U.K. Government should expect the De-globalization of finance to stay for a longer time


De-Globalization of Finance

The financial system worldwide is tending towards a more nationalistic one. The financial crisis aided this and also showed how much leverage the banks had. In the two decades that led to the European financial crisis, the national borders became more and more insignificant. The taxpayers back home supported the banks thus making it clear that nationality did not hold any significance.

Three years ago, the mass bailout of banks was forced on Western taxpayers. Regulators and the government have now encouraged the Western lenders to retreat.  Barclays Capital, the leading British investment bank declared that in mid-2011 European lenders had assets worth $1.2 trillion in the European markets. This amount was twice that of the amount seven years ago. The parent bank’s funding and capital support majority of these assets. The scarce capital and high funding costs make the retreat almost inevitable.

European banks have also put under consideration the pulling back of lending in dollars. Dollars were mostly borrowed from the U.S. money market funds and this business became too risky ever since the U.S. investors disappeared last year from Europe.

De-globalization is likely to be caused by the regulations post the financial crisis. Banks in Europe that are short of capital have sold their foreign businesses. On the recommendation of the Independent Commission on Banking, the U.K. government has decided to ring-fence the domestic retail banking operations.  The latest stress tests by U.S. have resulted in punishing major U.S. lenders with large European operations by making it essential for them to be able to withstand a eurozone meltdown.

Even the Government wants its financial institutions to focus their efforts in their own country. Politicians have also started stressing on the need for lending to local small consumers and businesses as they do not find global financing advantageous.

Commerzbank announced that it would restrict lending only to Germany and Poland. Orders have limited Austrian banks to serve only the central and Eastern Europe. Few European lenders have been forced to buy bonds of their home government. According to predictions by The Institute for International Finance, the net capital flows to emerging markets in this year will see a fall by approximately a fifth to $746 billion. This fall is expected to hinder economic growth by making credit even more costly.

Despite all these, credit can still flow freely between the developed countries. The Eurozone which is the most ambitious cross-border financial venture is still in a good shape. Brazil is one of the few countries that have explicit national capital controls as it was wary of attracting excess foreign money and not of lending it. The Western Governments have for a long time, adhered to the principles of liberalization and globalization believing that efficient allocation of resources and growth would be possible by encouraging free markets. The discrepancies in the existing global financial system could lead to a heavy destruction, perhaps even more detrimental than the after effects of the European financial crisis.