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Thursday, December 29, 2011

Shin, Hyun Song: ''Global savings glut or global banking glut?''


"It has become commonplace to assert that current-account imbalances were a key factor in stoking subprime lending in the US. This column says the ‘global banking glut’, i.e. the rise in cross-border lending, may have been more culpable for the crisis than the ‘global savings glut’. As the European banking crisis deepens, the deleveraging of the European global banks will have far-reaching implications not only for the Eurozone, but also for credit supply conditions in the US and capital flows to the emerging economies.

Since Bernanke’s 2005 speech (Bernanke 2005), it has become commonplace to assert that current-account imbalances were a key factor in stoking the permissive financial conditions that led to subprime lending in the US. The ‘global savings glut’ is what Ben Bernanke called it. This phrase provided a powerful linguistic focal point for thinking about the surge in net external claims on the US on the part of emerging economies. The biggest worries concern the financial stability implications of these large and persistent current-account imbalances.
But maybe the finger is being pointed the wrong way. My recent research suggests that the ‘global banking glut’ may have been more culpable for the crisis than the ‘global savings glut’ (Shin 2011).

As the European banking crisis deepens, the deleveraging of the European global banks will have far-reaching implications not only for the Eurozone, but also for credit supply conditions in the US and capital flows to the emerging economies. Just as the expansion stage of the global banking glut relaxed credit conditions in the US and elsewhere, its reversal will tighten US credit conditions. Its impact in the emerging economies (especially in emerging Europe) could be devastating. In this sense, there is a huge amount at stake in the successful resolution of the European crisis, not only for Europe but for the rest of the world."

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