Capturing banking flows: the predominant role of OFCs in the international financial architecture

Abstract

This article presents new findings on offshore financial centers (OFCs) and their role in the international financial system. We develop a statistical methodology to identify and quantify the importance of OFCs based on international banking data, leading to a list of 13 countries/jurisdictions. We also compute an indicator measuring the degree of extraterritoriality for each banking system based on this list to quantify OFCs’ importance in the international financial architecture. The analysis reveals that the banking system of a reporting country holds, on average, 1/5 of its asset positions on entities resident in OFCs and receives 1/6 of its liability positions from entities resident in OFCs. The article also explores the financial stability issues raised by OFCs during the 2008 financial crisis and applies a community detection method to analyze the organizational pattern of banking systems interactions. The study shows that OFCs participate in the regionalization of banking systems interactions, suggesting that despite increasing interconnection, OFCs retain a form of geographical specialization.

Kevin Parra Ramirez

PhD candidate in Economics, Sciences-Po Paris &

I am a Ph.D candidate at Sciences-Po Paris under the supervision of Prof. Philippe Martin (Sciences-Po) and Vincent Vicard (Deputy Director of CEPII) and Research Economist at Banque de France