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Abstract

This paper investigates the pattern of financial deglobalization of banking in the wake of the financial crisis and explores possible explanations. We estimate the strength of the "flight home" effect based on a panel of data on foreign claims of BIS reporting banks, where the flight home effect is the change in domestic credit extended by domestic banks that cannot be accounted for by recipient or lender effects. We find that almost all banking systems are less active internationally. In periods of calm, reversals of the flight home are small. As a result, the pattern is one of cumulative renationalization. Own bank soundness explains some of the variance in the flight home effect. Financial protectionism could be an underlying explanation for this behavior, as we can expect it to be strongest in countries with more damaging crises. Sovereign stress paired with banking stress also helps explain the flight home effect. Sales and acquisitions of banks contributed to the flight home; however, the flight home effect was strong at the intensive margin as well.

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