Offshore Banking Report, cross-border capital flows plunge

by Aaron A Day on March 1, 2013

The European Union reached a preliminary deal to curb bankers’ compensation that would drastically limit the amount that can be paid in bonuses.

The Royal Bank of Scotland, which is still majority owned by the British taxpayer five years after a government bail-out, reported an annual pre-tax loss of £5.2 billion ($8.2 billion).

RBS’s loss was put in the shade, however, when Bankia later posted a net loss for 2012 of €19 billion ($24 billion). The Spanish government owns just under half the bank, but that is expected soon to rise to 70%.

A report by McKinsey underscored the impact of the financial crisis on annual cross-border capital flows, which fell by 60% from 2007 to $4.6 trillion last year. The study says that financial globalisation has “stalled” and that markets have reached an “inflection point” that could lead to a “Balkanised” structure based on local, rather than global, banking systems.

Several unsustainable trends—most notably the growing size and leverage of the financial sector itself—propelled much of the financial deepening that occurred before the crisis. Financing for households and corporations accounted for just over one-fourth of the rise in global financial depth from 1995 to 2007—an astonishingly small share, since providing credit to these sectors is the fundamental purpose of finance.

Cross-border capital flows have collapsed, falling from $11.8 trillion in 2007 to an estimated $4.6 trillion in 2012 (Exhibit 2). Western Europe accounts for some 70 percent of this drop, as the continent’s financial integration has gone into reverse. Eurozone banks have reduced cross-border lending and other claims by $3.7 trillion since 2007, and central banks now account for more than 50 percent of capital flows within the region.

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