Published as part of the Financial Integration and Structure in the Euro Area 2024
Cross-border bank lending to non-banks is an important element of banking market integration within the Economic and Monetary Union (EMU).[1] Cross-border bank lending may follow a direct or an indirect model. With direct lending, a lender based in euro area country A lends money to a borrower domiciled in euro area country B. In an indirect model, a banking group headquartered in euro area country A lends money – via a branch or a subsidiary located in euro area country B – to a borrower residing in euro area country B. Using credit register data available at the ECB, this box sheds light on the relevance of cross-border bank lending in the euro area.[2]
A small though significant share of euro area banks’ lending to non-banks is direct cross-border lending. Comparing the domicile of euro area banks and of borrower legal entities gives an idea of the scale of direct cross-border lending. As at the end of 2023, direct intra-euro area cross-border lending amounted to €1.03 trillion, or 14.1% of euro area bank lending to non-banks, with this share increasing by 1.65 percentage points from March 2019 (Chart A, panel a).[3]
When assessing the role of the direct and indirect approach to banking market integration, it is essential to consider the group structure of lenders and borrowers, and the domicile of their respective parents. In the case of genuine cross-border lending, the legal entities of the bank and the borrower reside in two different euro area jurisdictions and their respective parents are not domiciled in the same country. With pseudo cross-border lending, the parent entities of the lender and the borrower that are in a cross-border relationship reside in the same country, which is outside the jurisdiction of their subsidiaries. For example, in pseudo cross-border cases, a bank domiciled in country A lends to a firm domiciled in country B, but the parent entity of both the lender and the firm are resident in country C. Domestic bank lending can also be broken down into genuine, pseudo and financing of the local business abroad. Pseudo domestic refers to cases where the subsidiaries of a bank and a borrower are domiciled in the same country, but (at least) one of their parents is domiciled in a different jurisdiction. For example, a bank domiciled in country A lends to a firm domiciled in country A, but at least one of either the bank’s or firm’s parent is domiciled in country C. Finally, when the legal entities of the bank and the borrower reside in the same country, and their parents reside in the same country that is different from the jurisdiction of their subsidiaries, we classify such cases as financing of the business abroad.
Accounting for the group structure of lenders and borrowers, and the domicile of their respective parents, intra-euro area cross-border exposures increased by 67%, from €1.03 trillion to €1.72 trillion, as of December 2023. This is due to the shift of more than €600 billion from the domestic case to the pseudo-domestic case, 85% of which refers to indirect cross-border lending (Chart A, panel b). The financing of the local business abroad, i.e. when bank and borrower parents are domiciled in the same country that is different from where the deal occurs, and pseudo-cross border cases are less relevant than pseudo-domestic cases and constitute mainly loan exposures.
Chart A
Intra-euro area cross-border bank lending exceeded €1 trillion in December 2023…
a) Bank lending by euro area-domiciled credit institutions to non-banks | b) Cross-border intra-euro area loan exposures by type of instrument |
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(Q1 2019 – Q4 2023, outstanding nominal exposures in EUR trillions (left-hand scale); percentage of total lending by euro area banks to non-banks (right-hand scale)) | (Dec. 2023, outstanding nominal exposures in EUR billions) |
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Sources: ECB (AnaCredit) and ECB calculations.
Notes: Panel a): The reported figures represent a lender-borrower relationship at the entity level and disregard the residence of the respective parent entities. They include credit exposures of euro area domiciled banks (ESA sector “S.122”) to euro area and globally-domiciled non-financial corporations (“S.11”), other financial intermediaries (“S.125”), financial auxiliaries (“S.126”) and captive financial institutions (“S.127”). The credit exposures include overdrafts, trade receivables, revolving credit, credit lines, reverse repos and term loans. Overdrafts are debit balances on current accounts, i.e. current accounts with agreed overdraft limits. Revolving credit is not necessarily linked to a current account, and the debtor may withdraw funds up to a pre-approved credit limit without giving prior notice to the creditor; in this way, the amount of available credit can increase and decrease as funds are borrowed and repaid, and the credit may be used repeatedly. Credit lines allow the debtor to withdraw funds up to a pre-approved credit limit without giving prior notice to the creditor; in this case, the credit may be used in tranches, but it is not revolving. With credit lines, the amount of available credit can only decrease as funds are drawn, and repaying funds does not increase the available amounts. Panel b): The reported figures include credit exposures between euro area-domiciled banks and euro area-domiciled non-banks, irrespective of the domicile of the parents (i.e. provided that the legal entities of the lender and borrower are domiciled in the euro area). “Cross-border” includes cases where (i) a bank’s parent and subsidiary are domiciled in the same country, but that country differs from the country of domicile of the borrower’s parent and subsidiary, or (ii) a bank’s parent and subsidiary are domiciled in different countries and those countries differ from the country of domicile of the borrower’s parent and subsidiary, or (iii) a bank’s parent and subsidiary are domiciled in the same country, but that country differs from the country of domicile of the borrower’s parent, which is not the same country of domicile of the borrower’s subsidiary. The bars of “local business abroad” and “pseudo cross-border” could include cases of intragroup transactions if the ultimate parent of the lender and the ultimate parent of the borrower are both banks and are domiciled in the same country.
