Financial Crisis May Cause Permanent Retreat of German Banks from Areas of International Business

International activities of German banks have slumped since the outbreak of the financial crisis: from 2008 to 2009 alone, the international assets of large German banks dropped by 20 per cent. From 2002 until 2007, international assets had been growing by eight per cent per year. This development can be put down to political interventions in the German banking sector, a changing international regulatory environment as well as to a shift in the risk perception and risk appetite among banks. In some areas, the retreat of German banks from international operations could be permanent. These are the findings of a current survey conducted by the Centre for European Economic Research (ZEW) in cooperation with the Halle Institute for Economic Research and the Institute for Applied Economic Research, Tübingen.

In their study, the participating researchers examined the 92 largest bank holding companies in Germany as well as their foreign subsidiaries and branches with regard to internationalisation activities before and during the crisis. The research data covers the years 2002 through 2011 and was taken from the "External Position Reports" data set provided by the Deutsche Bundesbank.

To operate on an international scale, German banks have two options to grant loans to foreign entities: either directly from their headquarters in Germany or indirectly through subsidiaries and branches abroad. The retreat of German banks from international operations is in particular reflected by the decrease in directly-held foreign assets. Following a continuous increase from 2002 to 2008, foreign assets fell by 21 per cent between 2008 and 2011. From 2002 to 2011, German banks reduced the number of foreign subsidiaries by more than 55 per cent; 25 per cent of the 92 banks observed completely withdrew from subsidiary-based international business. The number of foreign branches had been growing by an average of two per cent per year between 2002 and 2008, but dropped by seven per cent in just one year and remained unchanged until 2011. Other than foreign-based subsidiaries, the overall number of banks operating through foreign branches remained barely unchanged between 2002 and 2011.

The researchers assume that it is highly probable that German banks have retreated from subsidiary-based foreign operations on a long-term basis. However, the decrease in international activities via branch offices and the slump in direct international banking are seen as rather temporary phenomena.

Employing an econometric model, the researchers analysed possible reasons for the decline in international banking reflected by the closure of foreign subsidiaries and branches as well as by the reduction of directly-held foreign assets. Three factors are considered the main reasons:

First, political interventions contributed to the reduced international operations of German banks. On average, banks that drew on financial support by federal and state governments during the crisis reduced their international activities to a greater extent than others. Some of them were forced to consolidate their activities abroad or even close down foreign-based subsidiaries. In other countries, where subsidiaries and branch offices of German banks are located, regulatory measures such as limited loan-to-value ratios led to a decline in the international operations of German banks. Unlike foreign-based branches, subsidiaries are subject to the regulations of the respective host country. For this reason, numerous banks have decided to shut down foreign subsidiaries. This increases the likelihood of a permanent retreat from this type of international business.

Second, banks that refinance their operations mainly on the interbank market hold higher foreign assets. Consequently, a long period of difficult refinancing conditions will have a lasting impact on the future internationalisation strategies of German banks. If the current re-regulation of banks creates lasting changes in the market structures, the decrease in foreign operations of German banks will likely be permanent.

Third, changing risk perceptions, a different attitude towards risk-taking, a still evolving regulatory environment as well as an increased sensitivity of banks to frictions on the international financial market, e.g. transaction or information costs, contribute to the partial retreat of German banks from international business.

For further information please contact

Christoph Schröder, Phone +49/621/1235-390, E-mail christoph.schroeder@zew.de