Kristin Forbes gives a speech on deglobalization in banking and financial flows. She notes that in the 1960s, the UK risked running out of dollars but was saved by the Beatles' dollar concert receipts. However, by 1967 the UK had to abandon its exchange rate peg, the pound was devalued, and the UK took an IMF loan. Since the financial crisis, cross-border banking flows have remained depressed despite broader economic recovery, with banking being the main culprit. Reduced global banking networks and banking flows relating to the UK are particularly striking. The implications of reduced global banking are ambiguous but could include a more domestic credit supply and increased market volatility.

1. Forbes:
Deglobal isat ion
FINANCIAL
DEGLOBALISATION?

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SPEECH BY FORBES, MPC BOE
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T h e m a i n m e s s a g e s o f K r i s t i n ’ s s p e e c h a r e a s f o l l o w s :
 K r i s t i n i n t r o d u c e s t h e t o p i c o f g l o b a l f i n a n c i a l f l o w s b y n o t i n g t h a t “ i n t h e 1 9 6 0 s t h e U K w a s a t r i s k o f r u n n i n g
o u t o f d o l l a r s a n d … . t h e s a v i o u r w a s t h e B e a t l e s … e a r n i n g w o r l d - r e c o r d d o l l a r c o n c e r t r e c e i p t s ” . S h e n o t e s t h a t
“ t h e b a n d ’ s l a s t c o m m e r c i a l c o n c e r t w a s i n t h e s u m m e r o f 1 9 6 6 … . J u s t o n e y e a r l a t e r [ t h e U K ] w a s f o r c e d t o
a b a n d o n i t s [ e x c h a n g e r a t e ] p e g , s t e r l i n g w a s d e v a l u e d b y 1 4% a g a i n s t t h e d o l l a r a n d t h e U K s i g n e d a n
e m e r g e n c y I M F l o a n p a c k a g e ” .
 T u r n i n g t o m o r e r e c e n t h i s t o r y , K r i s t i n n o t e s t h a t t o d a y “ c o u n t r i e s h a v e b e c o m e m u c h m o r e f i n a n c i a l l y
i n t e g r a t e d ” . B u t “ i n t e r n a t i o n a l c a p i t a l f l o w s f e l l s h a r p l y d u r i n g t h e c r i s i s a n d s h o w n o s i g n s o f
r e c o v e r i n g … . c r o s s b o r d e r f i n a n c i a l f l o w s … . ( s c a l e d b y t h e s i z e o f t h e i r e c o n o m i e s ) a r e n o w a s ‘ g l o b a l i z e d ’ a s
t h e y w e r e i n 1 9 8 3 ” . P u t a n o t h e r w a y “ I n t e r n a t i o n a l c a p i t a l f l o w s a r e n o w o n l y 1 . 6 % o f g l o b a l G D P , t e n t i m e s
l e s s t h a n t h e p e a k o f 1 6 % i n 2 0 0 7 ” . K r i s t i n s u g g e s t s t h a t i t i s “ r e m a r k a b l e ” t h a t c a p i t a l f l o w s h a v e r e m a i n e d a t
s u c h d e p r e s s e d l e v e l s d e s p i t e t h e b r o a d e r r e c o v e r y i n t h e g l o b a l e c o n omy .
 T h e d a t a s u g g e s t t h a t “ b a n k i n g i s t h e c u l p r i t ” . “ P o r t f o l i o f l o w s , a n d f o r e i g n d i r e c t i n v e s t m e n t h a v e b o t h s i n c e
s t a b i l i z e d a t p o s i t i v e ( a l b e i t s ome w h a t l o w e r ) l e v e l s s i n c e t h e c r i s i s , w h i l e b a n k i n g f l o w s h a v e c o n t i n u e d t o
c o n t a c t r e c e n t l y . I n o t h e r w o r d s , b a n k s a r o u n d t h e w o r l d a p p e a r t o c u r r e n t l y b e r e d u c i n g t h e i r f o r e i g n e x p o s u r e s
a n d b r i n g i n g m o n e y h o m e ” . A s a r e s u l t t h e r e h a s b e e n a “ m a j o r c o n t r a c t i o n i n t h e g l o b a l b a n k i n g n e t w o r k ” a n d
“ t h e c o n t r a c t i o n i n b a n k i n g f l o w s r e l a t e d t o t h e U K i s p a r t i c u l a r l y s t r i k i n g ” .
 B a n k i n g f l o w s a r e t y p i c a l l y mo r e v o l a t i l e t h a n o t h e r c r o s s b o r d e r f l o w s , a n d h a v e t e n d e d t o b e s e n s i t i v e t o
