Cross-border bank lending boosts domestic economic productivity
A new Bank of England working paper finds that increased cross-border lending by domestic banks significantly enhances the productivity of the domestic real economy. This beneficial effect is observed across European economies and for UK firms.
Domestic banks' international reach pays off
The paper empirically investigates whether domestic banks lending more abroad benefits domestic real economy productivity.
Using cross-country/cross-sector data from European economies and granular UK firm and bank panel data, the study finds a beneficial role for higher internationalisation of the domestic banking system.
This effect is particularly strong when domestic banks lend to firms in foreign advanced economies and is not limited to exporting firms.
It is also more pronounced during the early phase of a new banking relationship.
In contrast, the inflow of lending from foreign banks does not result in productivity improvements for the domestic real economy.
The research employs various models, including OLS, system GMM, local projection, and IV models, to establish these robust findings.
Knowledge transfer and diversification benefits
A global financial centre has a dual role: channeling finance domestically and hosting international activity.
Cross-border lending by domestic banks can offer geographical risk diversification, enhancing resilience.
However, it also risks crowding out domestic lending if banks channel savings abroad for higher returns.
The paper posits that knowledge gathered through international lending improves domestic banks' ability to screen and monitor domestic non-financial corporations (NFCs), especially less-established ones.
This information-sharing channel can convey best business practices and trends.
The study combines cross-country/cross-sector panel data from the BIS with within-country/cross-firm panel data from the UK to investigate these effects.
Beyond the balance sheet
This paper provides compelling empirical evidence for the often-debated real economic benefits of financial internationalisation.
Its granular approach, combining cross-country and firm-level data, strengthens the argument for domestic banks' global engagement.
Policymakers should consider these positive spillovers when assessing the broader impact of cross-border financial flows.