banks skyrocketed, and people couldnt

pay them off. The banks needed to make money, so they began giving out loans to people they

knew wouldnt be able to pay them off. These loans would then be packaged together in pools

and be sold to businesses, other banks, and even other nations around the world. When the loans

werent paid off, the other institutions that bought the loans lost money. This whole process

ultimately caused the massive recession that almost put the entire global economy over the edge.

Ever since this crisis, international banks, such as the International Monetary Fund, have taken

steps to maintain global relations and prevent another economic downturn. As Frederic Lambert

stated, Foreign banking claims as a share of world GDP have been declining since [2007]

(2016, p. 4). The crisis caused less bank to bank lending, also known as foreign banking

claims, which in turn limited the potential development of global banking systems. In an

attempt to develop more stable banking systems, new regulations have impacted nations across

the world. New international laws have attempted to spark a reconstruction of this global

banking market. More influential markets, such as the United States, have flourished because of

this effort. However, countries that were already struggling to begin with found that these

changes to the system actually hurt them. Since the global economic crisis of 2008, changes in
INTERNATIONAL BANKING CRISIS 4

international regulations and foreign relations in the banking sector have benefitted the largest

economies at the expense of underdeveloped and developing nations.

Since the crisis, stronger nations have actually experienced an economic growth, making

them a larger influence in global markets than they were before the crisis. Countries that were

stable enough to continue international sharing after the recession saw the immediate benefits of

it. New regulations were put in place in an attempt to encourage this global lending. According

to Claessens and van Horen, the share of local lending by foreign affiliates in total international

bank lending increased by 6 percentage points to 41 percent by 2012 (2014, p. 20). Banks were

starting to loan to other national banks at lower interest rates, allowing them to find more success

in an attempt to avoid the effects of the recession. The underdeveloped nations couldnt afford to

make risky investments in bonds and loans. They didnt have any banking infrastructure to rely

on, causing them to remain interiorly focused on building up their own economy before they

worry about foreign affairs. This limited them because international lending is crucial to every

nations success. If you refer to Figure 1, you can see that a majority of banking lending is

coming from the biggest countries, especially America and some European nations. They lend to

each other without including underdeveloped nations, so they dont have much of an influence

on global trade. Claessens and van Horen mention, Our newly collected data show that as a

result of the recent financial crisis, banking in terms of foreign bank presence has become

somewhat less global, but not more fragmented (2004, p. 22). This represents the idea of

smaller nations becoming uninvolved in foreign banking affairs. The international lending that

was occurring pre-crisis has shifted to a relationship more focused within the economic

powerhouses of the world. According to Frederic Lambert, The analysis by subcategories of

INTERNATIONAL BANKING CRISIS 5

claims suggests that cross-border lending from banks headquarters has been more affected by

regulations on banks international operations than local lending from banks affiliates (2016, p.

6). Basically, the new regulations that the world banks have put in place have forced nations to

focus on major bank lending. The major banking headquarters are only present in major

economic systems, so this lending is limited within the biggest countries. Meanwhile, the smaller

nations that are banks affiliates dont have as much representation and arent receiving the

benefits of bank lending anymore. This causes decreased global impact without breaking major

relations since the big business nations like the United States and China continue to invest and

trade with each other, while the struggling economies are left out.

Figure 1. Bank lending by country/area, 2000-2014. Reprinted from Cross-border Capital Flows since the Global Financial Crisis, by Elliot
James, Katie McLoughlin, and Ewan Rankin, 2014, Reserve Bank of Australia.

Underdeveloped nations, however, have a difficult time trying to expand their economies

after such a harsh recession. Because these markets are not yet mature, they arent able to use
INTERNATIONAL BANKING CRISIS 6

higher interest rates to their advantage. They are forced to lower these rates on bonds, causing

them to be less productive. New regulations put more pressure on these nations to succeed, but

they arent yet prepared to do so. Because most of these developing economies are relying on

independent fiscal policy, they arent as involved in globalization techniques. Petkovski and

Kjosevski found that the cause of this deficit is likely the large stock of non-performing loans

and the banking crises experienced by these economies at the beginning of the transition period

(2014, sec. 5 par. 2). Lower interest rates didnt allow for them to be sold as efficiently by banks

because there was less room for rates to fall again. At the time of the crisis, this was already

starting to impact developing nations. Once the crisis hit, they became isolated from the rest of

the world, and some still are today. However, the nations that were forced to integrate with other

foreign markets struggled as well. According to S. L. Schmukler in 2004, the domestic markets

of underdeveloped nations are disrupted by the influence of foreign investors trying to make

money. They break down the key elements of a successful economy by trying to force their will.