p e r c e p t i o n s o f r i s k – w h e n r i s k i s p e r c e i v e d t o f a l l , b a n k i n g f l o w s t e n d t o r i s e . B u t K r i s t i n s h o w s t h a t i n t h e
y e a r s s i n c e t h e f i n a n c i a l c r i s i s , b a n k i n g f l o w s h a v e n o t r e s p o n d e d t o t h e d e c l i n e i n p e r c e i v e d r i s k .
 K r i s t i n c i t e s a v a r i e t y o f p o t e n t i a l r e a s o n s f o r t h i s i n c l u d i n g h i g h e r c o s t s f o r b a n k s o p e r a t i n g a b r o a d ( i n p a r t
d u e t o t h e r i s k o f p e n a l t y f i n e s ) , r e d u c e d a c c e s s t o w h o l e s a l e f u n d i n g , w e a k n e s s i n i n d i v i d u a l b a n k b a l a n c e
s h e e t s a n d r e g u l a t o r y c h a n g e s .
 K r i s t i n d r a w s o u t a w i d e v a r i e t y o f p o s s i b l e imp l i c a t i o n s o f b a n k i n g l e d d e g l o b a l i z a t i o n f o r t h e U K . T h e imp a c t
o n t o t a l c r e d i t s u p p l y t o t h e U K e c o n omy i s amb i g u o u s , b u t d ome s t i c b a n k s w i l l l i k e l y s u p p l y mo r e c r e d i t w h i l e
f o r e i g n b a n k s p r o v i d e l e s s . U K t o t a l c r e d i t s u p p l y “ w i l l b e m o r e t i g h t l y l i n k e d t o t h e d o m e s t i c … b u s i n e s s c y c l e ”
b u t l e s s l i n k e d t o f o r e i g n s h o c k s . G l o b a l b a n k i n g i n s t i t u t i o n s s h o u l d b e c ome mo r e t r a n s p a r e n t . B u t t h e
w i t h d r a w a l o f g l o b a l b a n k i n g m a y r e d u c e l i q u i d i t y i n d i f f e r e n t m a r k e t s a n d t h a t c o u l d “ i n c r e a s e v o l a t i l i t i e s a n d
t h e r i s k o f s h a r p a n d d i s o r d e r l y p r i c e s w i n g s ” . S h a d o w b a n k i n g ( “ a s s e t b a c k e d s e c u r i t i e s , m o n e y m a r k e t f u n d s ,
h e d g e f u n d s a m o n g s t o t h e r s ” ) w i l l l i k e l y g r o w i n r e s p o n s e t o a n y f u n d i n g s h o r t f a l l . T h a t “ m a y i n v o l v e
r i s k s . C e n t r a l b a n k s a n d i n t e r n a t i o n a l i n s t i t u t i o n s a r e a w a r e o f t h e s e p o t e n t i a l b e n e f i t s a n d r i s k s ” .
 " A r e d u c t i o n i n i n t e r n a t i o n a l b a n k f l o w s c o u l d ma k e i t mo r e d i f f i c u l t , a n d p o s s i b l y e v e n mo r e e x p e n s i v e , f o r t h e
U K t o f u n d i t s c u r r e n t a c c o u n t d e f i c i t ” . “ A f o r e i g n e x c h a n g e c r i s i s , a s o c c u r r e d i n t h e e r a o f t h e B e a t l e s i s
u n l i k e l y h o w e v e r , d u e t o c h a n g e s s u c h a s t h e m o v e t o a f l e x i b l e e x c h a n g e r a t e ” .
 F i n a l l y , “ t h i s d e g l o b a l i z a t i o n i n b a n k i n g c o u l d i n f l u e n c e t h e f u n c t i o n i n g o f m o n e t a r y p o l i c y ” . “ G l o b a l b a n k s
r e s p o n d t o c h a n g e s i n t h e c o s t o f b o r r o w i n g … b y t r a n s f e r r i n g f u n d s a c r o s s b o r d e r s … . [ w h i c h ] c a n p a r t i a l l y
i n s u l a t e g l o b a l b a n k s f r o m c h a n g e s i n d o m e s t i c i n t e r e s t r a t e s ” . “ A s g l o b a l b a n k i n g n e t w o r k s c o n t r a c t , t h e r e
ma y b e l e s s r o om f o r c r o s s b o r d e r b a n k i n g f l o w s t o c o u n t e r a c t t h e l e n d i n g c h a n n e l f o r mo n e t a r y p o l i c y . A s a
r e s u l t , t r a d i t i o n a l m o n e t a r y p o l i c y c o u l d b e c o m e m o r e e f f e c t i v e . ”
 O v e r a l l , “ i t m a y b e t i m e t o s h i f t f r o m f o c u s s i n g o n t h e imp l i c a t i o n s o f i n c r e a s i n g l e v e l s o f f i n a n c i a l
g l o b a l i z a t i o n , t o a s e r i o u s d i s c u s s i o n o f t h e imp l i c a t i o n s o f b a n k i www.bankofengland.co.uk/publications/Pangge d esg/l onb ael iwz ast i/o n2” .014/149.aspx 5

