Every passing day, the debate about the possible effects of the 2008 Global Economic Crisis on future shape of the financial sector in general and on the banking sector in particular, is becoming more controversial, more heated and more interesting. Today, we would like to discuss one major effect of the recent crisis on the banking sector which is ignored in popular press, but may be felt over the coming years.
Source: Total external assets plus external liabilities of all banks in all reporting countries in all currencies, published by BIS.
The above chart shows that the recent crisis affected the international operations of banks in a major way. The total of external assets and external liabilities, which was showing relentless increase since mid 1990s, in spite the Asian Crisis or the dot-com bust or the 9-11 event, has contracted since 2008, and has remained stable around the US$ 55 to 60 trillion mark in the last twelve months. Interestingly, banks in Japan, Finland and Canada were able to expand their respective international balance sheets since 2008, while the banks in Europe contracted their international balance sheets, led by the UK.
Table 1: Rankings based on change in total external assets and liabilities of banks since March 2008
Source: BIS, DPA
This changing dynamics in the nature and structure of international banking will affect the relative economic strength of the countries and also the manner of functioning of the markets in more ways that what is perceived right now.