The Hindu Business Line : Bank lending in Q3 lacklustre: BIS

IN the international capital markets, banks in the reporting area did not extend any new international credit in the third quarter of 2001 and took steps to reduce their risk exposures.

Disclosing this in its latest international consolidated banking statistics, the Basle-based central bankers' central bank, the Bank for International Settlements (BIS) said the deterioration in global economic prospects was largely responsible for the weakness of bank lending, as it both reduced corporate demand for bank finance and heightened perceptions of credit risk.

It said between end-June and end-September 2001, foreign claims of banks in the BIS reporting area increased by three per cent to $11.6 trillion. But, virtually all of this increase is estimated to have been due to currency movements, in particular the appreciation of the euro, yen and other major currencies against the US dollar.

However, the share of claims guaranteed by a third party or backed by collateral continued to rise in several countries, as did the share of claims on the public sector. Banks further reduced their exposure to Argentina during the third quarter, but maintained their claims on most other emerging economies.

BIS said banks in the reporting area continued to make use of credit risk mitigants to limit their exposure to the US. As a result, even though total contractual claims on the US remained stable at $2.6 trillion during the third quarter, banks' ultimate risk exposure fell further to 95 per cent of contractual claims.

Total claims on Europe barely increased after allowing for the appreciation of the euro, but there was a shift in the sectoral composition of claims towards the public sector.

Consolidated claims on offshore financial centres rose by four per cent between end-June and end-September to $893 billion, driven by lending to financial intermediaries in the Caribbean. The events of September 11 heightened insurance companies' demand for bank finance, thereby boosting claims on Bermuda, a hub centre for global insurance.

Hedge funds, many of which are domiciled in the Cayman Islands and other offshore financial centres, enjoyed large inflows of funds during the first three quarters of 2001 and this bolstered increased borrowing from banks.

BIS said securitisation activity in offshore centres also lifted bank claims. Lending to these various intermediaries contributed to a five-percentage point rise between end-2000 and end-September 2001 in the non-bank private sector's share of international claims on offshore centres to 66 per cent.

In Asia, consolidated banks' claims remained virtually unchanged at $375 billion. However, in some countries, the composition of claims shifted towards less risky credits. Claims on China on an ultimate risk basis fell further to 83 per cent of contractual claims in September from 86 per cent in June and international claims continued to shift towards the public sector.

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Bank lending in Q3 lacklustre: BIS