The Global Financial Department of the World Bank (International Bank for Reconstruction & Development) released its 2017/2018 annual report on the state of international banking. It says “Growing restrictions imposed on foreign banks operating in developing countries since the 2007/2009 financial crisis are hampering better growth prospects by limiting the flow of much needed financing to firms and households”. The report says that even though Ex Ante ring fencing, which is a form of regulatory supervisory practice used during extraordinary times to ensure:
- Higher capital or liquidity requirement
- Tighter dividend restriction
- Limitations on liquidity flows
The downside is increased capital requirements as it relates to capital adequacy and capital reserve ratios of subsidiaries of foreign banks in host countries, limits the lending pool to businesses and household of host countries by a whooping 6%. For instance, Ecobank Transnational Corporation (ETI) a Togolese Bank with 1,239 branches in 33 countries, of which 512 branches are domiciled in Nigeria, 40% of total assets are based in Nigeria, and only 12% of its $2.1bn annual revenue for the 2015/2016 fiscal year came from its host country in Togo, has its benefits to the Nigerian economy and other African Economies where its registered as a subsidiary of its parent company not fully felt, as the increased reserve requirements of a foreign bank in a host country restricts the lending capacity by 6%.
The Banking without Borders Report says “Emerging economies are more likely to adopt such policies than others, even though borrower based macro prudential tools such as limits on loan-to-value and debt-to-income ratios are associated with slower credit growth in all countries, the relationship is stronger for developing countries. Similarly institutional based tools such as dynamic provisioning, limits on leverage and counter cyclical capital requirements are negatively associated with credit growth in developing economies. Finally, limits on foreign currency lending are negatively related to credit growth in all countries, but especially in emerging markets and developing economies. Macroprudential policies can help host countries manage financial cycles, though the evidence also indicates that they are more effective in boom and bust phases. These policies are also associated with increased cross border lending, suggesting that some lending that would otherwise occur in host countries is diverted to avoid them.”
The World Bank is urging developing nations all around the world with particular emphasis on West Africa & Nigeria to adopt a proactive regulatory model to the capital requirement and operational structure of foreign banks in host nations as a way to maximize credit on local businesses and household, that systematically avoids buffers that should only be in place in extreme times of a financial crisis or the peak of a financial boom. In its opening statement, the World Bank says “Successful international integration, supported by sound national policy and effective international cooperation has underpinned most experiences of rapid growth, shared prosperity, and reduced poverty.”