Many banks run overseas operations with relatively aggressive loan-to-deposit ratios and if they can’t bridge those funding gaps in the dysfunctional interbank markets or in the nervous wholesale markets and if regulators also prevent inter-group funding transfers, then this could add a further constraint on the availability of bank lending in Europe. That is a problem in a region where banks are responsible for over 70% of credit provision to corporates. Analysing a sample of 24 of the largest banks in Europe, Barclays finds that they all have a funding deficit in some of the countries they operate in and that the aggregate deposit funding deficit can be measured anywhere from €75 billion to €175 billion at each at the top dozen most exposed large banks.
Rising cross-border activity was a common theme across the European banking sector up to 2008. Since then, it has gone into reverse.
The Barclays analysts report that: "Worryingly, balkanization – once started – can be difficult to stop. If a regulator thinks that foreign regulators will limit cross-border balance-sheet transfers from international banks, they may be more likely to become more defensive themselves to prevent the capital/funding of ‘their’ banks getting trapped abroad." They add: "If banks are being forced to reduce cross-border activities (ie, balkanization) both globally and within Europe, this clearly calls into question the viability of multi-geography business models."