Multinational banks' deleveraging in the crisis driven by pre-crisis characteristics and behavior

After the collapse of Lehman Brothers, a rapid and far-reaching shrinkage of international
banks’ assets with a focus on foreign claims took place. For the largest
67 German banking groups, we find that both their characteristics and behavior
in the pre-crisis episode had repercussions for the crisis period. Above all, prior
non-traditional banking activities - proxied by the relevance of securities and noninterest
income - resulted in balance sheet contraction in the crisis. While, from
2002 to mid-2008, a disproportionately high growth rate in profits to assets is found
to be indicative of too much risk taking, both high average income and a strong
balance sheet expansion in the pre-crisis period are found to be positive per se. In
contrast, a high average income or a strong growth in assets in just the last three
and a half years before the outbreak of the crisis put balance sheets during the crisis
under adjustment pressure. During the crisis, short-term wholesale funding proved
to be a disadvantage, while good capital endowment (core Tier 1 capital to RWA
ratio), deposit funding and strong affiliate presence abroad had a stabilizing impact.
Most of these variables lose their significance in normal times.