A more integrated lending market could improve banks’ risk diversification and make the funding structure of borrowers more resilient. Cross-border lending generates several benefits, usually related to private sector risk-sharing across euro area countries. On the lender side, banks might reduce the concentration and home bias of their exposures by increasing the cross-country diversification. On the borrower side, multiple cross-border bank relationships may broaden access to financing, strengthen borrowers’ funding resilience or potentially stabilise funding when the domestic market is under stress.[4] A more integrated banking market may also better support firms’ growth and their international expansion. As at the end of 2023, roughly 14% of the turnover generated by euro area non-financial corporations is related to operations in other euro area countries, and this share started to grow in 2019, although not homogeneously across sectors.[5]
Almost 70% of intra-euro area cross-border bank lending to non-banks is to non-financial corporations, with some heterogeneity in the most common type of exposures. The largest cross-border lending volumes are associated with the home countries of the largest euro area banking groups, i.e. France and Germany. Direct and indirect cross-border intra-euro area lending primarily targets firms. Exposures to other financial institutions (OFIs) and captive financial institutions are concentrated in specific jurisdictions depending on the domicile of the banks – again French and German lenders respectively (Chart B, panel a).
Credit exposures take the form of loans, credit lines or reverse repos, with credit lines originated mainly by German banks and reverse repos by French banks. Italian lenders’ cross-border lending activity is primarily via loans (Chart B, panel b). Lending to OFI borrowers has a strong footprint in France, and it occurs mainly via reverse repo. More than two-thirds of lending to captive financial institutions is directed to borrowers in Luxembourg and, to a lesser degree, in the Netherlands.[6] These exposures are mainly via loans (46%) and credit lines (34%). Lending to financial auxiliaries consists mainly of French and Irish borrowers, and loans cover almost half of the exposures to these borrowers (Chart A, panel b).[7] French and Dutch lenders are mostly involved in the genuine cross-border lending business. The pseudo-domestic component of cross-border lending is quite significant in Germany and Italy. For example, in Italy it covers around 80% of total cross-border lending (Chart B, panel c).
Chart B
…with some types of exposure concentrated in specific borrower countries
a) Cross-border intra- euro area exposures by borrower sector | b) Cross-border intra-euro area exposures by type of instrument | c) Cross-border intra-euro area exposures by borrower domicile |
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(Dec. 2023, outstanding nominal exposures in EUR billions) | ||
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Sources: ECB (AnaCredit) and ECB calculations.
Notes: The reported bank lending figures include direct and indirect cross-border lending. Countries on the x-axis represent the domicile of euro area banking group parents. Panel b): Around 70% of direct and indirect intra-euro area cross-border lending via reverse repos refers to lending by a central clearing counterparty that has a banking licence.
The cross-border lending market is quite competitive for banks domiciled in large euro area economies, while borrowers are concentrated in only a few sectors.[8] A larger number of German and French lenders are involved in cross-border lending than is the case for banks in the Netherlands and Luxembourg (Chart C, panel a). The real estate sector is the one that benefits most from cross-border lending in terms of lending volumes, with lending evenly spread across different sizes of firm. Other borrowers are mainly large firms involved in manufacturing, professional and scientific activities, as well as in wholesale and retail trade. Services sector borrowers (e.g. from the ICT or professional science activities sectors) are the largest cross-border lending beneficiaries in relative terms (Chart C, panel b).
Chart C
Cross-border borrowers are mainly firms involved in the services sector
a) Concentration of banks involved in cross-border lending | b) Size and sectoral breakdown of non-financial corporations involved in cross-border lending |
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(Dec. 2023, HH Index in percentages) | (Dec. 2023, outstanding nominal exposures in EUR billions, percentages) |
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Sources: ECB (AnaCredit) and ECB calculations.
Notes: Panel a): The Herfindahl-Hirschman (HH) Index is calculated based on the domicile of the banks’ parents. Panel b): The sector and firm size breakdown refers to the sample of non-financial corporations (ESA sector “S.11”) involved in cross-border and pseudo-domestic cross-border lending.
