Cross-border lending has been cut back sharply across the western world as banks reduce their exposure to Europe and prepare for tougher capital adequacy rules such as Basel III, according to the latest report from the central bank forum: the Bank for International Settlements (BIS).
In the fourth quarter of 2012 foreign bank loans fell by US$472bn (£311bn) in major developed economies, equivalent to an annual contraction of 8%. The decline partly reflected a sharp drop of interbank loans in the eurozone as lenders in creditor states continues to pull back from periphery countries. Volumes in the eurozone dropped by US$284bn, representing a 20% rate of contraction.
The BIS noted in its quarterly report that the markets are “under the spell of monetary easing”, convinced that central banks will keep the asset boom going despite signs of “broad deceleration” in the US economy and flagging growth in China, the world’s second-largest economy.
According to BIS data the eurozone’s share of the global interbank market has fallen from a record high of 55% in 2008 to only 38% at the end of 2012 as banks steadily retreat to their home markets.
Cross-border loans to emerging markets grew in Q412, rising to US$2.4 trillion from US$2.2 trillion a year earlier, although much of the money was directed to economies already near the end of their credit cycle. These loans could present a significant problem as currencies have fallen in South Africa, Brazil, Mexico, Turkey and East Asian countries.
The BIS also released a blueprint on Sunday for how to recapitalise a major lender in the event of a failure, aiming to avoid a repetition of the ad hoc rescues that characterised the 2008 financial crash and subsequently.
According to the BIS its proposed plan would enable banks to be recapitalised quickly and easily and would allow authorities to give an unequivocal guarantee that insured depositors would not lose savings.
“(It) proposes a simple recapitalisation mechanism that is consistent with the rights of creditors and enables recapitalisation of a too-big-to-fail (TBTF) bank over a weekend without the use of taxpayers’ money,” the paper stated.