The 2008 financial crisis and its aftermath has reversed decades of progress in expanding the world financial system, with global cross-border capital flows falling by more than 60% from their pre-crisis peak, according to a report from the McKinsey Global Institute.
The consultancy said that loans and investment flows between countries were worth around US$4.6 trillion in 2012, against a record of US$11.8 trillion in 2007, with Europe’s sovereign debt crisis and interrupted economic growth in the US contributing to much of the reduction as capital flows were steadier in the world’s emerging economies. The report combines databases from the International Monetary Fund, global central banks and other sources.
Following the collapse of Lehman Brothers in September 2008, global capital flows collapsed to only US$1.9 trillion in 2009, the lowest figure since 1995. A subsequent recovery in 2010 proved short-lived as the developing crisis in the eurozone saw many banks retreat to their home markets. According to the report, Western Europe accounted for 56% of growth in the period 1980 to 2007, and for 72% of the subsequent collapse in global capital flows.
Although the UK sits outside of the eurozone, McKinsey said that the country was hit even harder with an 82% fall in cross-border capital flows between 2007 and 2011, reflecting its role as a hub for European financial transactions. Most of the UK’s decline reflected a contraction in inflows and outflows of bank loans.
The reduction over the past five years “has cast uncertainty over the future evolution of financial globalisation,” McKinsey said. Although much of the increase in the period to 2007 was linked with growing economic imbalances and to debt bubbles, the report warns of “a more Balkanized financial system with constrained access to credit and higher costs of borrowing in some countries.”
“While some of the correction is healthy, if we see a continuation of these trends, it threatens recovery,” said Susan Lund, a McKinsey principal and one of the report’s authors. “It is not the end of global banking, but it is a significant retrenchment. It questions whether we will ever see a recovery.”
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