Deglobalization of Banking: The World is Getting Smaller

Banks have been running for home. We investigate the pattern of this increasing home bias in the wake of the financial crisis and explore possible explanations. We estimate the strength of the flight home effect as the change in domestic credit extended by domestic banks that cannot be accounted for by recipient or lender effects. We find evidence of flight home for almost all banking systems with the notable exception of the US and Japan. In periods of calm, reversals of the home bias are small. The result is cumulative renationalization, with domestic lending growing on average 25% more than foreign lending during 2008-12. Sales and acquisitions of banks contributed to the home bias and the flight home was strong at the intensive margin as well. Deterioration of bank soundness explains some but not all of the effect, e.g. Germany and Switzerland had a strong flight home notwithstanding improving bank soundness during the eurocrisis. We also find evidence of the vicious circle between banks and sovereign balance sheets: sovereign stress paired with banking stress contributed to the renationalization of banking.