Banks Cut Cross-Border Lending

Global banks scaled back cross-border lending to companies, governments and each other at the fastest rate since 2008 in the final quarter of last year, with lenders based in the euro area leading the way.

Lenders reporting to the Bank for International Settlements, the record-keeper of the world's central banks, shrank their cross-border assets by $799 billion, or 2.5 percent, in the three months ended Dec. 31, data released by the BIS show. The decline was the sharpest since the fourth quarter of 2008, when interbank lending markets froze worldwide following the collapse of Lehman Brothers Holdings Inc.

“The decline was led by a significant drop in interbank lending arising from the spillover of the euro-area sovereign debt crisis to bank funding markets,” BIS said in its quarterly report. “The reduction was especially marked for cross-border claims on residents of the euro area and was mostly attributable to euro-area banks.”

European banks were trimming their balance sheets to help meet stricter capital requirements set by the European Banking Authority and by the Basel Committee on Banking Supervision. Foreign banks also reduced their lending to European banks on concern that the region's sovereign debt crisis is spreading, prompting concerns that a credit drought might further cripple the economy of the currency union.

Interbank lending contracted by $637 billion during the fourth quarter as the European debt crisis infected bank-funding markets, particularly affecting the euro's 17 member countries, the BIS said. Cross-border claims on banks in the euro region fell $364 billion during the period. The Libor-OIS spread, a gauge of banks' reluctance to lend to each other, “increased to high levels on the back of higher risk premia and the growing reluctance of market participants to engage in interbank loan transactions,” BIS said.

Italy and Spain saw the largest funding contractions, falling $57 billion, or 10 percent, and $46 billion, or 9 percent respectively, according to the report. Banks also cut their cross-border claims on German banks by 9 percent, or $104 billion, and on French banks by 4 percent, or $55 billion.

Greece Plummets

Lending to Greek borrowers continued to shrink in the quarter. At $96.3 billion by the end of 2011, it was less than half the level two years earlier, when it stood at $217.2 billion.

The cutoff point for the BIS data was before the country's debt swap in March, which will be reflected in upcoming first-quarter numbers. More than two-thirds of the total, or $69.4 billion, is lending to the private sector and includes the assets of foreign banks' subsidiaries in Greece.

Euro-area banks slashed cross-border lending by $584 billion in the quarter as institutions including Societe Generale SA, Commerzbank AG and UniCredit SpA cut assets to meet European Banking Association capital rules. That included a $197 billion retreat by French-headquartered banks, predominately from their euro-denominated assets, the BIS said. The 5.3 percent cutback is the second-biggest drop for French banks in 12 years, after the 7.1 percent decline the previous quarter.

Wary of lending to one another, firms are increasing the amount they park with the European Central Bank. Deposits with the central bank rose to a record 828 billion euros on March 5, and were at 770 billion euros on May 30. European lenders deposited an average of about 280 million euros with the ECB in the eight years before Lehman's collapse.

Markets recovered earlier this year after the ECB pumped more than 1 trillion euros into the region's banks via two three-year Longer Term Refinancing Operations. That optimism has now evaporated as concern mounts about the future of the euro, the BIS said.

The BIS data record the cross-border business of banks in the countries reporting to it. Data for banks' consolidated cross-border claims — which include bonds, loans and funds deposited at banks — are reported by 30 countries. Those countries include most developed and some emerging economies.

Lending to emerging markets also shrank in the quarter for only the second time in three years, the BIS reported. Cross-border claims from foreign banks to those countries fell by $75 billion, or 2.4 percent, following a $17 billion decline in the previous three-month period. The Asia-Pacific region, especially Chinese banks, accounted for 91 percent of the reduction in cross-border credit.

Bloomberg News

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