Shrinking international financial flows could make it more difficult for the UK to fund its current account deficit, Bank of England monetary policy committee member Kristin Forbes said today.
The American economist argued that international financial flows have shrunk since the last financial crisis, leading to a climate of banking deglobalisation.
Forbes, who previously worked for the US Treasury department, explained that cross border financial flows are now as globalised as they were in 1983.
She argues that this trend could have "widespread repercussions" for some time and could lead a return to "traditional monetary policy", with domestic banks providing more credit to the UK economy and foreign banks providing less.
Potential implications of a less globalised banking system, included more transparent global banking institutions, the sensitivity of UK credit to domestic shocks, and the expansion of international banking in less represented countries.
A less globalised banking system could increase the cyclicality of domestic credit to domestic shocks.As UK banks lend less abroad, and foreign banks lend less in the UK, the total UK credit supply will be more tightly linked to the domestic supply of credit and business cycle.This stronger home bias will increase the sensitivity of credit and lending to domestic shocks and changes in domestic banks.
However, by the same token a deglobalised banking system would also reduce the correlation to shocks in foreign banks, argued Forbes.
She concluded her speech by saying: "It may be time to shift from focussing on the implications of increasing levels of financial globalisation, to a serious discussion of the implications of banking deglobalisation."