This is exactly what occurred after the crisis hit. Economically superior nations look to weaker

countries in an imperialistic manner. They can take advantage of the struggling social conditions

and even attempt to short their market by betting against economic growth. This heavy influence

leaves no room for growth and expansion, which shows in the inanimate aggregate output ratings

of recent years. When banks dont have control in the economy, they are stuck in the market and

lose their ability to enter and exit freely. This locks up the current economic situation because the

banks have no control over the market anymore. This isnt an issue in larger nations because they

are more stable. Banks were able to exit the industry when the recession occurred, allowing them

to jump back in when the economy began to expand again. They were able to stabilize once
INTERNATIONAL BANKING CRISIS 7

again, which is why these nations were able to find success after the crisis. Underdeveloped

nations lost control of their own economic progress, making it very difficult for them to deal

with the effects of the global crisis in the following years.

The effect of the crisis is clearly present in todays world. Nations that were able to rely

on international lending are starting to boom once again. Bob McTeer talks about how GDP is

directly correlated to employment (2008). This means that when the economy grows and

produces more, more jobs are going to be filled. This makes it relatively easier to analyze which

countries are finding success again and which nations continue to struggle. The unemployment

rate in America actually started to decrease towards the end of the crisis (McTeer, 2008). This

trend has continued into the present, meaning the United States is producing at a level much

higher than during the crisis. Unfortunately, the opposite is true for underdeveloped nations.

These countries continue to struggle with poverty and unemployment at abnormal levels. This

has been represented by a lack of production, and therefore a lack of exports. Because they are

unable to trade with foreign nations, they dont have an impact in foreign lending either.

Petkovski and Kjosevski did a study analyzing the effect of banking developments in developing

regions. They found that the IMF and other banks are less willing to lend money to these nations

because they know they wont be able to get as much in return. They arent able to develop

because they cant receive the help they need (2012). Regions that are forced to grow without

any foreign help are often unable to do so. The banks only want to help each other in major

countries where they know they can get their money back with interest. The poorer nations need

help to develop, but the banks wont give help because they arent developed. As long as

globalization in the banking sector is stuck where it is right now, these countries cant do much
INTERNATIONAL BANKING CRISIS 8

to help themselves. According to Schmukler, Financial globalization can lead to the

development of the financial system [and] can increase the availability of funds (2004, p. 6).

Schmukler was right, as after the crisis, the nations that began to work together found success

and an increased lending availability. The only issue is that this financial globalization only

took place among developed nations. The efforts of the international banking system to increase

global lending and global market success has stopped at the largest economies. This

increases the gap between the rich and poor nations and doesnt give them much of a chance.

Globalization in the banking sector hasnt actually been a global effort.

Developed economies have been able to find plentiful success since the economic crisis,

but developing regions havent had a chance to grow. As regulations continue to encourage

lending between powerhouses, they will continue to trade and advance economically. Until these

countries work together to help out the underdeveloped regions of the world, they will never be

able to grow and have representation in the banking sector. This limited globalization has caused

an increasing gap between the elite economic nations and the helpless countries trying to support

themselves. Globalization in terms of international banking is only truly occurring in major

countries, and until an effort is made to change that, it will continue to happen.
INTERNATIONAL BANKING CRISIS 9

References

Claessens, S., & van Horen, N. (2014, October). The impact of the global financial crisis on

banking globalization. In IMF Working Paper. Retrieved from

https://www.imf.org/external/pubs/ft/wp/2014/wp14197.pdf

Lambert, F. (2016, April 8). Post-crisis international banking : an analysis with new regulatory

survey data. In International Monetary Fund. Retrieved from

https://www.imf.org/external/pubs/cat/longres.aspx?sk=43861.0

McTeer, B. (2008, December 10). The impact of foreign trade on the economy. In The New York

Times. Retrieved from https://economix.blogs.nytimes.com/2008/12/10/the-impact-of-

foreign-trade-on-the-economy/?r=1

Petkovski, M., & Kjosevski, J. (2014, September 5). Does banking sector development promote

economic growth? An empirical analysis for selected countries in Central and South

Eastern Europe. Economic Research, 27(1), 55-66. Retrieved from

http://www.tandfonline.com/doi/full/10.1080/1331677X.2014.947107

Schmukler, S. L. (2004, June). Benefits and risks of financial globalization: challenges for

developing countries . In World Bank. Retrieved from

http://siteresources.worldbank.org/DEC/Resources/BenefitsandRisksofFinancialGlobali

zationSchmukler.pdf