A new paper shows that British banks engaged in more offshore banking than any other financial centre. Researchers examining the resilience of the world’s financial centres after the global economic crisis conclude that the future stability of the UK is perhaps the most uncertain of all. The paper concludes that in an era where attention has focused on the sustainability of public financial debts, it would appear there should be more concern about the potential amount of private foreign debt being held by British banks, which it describes as ‘the greatest threat to the national solvency’.
The working paper says that while the international position of British banks clearly benefited from being outside of the Eurozone, their foreign currency balance sheets are cause for concern’. They are described as ’extremely stretched’ on the eve of the crisis in 2007, and the paper warns that the future stability of The City may be ‘in the hands of unpredictable global forces’.
The research paper authored by Dr Daniel Haberley from the University of Sussex and Professor Dariusz Wójcik from the University of Oxford is to be presented at the world’s biggest economic geography conference, hosted by the University’s School of Geography and the Environment and the Smith School of Enterprise and the Environment. They show that British banks by nationality grew to become the world’s largest (by international assets) in 2012. The paper links this growth with British banks shifting their focus away from Europe during the global crisis towards what were seen as more robust economies – the US and to a lesser extent Japan – as funding sources. While British banks appear to have finally begun to deleverage in 2013, the paper shows this only brought their cross-border assets down to 2007 levels by the end of 2014.
Dr Daniel Haberly said: ‘The national cost-benefit balance of this offshore banking strategy is increasingly questionable. There has been a shift in where the risk is felt, so rather than its effects being outside of Britain, bad debts would affect the state’s balance sheets and, in the long run, the British taxpayer. Taxpayers would end up paying the cost of bad debts resulting from the offshore banking activities undertaken by British banks, whether the banks were publicly run or not.’
Professor Dariusz Wójcik said: ‘The UK is the offshore lynchpin of the global banking network. It appears to be trapped between an unravelling European financial system and an uncontrollable global financial system, with greater risks as host state than in the past due to the deregulation of recent decades.’
The paper tracks the historical context, explaining that the UK’s fragility is, in part, due to the deregulation of the 1980s, the so-called ‘Big Bang’, wherein the Keynesian-era ring-fencing system was torn down altogether. Even more significant were the Basel Accords, which created a new regulatory framework ensuring that host states supervise the liquidity of their national banks globally. This produced an international ‘race-to-the-bottom’, says the paper, which increasingly took a more permissive approach towards nationally headquartered banks, as opposed to attracting foreign banks backed by foreign governments. By contrast, in the 1950s to 1970s, offshore banking centres, led by Britain, were mostly able to shift the financial risks generated by deregulation onto other economies, the authors note.
The most resilient models in offshore banking were found to be those with large sovereign forex reserves, such as Singapore and Hong Kong. Currency sovereignty appears to be the key factor for stability, concludes the paper. It says, in theory, Eurozone offshore banking centres should have been in a strong position to weather the crisis as they have their own currency. However, ironically, the own currency debts of Eurozone member banks are described as ‘more destabilising’ than the foreign currency debts of other countries’ banks. The study argues this is because of the refusal of the European Central Bank to unconditionally backstop the debts of its member states. This had the effect of ‘disproportionately’ impacting Eurozone offshore banking centres, which should have been ‘easily avoidable’, the paper says.
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Notes for Editors
- The working paper, ‘Fragile Renegades: Offshore Banking Centers in the Global Financial Crisis’ is by Daniel Haberly, from the University of Sussex, and Dariusz Wójcik, from the University of Oxford.
- The University’s School of Geography and the Environment, and The Smith School of Enterprise and the Environment, is staging what is thought to be the world’s biggest conference on economic geography. Nearly 700 delegates from over 50 countries are presenting 500 research papers on the changes that are taking place or that need to take place to ensure a stable, equitable and sustainable global economy. See the conference website athttp://www.gceg2015.org/
- The objective of the Conference is to foster interdisciplinary worldwide dialogue on the state of the art and the future agenda of economic geography. Its title ‘Mapping Economies in Transformation’ is based on the premise that while the world economy has been recently experiencing major shocks and shifts, it needs transformative change to address the challenges of unstable, unequal, and unsustainable development. South to South economic relations have become one of the engines of the global economy. Regulatory reforms in the wake of the global financial crisis are redefining the relationships between state and markets. It builds on the success of previous global conferences held in Singapore (2000), Beijing (2007) and Seoul (2011).
Dr Daniel Haberly is a Lecturer in Human Geography at the University of Sussex and a Research Associate at the University of Oxford. His research interests lie broadly in the area of economic geography, with an emphasis on the relationships between states and financial globalization. He has published on sovereign wealth funds, corporate governance, and offshore finance in leading journals in economic geography. His research has been reported in the BBC World Service.
- Professor Dariusz Wójcik is an economic geographer, specialising in financial geography. He has published three books and over forty articles and book chapters in leading journals and edited volumes. In the last five years he has won several research grants with a value of over £2m as principal or co-principal investigator in the UK and abroad, including a major grant from the Research Grants Council Hong Kong, which allows him to co-lead one of the largest ever research projects on financial centre development in co-operation with lawyers and economists. His contribution to research has been recognised by nominations to the editorial board of Economic Geography and the Journal of Economic Geography, the leading journals in the field, and visiting appointments at the universities in Beijing, Hong Kong, Singapore, and Sydney. He has been involved in shaping the future of economic geography by organising international and interdisciplinary seminars, and acted as a member of the International Advisory Board for the Third Global Conference on Economic Geography, Seoul 2011.