BIS Quarterly Review March 2002 - International banking and financial market developments
11 March 2002
The BIS Quarterly Review is divided into two parts. The first part analyses recent developments in financial markets, financing flows and derivatives activity. The second part presents articles on topics of special interest. In this issue, there are four topics, each one on an aspect of international banking.
Concerns about transparency cloud market optimism
The onset of 2002 saw a three-month global equity market rally brought to a halt by concerns about transparency in corporate accounting. These concerns emerged from revelations about the circumstances behind the collapse of Enron, a large US energy trading firm. The rally had taken place in the closing months of 2001, as investors worldwide reversed the flight to quality and safety that had started in the summer and took positions in anticipation of an imminent economic recovery. The first week of March 2002 saw markets poised for another rally, with US GDP data appearing to confirm the recovery.
The buoyant mood in the fourth quarter of 2001 pervaded both equity and debt markets. In stock markets, a resilient bounce in the aftermath of the 11 September attacks turned into a rally driven by optimism about future prospects for economic growth. In fixed income markets, a similarly positive mood had taken hold by November, resulting in steeper yield curves and narrower corporate credit spreads. Equity and debt markets in emerging economies were also generally strong, with investors largely undeterred by problems specific to Argentina.
During the fourth quarter rally, investors in the United States and Europe drew encouragement from continued monetary easing by the Federal Reserve and the ECB, from macroeconomic indicators that had stopped deteriorating and from progress in the US-led military effort in Afghanistan. However, investors found little to be optimistic about in Japan and became increasingly sceptical about the prospects for significant financial restructuring and an end to recession in the near future.
In the wake of the revelations about Enron, releases of financial statements in January and February 2002 by various firms in the United States and Europe were often greeted by market-wide asset price declines. Investors punished especially the stocks and bonds of both highly leveraged firms and companies judged to have relatively opaque financial reports.
The international debt securities market
Fund-raising in the international debt securities market during the fourth quarter reflected the growing optimism of portfolio investors, an effort to lock in low funding costs and a precautionary demand for liquidity by some companies. Net issuance rebounded from the steep decline of the third quarter. Part of this represented issuance that had been postponed when capital markets were disrupted by the attacks of 11 September. However, the rise in issuance in euros, US dollars and pounds sterling also reflected borrowers taking advantage of increasingly attractive financing terms in these currencies.
As had been the pattern throughout 2001, short-term issuance was weak, with a turbulent commercial paper market keeping out newly downgraded borrowers. Issuers in both US dollars and pounds sterling exhibited a strong preference for fixed rate bonds and notes, while issuers in euros and yen still preferred floating rate structures. A sharp increase in European net issuance stemmed from a surge in new financing, while an increase in net issuance by US nationals was due in large part to a drop-off in repayments.
In spite of generally favourable borrowing conditions for emerging markets, net issuance by such borrowers recovered only slightly from the depressed levels of 1999 and 2000. The large emerging economies in Asia continued to run current account surpluses and thus found little need for foreign funds. Private sector issuers in South Korea accounted for much of the issuance from these economies.
Aggregate turnover of exchange-traded derivatives contracts monitored by the BIS reached a new record in the fourth quarter of 2001, with the notional value of transactions rising by 8% to $163 trillion. Continued uncertainty concerning the extent of further monetary easing in the major industrialised countries, and an abrupt steepening of government yield curves in the middle of the quarter, were accompanied by an upsurge in the trading of fixed income contracts. Trading in money market contracts - which had been remarkably buoyant since the beginning of the year - continued to be brisk. At the same time, transactions in stock index contracts also increased.
The international banking market
Reflecting the slowdown in the global economy, banks in the BIS reporting area extended in aggregate no new international credit in the third quarter of 2001. After adjusting for movements in exchange rates, the outstanding stock of cross-border bank claims remained stable at $11 trillion. Cutbacks in yen lending by Japanese banks contributed to a $26 billion decline in claims on banks, the second consecutive quarterly decline. Purchases of European government securities and US agencies supported the continued growth of claims on non-bank borrowers but, at $30 billion, the increase was the smallest in nearly three years.
Net bank flows to emerging economies turned positive for the first time since 1999. This inflow amounted to $4 billion in the third quarter, compared to a $35 billion average quarterly outflow in the first half of 2001. The turnaround, however, did not reflect a pickup in bank lending; claims on some countries increased but in aggregate emerging economies continued to pay down their external bank debt. Instead, the turnaround reflected a withdrawal of deposits. Oil-exporting countries and East Asian economies, which had previously placed large amounts with banks abroad, began to withdraw them in the third quarter.
Globalising international banking
A feature article examines the shift from international (cross-border) to global (local presence) banking. Over the past two decades, internationally active banks have become more global by serving customers through a local presence funded locally rather than across borders. This shift is evident over time, across reporting banks of various nationalities and across markets. However, some banks and markets are more globalised than others. For example, in western Europe international banking activity still predominantly takes the form of cross-border claims, while in Asian markets foreign banks are surprisingly active at the local level. Foreign banks are also increasingly active in the local markets of Latin America. The article outlines reasons for this shift towards global banking and highlights the change in risks that accompanies the new strategy.
Lending to emerging markets: the 1990s roller coaster
Seeking to understand the remarkable surge in international bank lending to developing countries in the 1990s and the sharp retrenchment after 1997, a second article takes a systematic look at the consolidated claims of BIS reporting banks on the largest emerging market countries in Asia and Latin America. The analysis is guided by the hypothesis that lending flows tend to be driven by economic fundamentals but that other factors can at times also matter.
The estimates show that both external ("push") and internal ("pull") factors influence international bank lending as expected. Surprisingly, however, two of the most widely discussed push factors, namely real GDP and real interest rates in lending countries, exhibit procyclical rather than countercyclical influences on international bank lending. That is, strong growth and high short-term real interest rates at home lead to greater lending abroad. The analysis also seems to suggest that fixed and tightly managed exchange rate regimes tend to encourage lending while floating rates inhibit it.
Do syndicated credits anticipate BIS banking data?
A third article examines the extent to which commercially provided data on syndicated loans anticipate movements in BIS consolidated banking statistics. While figures on announced syndicated credit facilities are available three months earlier than the BIS data, the latter have the advantage of reflecting actual loan drawdowns and early repayments. Syndicated loans seem to account for a significant part of actual international bank claims and could thus contain information that anticipates the BIS data.
The authors show that comparing one data set with the other leads to a better understanding of both the nature of the consolidated claims reported to the BIS and the way syndicated facilities are used. Moreover, they find that, under certain conditions and for certain classes of borrowers, the more timely syndicated credits can provide useful advance information about the consolidated data.
Uses of the BIS statistics
A final article looks at how the various statistical series released by the BIS can be used in a complementary fashion to shed light on many aspects of international banking and financial markets. The first set of BIS statistics - the locational banking statistics - were originally compiled because of their potential relevance to monetary stability. In particular, they enabled domestic monetary and credit aggregates to be extended to capture cross-border and foreign currency positions. While this function is still important, the motivation for the collection of subsequent series has gradually shifted towards a focus on financial stability. Key uses of the statistics include: monitoring stocks and flows of external debt, especially the risks associated with such debt; understanding the size and nature of creditor banks' country risk exposures; and measuring changes in the growth and structure of financial markets, the constellation of players active in markets and other facets of financial intermediation.