So, if those are the benefits, what about the potential risks of international banking? The risks from banking are well known – that the failure of an institution can lead to contagion and spillovers that may have direct and indirect impacts on financial stability. These risks may be amplified, accelerated, and transmitted through the increased degree of interconnectedness that international banking brings. This could be through greater exposure to cyclical global macroeconomic trends, or through a greater appetite and capacity for risk without appropriate controls. Successive crises have clearly demonstrated the effects of international banks, and capital markets, “freezing”. Contraction in credit supply is a powerful channel through which financial crises hit global and domestic economies. And the balance between international and domestic services can shift rapidly in a recession as international banks serve the home market. In 2008–09 for example, UK resident banks cut cross-border lending by 30% 5, significantly more than lending in the UK. The same patterns were seen internationally. Lehman of course had global effects, but numerous other entities had substantial cross border effects too. The crisis showed us all too clearly that international banking, interconnectedness, and unrestricted capital flows carry risk as well as rewards. All this underlines the importance of delivering effective oversight of international banks. Prudent international regulatory standards are a necessary part of this, but are not on their own sufficient.
Banks subsequently extended the securitisation  1  I am very grateful to Pontus Aberg, Valia Rentzou and Isabel Von Koppen-Mertes for their valuable inputs and contributions, and to David Marqués for useful comments. 2  See ECB (2008), “Securitisation in the euro area”, Monthly Bulletin, February. BIS Review 68/2008  1  model to other forms of credit, such as consumer credit and student loans, that were historically regarded as highly illiquid. In Europe, the market for structured finance products has grown rapidly during the last 5-10 years, often at double-digit rates (See Chart 1). This development was maybe even more pronounced in the euro area compared with other regions due to several factors, including the introduction of the single currency, further financial market integration through the use of 3 credit derivatives and related financial instruments, and an innovative financial industry. Growth in structured finance products has also been fuelled by high demand from investors stemming from the search for yield and diversification opportunities. Securitisation has also been positively affected by the move towards a more market-based financial system. Increasing securitisation of lending-related assets, together with relentless financial innovation in credit markets, have led to the diffusion of a new business organisation – the “originate to distribute” model – among banks, particularly those of large size. There is certainly no need to explain to this audience how, under this new business model, the loans originated by banks are transformed into marketable asset-backed securities.