Following recent crises, cross-border capital flows have declined considerably, and many advanced countries’ banks are retrenching. At the same time, banks from emerging and developing countries continue to expand abroad, and banking has become more regional. Research highlights that long-term debt flows are less volatile and that foreign banks with larger presence, more domestic funding, and closer relationships provide more finance and share risks better. While ongoing changes in global banking influence its overall benefits, the crises also revealed the need for a consistent framework for supervising and resolving globally active banks, with the European Banking Union an important model.

International banks greatly reduced direct cross-border and local affiliates’ lending as the global financial crisis strained their balance sheets, lowered borrower demand, and altered government policies. Using bilateral lender–borrower data and controlling for demand, we show that reductions largely varied in line with markets’ prior assessments of banks’ vulnerabilities, with financial statements’ and lender–borrower data playing minor roles. Those banking systems subject to less market discipline, however, were less sensitive to markets’ perceptions. Moving resources within banking groups became more restricted as drivers of reductions in direct cross-border loans differed from those for local affiliates’ lending, especially for more impaired banking systems.

We document increased stock price comovement for companies added to major indices around the world. Using data on forty developed and emerging markets for 10 years, we find that in most markets, when added to a major index, firms experience an increase in their beta (especially if their pre-inclusion beta is low) and in the extent to which market returns explain firm stock returns (R2). Stock turnover and analyst coverage also typically increase upon inclusion. Various empirical tests suggest that the category/habitat views of Barberis, Shleifer and Wurgler explain most of these results, although information-related factors also account for some findings.