BIS international consolidated banking statistics - third quarter of 2001
28 January 2002
The international consolidated banking statistics released by the BIS today indicate that, in aggregate, banks in the reporting area extended no new international credit in the third quarter of 2001 and, moreover, took steps to reduce their risk exposures.1 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.
Whereas previous press releases on the consolidated banking statistics focused on BIS reporting banks' international claims, the analysis and tables in today's release have been expanded to include local claims of reporting banks' foreign affiliates denominated in local currencies. Local claims account for a large, and in some countries rapidly growing, proportion of reporting banks' total foreign claims, and so examination of such exposures is critical to understanding the amount and types of risk faced by banks.2
[Graph omitted from the HTML version]
Shift towards lower-risk assets in developed countries
Between end-June and end-September 2001, foreign claims of banks in the BIS reporting area increased by 3% to $11.6 trillion. However, 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 (and the consequent increase in the US dollar value of claims denominated in these currencies). If the data are adjusted for these movements, consolidated bank claims remained more or less unchanged during the third quarter. 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.
Banks in the BIS reporting area continued to make use of credit risk mitigants to limit their exposure to the United States. As a result, even though total contractual claims on the United States remained stable at $2.6 trillion during the third quarter, banks' ultimate risk exposure fell further to 95% of contractual claims (Graph 1).
The sectoral composition of international claims on the United States shifted further towards the non-bank private sector and away from the public sector. During the first three quarters of 2001, claims on the non-bank private sector rose by 5 percentage points to 58% while claims on the public sector fell by 2 percentage points to 12% (Graph 1). Purchases of US agency securities, in particular bonds issued by Fannie Mae and Freddie Mac, appear to be behind this shift. Owing to the decline in the outstanding stock of US Treasury securities, a perceived deterioration in their liquidity and low government yields, agency securities are an increasingly attractive alternative to Treasuries.3
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. Reporting banks' claims on public sector borrowers in Europe were steady at 12% of international claims during the latter half of 2000 and first half of 2001, rising to 13% in the third quarter of 2001. Claims on the German and Italian public sectors increased the most. In Europe, government securities markets are as large and liquid as ever, and so government securities remain the riskless asset of choice. European banks were responsible for just over half of the increase in claims on the European public sector, and Japanese and US banks for the remainder.
Consolidated claims on offshore financial centres rose by 4% between end-June and end-September to $893 billion, driven by lending to financial intermediaries in the Caribbean. The events of 11 September increased insurance companies' demand for bank finance, thereby boosting claims on Bermuda, an important centre for international 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 supported increased borrowing from banks. Securitisation activity in offshore centres also lifted bank claims. Lending to these various intermediaries contributed to a 5 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%.
Claims on Argentina fall but those on other emerging economies are little changed
Banks in the reporting area broadly maintained their exposure to developing countries in the third quarter of 2001. Although foreign claims on developing countries increased by 4% to $1.3 trillion, acquisitions of local financial institutions rather than new lending were responsible for the increase. Several countries, notably Argentina, experienced a cutback in bank credit, but in most others there was little change.
Consolidated claims on Argentina fell by 5% to $82 billion in the third quarter. Whereas in the second quarter the government sector had been the most adversely affected by the retrenchment of international banks, in the third the evaporation of international credit spread to the banking sector, and in particular to government-owned banks. Claims on banks fell to 13% of international claims on Argentina at end-September from 17% at end-June. The withdrawal of interbank credit lines resulted in a commensurate fall in short-term claims, to 54% of international claims from 58%.
There were no significant changes in the distribution of claims on Argentina by nationality of reporting bank during the third quarter (Graph 2). US banks remained the largest creditors, with $23 billion in contractual claims at the end of September, followed by Spanish banks with $20 billion.4 These two banking systems alone account for 53% of total foreign claims on Argentina. The claims of other banking systems are much smaller, led by German, UK and Italian banks with approximately $7 billion each. In addition to differences in the absolute size of claims on Argentina, the risks associated with these claims differ across reporting banks.
