International bank flows and bank business models since the crisis

Developments in cross-border banking and bank business models have implications for international risk sharing. During the European sovereign debt crisis, cross-border banks only provided limited risk sharing and even amplified shocks in some euro area Member States. Policymakers responded by introducing an array of prudential instruments to improve bank resilience. This successfully strengthened the euro area banking system, fostering certain bank business models while disincentivising others. Euro area banks are now: (i) more domestically oriented with less cross-border activity; (ii) smaller; (iii) less trading, more lending oriented; (iv) more deposit funded. Conservative business models have advantages from a financial stability perspective, but they may also mitigate the advantages of cross-border activities for banks and the economy. Reforms may be necessary if banks are to play a greater role as a shock absorber in the European banking union.