Bank funding: evolution, stability and the role of foreign offices

The Covid-19 pandemic and the war in Ukraine have furthered a sustained retreat from global banking. The funding sources of local banking systems have shifted from cross-border to local and, within cross-border, from inter-office to unrelated sources. An increased share from local sources could improve the stability of funding, but greater cross-border funding from unrelated sources could be detrimental, as it is more sensitive to global shocks than is inter-office funding. The shift in the funding mix reflects salient differences between the funding models of domestic banking offices, which have been gaining in importance, and foreign banking offices – ie subsidiaries and branches with foreign parents. Furthermore, as individual foreign bank affiliates have withdrawn, the effect has been to increase the nationality concentration in local banking systems, which historically has correlated with higher funding volatility.