The direct cross-border lending approach is currently a stronger banking market integration force than the alternative indirect lending approach. While insolvency law and taxation are driving the direct approach to banking market integration, regulatory and supervisory frameworks are behind the indirect approach.[9] Further developing a single euro area banking market and making progress on cross-border risk-sharing via bank loans would be beneficial to supporting the complementarity of banks and capital markets. This box documents that only a limited number of large banking groups are active in cross-border lending, and this is likely part of their business model. Further developments in cross-border intra-euro area mergers and acquisitions could also enhance the role of indirect cross-border lending. Progress is required to make the regulatory, supervisory and crisis management frameworks further “country blind” in order to strengthen a single market for banking groups active in cross-border interbank, government, corporate, or retail bank lending.[10]
For the purposes of this box, the term “non-banks” includes non-financial corporations (ESA Sector “S.11”), other financial intermediaries (“S.125”), financial auxiliaries (“S.126”) and captive financial institutions (“S.127”). Retail bank lending to households, as well as bank lending to government and other non-bank financial intermediation entities (insurance companies, pension funds, investment funds and money market mutual funds) are excluded from the analysis.
The analysis in this box focuses on the integration of euro area bank lending market using credit register data available at the ECB. The analysis in the article entitled “Determinants of currency choice in cross-border bank loans” – published in “The international role of the euro” ECB, Frankfurt am Main, June 2023 – focuses on cross-border bank lending in major international currencies, including in euro, using bilateral Bank for International Settlements (BIS) locational banking statistics to assess various potential determinants of currency choice in international cross-border bank lending, such as bilateral distance, measures of financial and trade linkages to issuer countries of major currencies, and invoicing currency patterns. The analysis shows that international cross-border bank lending in euro is highly concentrated in a small number of countries, such as the United Kingdom.
At the same date, 19% of total lending by euro area banks was to extra-euro area domiciled non-banks.
Domestic lenders may be more squeezed in the event of a country-specific crisis and may reduce lending more than non-domestic banks. The literature reports contrasting views on the benefits of cross-border lending. Investigations of lending by global banks to emerging market economies during the global financial crisis find that a liquidity shock in developed countries reduces lending in emerging market economies owing to a contraction in direct cross-border lending by foreign banks and in local lending by foreign banks’ affiliates in emerging market economies. For further details, see Cetorelli, N. and Goldberg, L., “Global Banks and International Shock Transmission: Evidence from the Crisis”, IMF Economic Review, Vol. 59, No 1, 2011, pp. 41-76; and Vogel, U. and Winkler, A., “Do foreign banks stabilize cross-border bank flows and domestic lending in emerging markets? Evidence from the global financial crisis”, in Brada, J. and Wachtel, P. (eds.), Global Banking Crises and Emerging Markets, Palgrave Readers in Economics, pp.201-226. The withdrawal of banks from their cross-border business leads to a deterioration in the borrowing conditions of small firms, see Bremus, F. and Neugebauer, K., “Reduced cross-border lending and financing costs of SMEs”, Journal of International Money and Finance, Vol. 80, Issue C, pp. 35-58.
There are several reasons that might drive a firm’s decision to run its business abroad, ranging from moving steps of its production processes to somewhere cheaper to incentives to establish the parent entity in a jurisdiction offering tax reliefs.
For further details, see Di Filippo, G. and Pierret, F., “Key features of captive financial institutions and money lenders (sector S127) in Luxembourg”, Working Paper, No 150, Banque centrale du Luxembourg, December 2020; and Di Filippo, G. and Pierret, F., “A Typology of Captive Financial Institutions in Luxembourg: Lessons from a New Database”, Working Paper, No 157, Banque centrale du Luxembourg, February 2022.
Financial auxiliaries are companies that provide auxiliary financial services and other financial advisory and consultancy services, such as loan brokers and investment advisers.
The analysis in this box focuses on cross-border bank lending only. However, euro area banks also compete with non-bank lenders, ranging from traditional credit providers, such as finance companies, mortgage lenders and consumer credit firms, to newer market entrants, including fintech and big tech companies. As outlined in Section 4.1.2, the role of these non-bank lenders in the provision of credit to clients has continued to increase over the last few years. The regulatory approach to these entities should be adapted to cater for the opportunities and risks they pose.
The development of banking market integration under the indirect approach is achieved by expanding banking groups’ lending activities abroad through the cross-border consolidation of euro area banking groups. The state and challenges of this approach to banking market integration is discussed in Section 2.1 of Financial Integration and Structure in the Euro Area, ECB, April 2022 and in the article entitled “Cross-border bank consolidation in the euro area” in Financial Integration in Europe, ECB, May 2017.
This may require giving cross-border banking groups a specific treatment in general banking union legislation, particularly as regards the free movement of capital, liquidity and other prudential resources within the banking groups in this category. For further details, see Angeloni, I., “The Next Goal: euro area banking integration”, European Parliament, February 2024.