The global financial crisis was characterized by heightened financial risk in the USA, which spread to the rest of the world, including emerging economies. This paper constructs a core–periphery model with a global banking network and financial frictions. Due to a common-lender effect, when global banks lend to an emerging economy, heightened financial risk in the center depresses cross-border lending to the emerging economy, reducing real activities, and exacerbating monetary policy trade-offs. As financial markets become more integrated, exchange rate flexibility becomes less welfare enhancing and active capital account policy becomes more welfare enhancing.

Global banks are changing. With a new set of rules come new business models. We review the international dimension of the financial crisis, centring on cross-border losses and cross-currency funding problems that prompted authorities to adopt wide-ranging rescue measures and liquidity operations. Against this background, we proceed to examine the regulatory response, focusing on the Basel III framework and the ongoing work of the Basel Committee and Financial Stability Board regarding the amount of capital banks are required to hold, restrictions on maturity transformation on banks' balance sheets and proposals to mitigate the risks posed by systemically important financial institutions. Our conclusion is that capital and liquidity regulation will have distinctly different effects on the international organisation of banks. Liquidity regulation, especially when applied locally, has the greatest potential to reshape the global banking landscape.