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Multinational banks' deleveraging in the crisis driven by pre-crisis characteristics and behavior

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  • Frey, Rainer
Abstract
After the collapse of Lehman Brothers, a rapid and far-reaching shrinkage of international banks' assets with a focus on foreign claims took place. For the largest 67 German banking groups, we find that both their characteristics and behavior in the pre-crisis episode had repercussions for the crisis period. Above all, prior non-traditional banking activities - proxied by the relevance of securities and noninterest income - resulted in balance sheet contraction in the crisis. While, from 2002 to mid-2008, a disproportionately high growth rate in profits to assets is found to be indicative of too much risk taking, both high average income and a strong balance sheet expansion in the pre-crisis period are found to be positive per se. In contrast, a high average income or a strong growth in assets in just the last three and a half years before the outbreak of the crisis put balance sheets during the crisis under adjustment pressure. During the crisis, short-term wholesale funding proved to be a disadvantage, while good capital endowment (core Tier 1 capital to RWA ratio), deposit funding and strong affiliate presence abroad had a stabilizing impact. Most of these variables lose their significance in normal times.

Suggested Citation

  • Frey, Rainer, 2015. "Multinational banks' deleveraging in the crisis driven by pre-crisis characteristics and behavior," Discussion Papers 18/2015, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:182015
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    More about this item

    Keywords

    banks; deleveraging; foreign assets; financial crisis; pre crisis;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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