International banking grew rapidly from the 1950s to the 2000s, propelled by banks avoiding regulations that burdened their domestic funding, by financial liberalisation that expanded investment opportunities, and by financial innovation that offered new tools to manage risks. The core of the market is offshore, where lenders and borrowers transact in currencies foreign to them both. Competition among banks for market share contributed to surges in international lending that amplified credit booms preceding major financial crises. Losses during the Great Financial Crisis, and regulatory reforms in its wake, have constrained banks' expansion, making way for non-bank financial institutions to step in as major international creditors
From the ashes of the Second World War, international banking re-emerged starting in the 1950s. In 1963, when the BIS started to collect data, banks' outstanding international claims amounted to less than 2% of world GDP. They grew rapidly in the following decades, peaking above 60% in 2007 before retreating to near 40% in early 2021 (Graph 1, left-hand panel). As the market expanded, the early predominance of interbank activity in a few major currencies gave way to business with non-bank financial and non-financial counterparties in a multitude of currencies. This feature explains the structural and cyclical factors behind these developments.
Regulatory arbitrage, financial innovation and financial liberalisation were key drivers. Regulations that raised the costs of domestic intermediation made it attractive for banks to borrow and lend abroad. The development of new financial products, including syndicated loans and derivatives, altered the way that banks managed risks in their international portfolios. The transition of the broader international financial system from a tightly managed one with extensive exchange controls and capital account restrictions to today's market-driven, integrated system was both a cause and a symptom of international banking's growth.
Alongside these structural factors, global financial imbalances have shaped and been shaped by international banking. Cross-border lending enabled the credit booms at the heart of several international financial crises, notably the Latin American debt crisis in the early 1980s, the Asian financial crisis in the late 1990s and the Great Financial Crisis (GFC) of 2007–09. Ahead of each crisis, competition among banks for market share contributed to surges in international credit.