U.S. Banks and the Global Financial System

Abstract

International banking has undergone many ups and downs in the past century. Toward the end of the Victorian era at the close of the nineteenth century, it was very common for banks to fund investment projects abroad. The reason was partly because it was the heyday of colonization, and the ruling countries frequently undertook capital-intensive construction projects in the colonies. That changed with the First World War and the interwar period. After decades in decline, international banking again started increasing in importance with the Second Age of Globalization. This refers to the period starting in the eighties when large corporations began to move their production facilities to countries with low labor costs.¹ Focarelli and Pozzolo identify three ways in which banks can expand their activities across borders.² First, they can provide loan, asset-management, and liability-management services to foreign counterparts. Loans usually take the form of syndicated loans to large borrowers. Second, they can open a branch abroad. These typically focus on the wholesale market. Third, they can acquire shares in a foreign bank; in other words, they can create a subsidiary. These subsidiaries typically focus on the retail market.