Global Banking

International banking activities frequently result in financial instability and serious economic downturns as financial markets become more open and deregulated.
Competition from multinational banks has reduced the availability of credit to small- and medium-sized enterprises, to low- and middle-income consumers, and to farmers.
While economies experience financial instabilities and declining credit, governments are losing the means to protect their domestic markets.
Once a hometown business, banking is now a global affair. Since the early 1980s, bankers— working together with national policymakers and officials at such international financial institutions (IFIs) as the World Bank and the International Monetary Fund (IMF)—have largely succeeded in deregulating the global banking system. As local, domestic, and international barriers to private banking have tumbled, cross-border banking has spread dramatically, and major banks in the world’s wealthy nations have established branches throughout the globe. Although this globalization of private banking has increased the availability of loans to governments and businesses and improved the quality of banking services for some customers, its overall impact has been negative, both at home and abroad.
The global reach of private banking has two major dimensions: cross-border lending and direct investment in the financial services sector of other nations. Cross-border lending occurs when a U.S. institution like Bank America lends dollars to the Mexican government or to a company in Mexico. Direct investment occurs when a U.S. bank like Citibank establishes a subsidiary in a foreign country. Banks that have subsidiaries in other countries are called multinational banks (MNBs). The largest U.S. banks do both: lend internationally and have an array of subsidiaries active in the financial services sector of many foreign countries.
In the last two decades both types of global banking have expanded, although the rise in multinational banking has been more dramatic. In mid-1997, U.S. banks had a foreign loan portfolio of $131 billion, whereas the assets of the branches and subsidiaries of U.S. banks totaled $511 billion. U.S. banks, which account for about 15% of all cross-border lending, are aggressive MNBs. Citibank, for example, is one of the world’s largest banks, with operations in more than 90 countries.
The rise in international bank lending and the worldwide expansion of MNBs have given some borrowers better access to credit. But the spread of global banking has contributed to the financial instability of many nations and led to the disruption of domestic credit markets. Short-term, international lending favors speculative investments over those that increase long-term productivity. This sets the stage for speculative booms followed by economic crashes. The direct entry of MNBs into foreign financial markets—particularly those of low income countries (LICs)—often triggers a drop in the lending levels of domestic banks. Small- and medium-sized enterprises, consumers, and farmers are generally the first to lose access to affordable financing, while transnational corporations and domestic blue-chip companies are the least affected. Reduced access to credit means that firms cannot undertake all their investment projects, thus stifling economic growth.
The negative effects of global financial deregulation are not limited to LICs, however. To repay their international debt, countries with troubled economies often focus on increasing their exports and attracting foreign investors. Workers in the U.S. experience low-wage competition as imports increase and U.S. companies close domestic factories to set up shop abroad. Furthermore, to prevent financial crises from spreading, the IMF and lender governments orchestrate financial bailouts that are underwritten by the taxpayers of both the LICs and the wealthier countries like the United States.
Although the risks and problems associated with deregulated financial flows are increasingly evident, several multilateral institutions—including the IMF, the World Trade Organization (WTO), and the Organization for Economic Cooperation and Development (OECD)—are currently negotiating new agreements that would open more markets to MNBs on an even broader scale than previous regional agreements, such as the North American Free Trade Agreement (NAFTA) and the Asia Pacific Economic Cooperation (APEC) forum. The explicit purpose of the proposed rules is to create legal, political, and economic frameworks that would make it virtually impossible for governments to impose controls on international capital. For example, the IMF intends to amend its articles so that member countries would be required to obtain permission from the IMF to introduce capital controls; the WTO is negotiating a new agreement called the General Agreement on Trade in Services (GATS) to liberalize service sectors, including banking; and the OECD is negotiating a Multilateral Agreement on Investment (MAI), which would substantially increase the rights of international lenders and multinational banks.