Hyun Song Shin on the global banking glut
December 20, 2011
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Professor Shin discusses the Bernanke “savings glut hypotheses” in a post at Vox today. Drawing a parallel with Europe, he argues that to believe that the global financial crisis was due to a savings glut (in China) would imply that savers in Germany invested in Ireland and Spain because they couldn’t place their savings domestically. This argument strains credulity and shows that we need to look for a better explanation. He suggests that a more plausible narrative is a banking glut associated with the explosive growth of cross-border lending. According to Shin,
The banking glut in Europe was part of a global phenomenon, as documented in a recent paper delivered as this year’s Mundell-Fleming lecture at the IMF (Shin 2011). Effectively, European global banks sustained the “shadow banking system” in the US by drawing on dollar funding in the wholesale market to lend to US residents through the purchase of securitised claims on US borrowers, as depicted in Figure 4.
Figure 4. European banks in the US shadow banking system
Although European banks’ presence in the domestic US commercial banking sector is small, their impact on overall credit conditions looms much larger through the shadow banking system. The role of European global banks in determining US financial conditions highlights the importance of tracking gross capital flows in influencing credit conditions, as emphasised recently by Borio and Disyatat (2011). In Figure 4, the large gross flows driven by European banks net out, and are not reflected in the current account that tracks only the net flows.
Since European banks are so heavily intertwined with the US financial system, a successful resolution of the European banking crisis will mean a lot for the development of the US economy, according to Shin.