[Graph omitted from the HTML version]
A sizeable proportion of US banks' claims consists of lending to Argentine subsidiaries of foreign, mainly US, corporations, and as a result the ratio of ultimate risk to contractual claims on Argentina is much lower for US banks than for other banks: 88%, compared to 95% for all banks. German banks' involvement in Argentina is limited mainly to cross-border business, whereas US, Spanish, Italian and UK banks all have substantial local business.
Local currency claims booked by reporting banks' local subsidiaries make up a much smaller proportion of total claims on Argentina than of those on most other Latin American countries: 25% as of end-September, compared to 65% for Mexico, 48% for Brazil, and 48% for Latin America as a whole (Graph 2)5 This relatively low level of local currency lending reflects the greater use of the US dollar in Argentina. Moves towards dollarisation accelerated in the third quarter, with peso-denominated deposits placed with reporting banks' local affiliates falling by as much as 20% between end-June and end-September. These funds do not appear to have been withdrawn from reporting banks' local branches and subsidiaries, but rather seem to have been converted into US dollar deposits.
International banking activity in other countries in Latin America had not as of September 2001 been adversely affected by Argentina's difficulties. Consolidated claims on Brazil remained more or less unchanged at $139 billion, and short-term claims on Brazil were steady at 49% of international claims. Claims on Mexico increased by nearly 30% to $208 billion, boosted by US-based Citigroup's purchase of Banamex, Mexico's second largest bank. Contractual claims on Chile fell by 6% to $43 billion, owing in large part to the decline in the US dollar value of peso-denominated local claims and to a lesser extent to repayments of dollar-denominated loans. Similar to their leading role in Argentina, Spanish and US banks dominate international banking activity in the Latin American region as a whole. Spanish banks originate 31% of total foreign bank claims on Latin America, and US banks 29%. The next largest bank creditors, Germany and the United Kingdom, have only a 7% share of the Latin American market.
Outside Latin America, the retrenchment of international banks from Turkey began to abate in the third quarter. Reporting banks continued to reduce short-term credit to Turkish banks, but this was partially offset by a rise in claims on the non-bank private sector. Consequently, whereas total claims on Turkey fell by upwards of 10% in each of the first and second quarters, they fell by only 2% in the third, to $38 billion. Cutbacks in credit to Turkish banks' affiliates in London and other international banking centres contributed to a further decline in reporting banks' net risk exposure, to 87% of contractual claims at end-September. Banks headquartered in the euro area, especially Germany, were slower to reduce their claims on Turkey than other reporting banks, and as a result euro area banks' share of total claims rose to 58% in September from 56% in June.
In Asia, consolidated bank 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% of contractual claims in September from 86% in June and international claims continued to shift towards the public sector. Similar trends were evident in Indonesia, where claims on an ultimate risk basis fell to 83% of contractual claims and claims on the public sector rose to 21%. Short-term claims on Korea continued to increase, to 59% of international claims at end-September from 57% at end-June. This increase arose mainly from the ageing of longer-term credits rather than a pickup in short-term lending.
1 A second set of BIS international banking statistics - the locational statistics - will be released on 11 March 2002 in the BIS Quarterly Review: International banking and financial market developments. The consolidated banking statistics provide a measure of the foreign exposure of national banking systems, while the locational statistics provide a better approximation of cross-border capital flows. A currency breakdown is not available for the consolidated statistics, and so exchange rate movements can result in changes in outstanding consolidated positions reported in US dollars even when positions remain unchanged. The explanatory notes at the end of this press release describe the consolidated statistics in more detail, and the statistical annex of the BIS Quarterly Review outlines the main differences between the two sets of international banking statistics. The consolidated and locational banking statistics are available on the BIS website (www.bis.org) and in the statistical annex of the BIS Quarterly Review. They are also included in the joint BIS-IMF-OECD-World Bank quarterly statistical release on external debt (www.bis.org/publ/r_debt.htm).
2 "Foreign claims" comprise BIS reporting banks' cross-border claims in all currencies plus their foreign affiliates' local claims in both local and foreign currencies. "International claims" are defined as reporting banks' cross-border claims plus their foreign affiliates' local claims in foreign currencies.