IN 2005 ITALY’S UniCredit bought HVB, Germany’s second-largest lender, in what at the time was the continent’s biggest cross-border bank merger. At a stroke this gave UniCredit a commanding presence in Germany, Austria and Poland. It was widely hailed as a foretaste of deals to come thanks to Europe’s single currency. “We will become the first truly European bank,” declared Alessandro Profumo, Unicredit’s chief at the time. So it was something of a shock when in 2011 Germany’s bank regulator, BaFin, sought to limit the amount of cash UniCredit could transfer to its Italian parent, fearing that the German unit’s financial health might be compromised. This seemed to violate the spirit of free capital movement within Europe, and officials in Brussels complained.
Finance, the sector that globalised the most in the years leading up to the crisis, is threatening to go into reverse. Between 1990 and 2007 cross-border bank flows increased about tenfold, to around $5 trillion, according to the McKinsey Global Institute, the consultancy’s research arm. Last year the figure was less than a third of that. The decline extended across all regions, though Europe suffered most.
This has happened for two reasons. The first is the banks’ own efforts to deleverage, either to shed money-losing operations and assets or to meet stiffer capital requirements. The second is the realisation that cross-border banks were an important channel for transmitting the mortgage crisis in America and the sovereign-debt crisis in peripheral Europe to other countries. To limit such spillovers and save taxpayers having to bail banks out of their foreign misadventures, regulators around the world are seeking to ring-fence their banking systems.