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 Kristin introduces the topic of global financial flows by
not i ng t h a t “ i n t h e 1 9 6 0 s t h e UK wa s a t r i s k o f r u nni ng
o u t o f d o l l ar s a n d…. t h e saviour was the
B e a t le s…e ar n in g wo r l d -record dol lar concer t
r e c e ip ts ”. S h e note s t h a t “ t h e b a nd ’ s l a s t c omme rc ial
c o n c e r t wa s i n t h e s umme r o f 1 9 6 6 …. J u s t o n e ye a r
later [the UK] was forced to abandon its [exchange
rate] peg, sterl ing was devalued by 14% against the
dol lar and the UK signed an emergency IMF loan
package”.
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 Turning to more recent history, Kristin notes that today
“ c o u n t r ie s h ave b e c ome mu c h mo r e fi n a n c i ally
i nte gr ated”. Bu t “ i nte r nat io nal c a p i t al fl ows fe l l
sharply during the crisis and show no signs of
r e c ove r in g…. cro s s b o r d e r fi n a n c i al fl ows …. ( s c a le d by
t h e s i z e o f t h e i r e c o n omi e s ) a r e n ow a s ‘ g l o b ali ze d’ a s
t h ey we r e i n 1 9 8 3 ” . P u t a n ot h e r way “ I n te r n at io n al
capital flows are now only 1.6% of global GDP, ten
t ime s l e s s t h a n t h e p e a k o f 16% i n 2 0 07 ”. Kr i s t i n
s u g g e st s t h a t i t i s “ r emarkable ” t h a t c a p i t al fl ows h ave
remained at such depressed levels despite the broader
recovery in the global economy.
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8.  @macropru The d a t a s u g g est t h a t “ b a nking i s t h e c u l p rit ”.
“ Po r t fo l io fl ows , a n d fo r e i g n d i r e c t i nve stme n t h ave
both since stabilized at positive (albeit somewhat
lower) levels since the crisis, whi le banking flows have
continued to contact recently. In other words, banks
around the world appear to currently be reducing their
fo r e i g n ex p o s ur e s a n d b r i n g in g mo n ey h ome ”. As a
r e s u lt t h e r e h a s b e e n a “ma jo r c o n t r a c t i o n i n t h e
g l o b al b a n k in g n e two rk ” a n d “ t h e c o n t r a c t io n i n
banking flows related to the UK is par ticularly
striking”.
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 Banking flows are typical ly more volati le than other
cross border flows, and have tended to be sensitive to
perceptions of risk – when risk is perceived to fal l ,
banking flows tend to rise. But Kristin shows that in
the years since the financial crisis, banking flows have
not responded to the decl ine in perceived risk.
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 Kristin cites a variety of potential reasons for this
including higher costs for banks operating abroad ( in
par t due to the risk of penalty fines) , reduced access
to wholesale funding, weakness in individual bank
balance sheets and regulatory changes.
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 Kristin draws out a wide variety of possible
impl ications of banking led deglobal ization for the
UK. The impact on total credi t supply to the UK economy is
ambiguous, but domest ic banks wi l l l ikely supply more credi t
whi le foreign banks provide less. U K t o t a l c r e d i t s u p p l y “ w i l l b e
mo r e t i g h t l y l i n k e d t o t h e d ome s t i c … b u s i n e s s c y c l e ” b u t l e s s
l inked to foreign shocks. Global banking inst i tut ions should
become more t ransparent . But the wi thdrawal of global banking
ma y r e d u c e l i q u i d i t y i n d i f f e r e n t ma r k e t s a n d t h a t c o u l d “ i n c r e a s e
volat i l i t ies and the r isk of sharp and disorder ly pr ice
s w i n g s ” . S h a d ow b a n k i n g ( “ a s s e t b a c k e d s e c u r i t i e s , mo n e y ma r k e t
f u n d s , h e d g e f u n d s amo n g s t o t h e r s ” ) w i l l l i k e l y g r ow i n r e s p o n s e
to any funding shor t fal l . T h a t “ma y i nv o l v e r i s k s . Cent ral banks
and internat ional inst i tut ions are aware of these potent ial
benef i ts and r isks” .
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 "A reduction in international bank flows could make it
more di f ficult, and possibly even more expensive, for
t h e UK to f u n d i t s c u r r e n t a c c o u n t d e fi c it”. “A fo r e i g n
exchange crisis, as occurred in the era of the Beatles
is unl ikely however, due to changes such as the move
to a flexible exchange rate”.
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 Finally, “ t h i s deglobalization in banking could
i nfl u enc e t h e f u nc t i o ni ng o f mo net a r y p o l i c y ”. “Gl obal
b a n k s r e s p o n d to c h a n g e s i n t h e c o s t o f b o r rowi n g… by
t r a n s fe r r in g f u n d s a c ro s s b o r d e r s…. [wh ic h ] c a n
par tially insulate global banks from changes in
d ome s t ic i n te r e st r a te s ”. “A s g l o b al b a n k i n g n e two rk s
contract, there may be less room for cross border
banking flows to counteract the lending channel for
monetary pol icy. As a result, traditional monetary
pol icy could become more ef fective. ”
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 Overall, “ i t may b e t ime to s h i f t f rom focussing on the
impl ications of increasing levels of financial
globalization, to a serious discussion of the
impl ications of banking deglobalization” .
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 http://blogs.wsj.com/economics/2014/11/18/boe-of
ficial -says-bank-retrenchment -may-bring-benefits/

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 http://www.reuters.com/ar ticle/2014/11/18/us-britain-
boe-forbes- idUSKCN0J225T20141118

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