March 2012 Quarterly Review discusses global market repercussions of euro area sovereign debt crisis
12 March 2012
The BIS Quarterly Review for March 2012, released today, discusses global impact of European bank deleveraging. The March issue also provides highlights from the latest BIS data on international banking and financial activity.
In addition, it features three articles (more detailed abstracts follow):
- The impact of Federal Reserve asset purchase programmes: another twist
- FX volume during the financial crisis and now
- Bank stock returns, leverage and the business cycle
Following special policy measures introduced by central banks around the beginning of December, European banks' funding conditions improved. Previously, many banks had been unable to raise funds in the unsecured senior bond market, and the cost of unsecured money market funding had risen to levels previously exceeded only during the 2008 crisis. Dollar funding had become especially expensive. Two three-year lending operations (LTRO) by the ECB and a wider set of collateral than was previously eligible relieved much of the stress. Furthermore, the cost of swapping euros into dollars fell in December, as central banks reduced the costs of their international swap lines. Short-term borrowing costs then declined and unsecured bond issuance revived.
At their peak in late 2011, funding strains fuelled fears that European banks would be forced to sell assets and reduce lending, thereby weakening real economic activity. New regulatory measures requiring banks to meet more stringent capital standards by mid-2012 added to these fears. European banks did sell certain assets and cut some types of lending, notably those denominated in dollars and those attracting higher risk weights. But, as other lenders stepped in, there was little evidence of any major impact on either asset prices or lending volumes.
The aggregate cross-border claims of BIS reporting banks expanded slightly during the third quarter of 2011. The overall rise was entirely accounted for by an increase in interbank claims. By contrast, claims on non-banks recorded their largest decline since the fourth quarter of 2009.
Despite the overall increase in cross-border claims during the period, there were several notable signs of a slowdown in international banking activity. First, cross-border lending to non-banks in all major developed economies (with the exception of Japan) contracted or remained virtually unchanged. Second, internationally active banks reported sharp reductions in their foreign claims on residents of the euro area economies experiencing fiscal difficulties. And last but not least, cross-border claims on emerging market economies declined for the first time in 10 quarters. Internationally active banks reduced lending to the residents of emerging Europe and Africa and the Middle East. The growth rate of cross-border claims on Asia-Pacific and Latin America and the Caribbean remained positive but well below that observed during the preceding two years.
This article examines the effectiveness of recent Federal Reserve asset purchase programmes. Jack Meaning (University of Kent) and Feng Zhu (BIS) estimate that, once they control for factors such as the size and the maturity profile of Treasury issuance, the new Maturity Extension Program (MEP) could have an impact comparable to that of the Large-Scale Asset Purchases (LSAP). The effectiveness of such programmes is limited by Treasury debt management policy. Indeed, the Treasury's extension of the average maturity of outstanding debt during LSAP is likely to have pushed up the 10-year bond yield significantly.
This special feature looks at trading activity in the foreign exchange (FX) market. By using information from surveys conducted by FX committees around the world as well as settlement data from CLS Bank, Morten Bech (BIS) analyses how global FX market activity was affected by the recent financial crisis. He shows that FX activity continued to grow during the first year of the crisis, but experienced a sharp drop after the Lehman bankruptcy, from which it recovered only slowly. He estimates that global FX activity was around $4.7 trillion a day on average in October 2011, compared with $4.0 trillion reported by the latest triennial central bank survey of foreign exchange activity conducted in April 2010.
BIS economists Jing Yang and Kostas Tsatsaronis show that the returns on bank stocks rise and fall with the business cycle, making bank equity financing cheaper in booms and dearer in recessions. This finding provides support for the use of prudential tools that give banks incentives to build capital buffers in good times, when the cost of equity is lower. The authors go on to demonstrate that banks with higher capital ratios, regardless of the state of the business cycle, experience lower funding costs.