BIS Quarterly Review, December 1996

The BIS is releasing today its regular quarterly commentary and statistics on recent developments in international banking and financial markets. Data available for the third quarter of 1996 show that currency stability in the latter part of the quarter, continuing low inflation and a high degree of global liquidity were supportive of international portfolio diversification, drawing an increasing number of new borrowers, issuing currencies and structures to the markets. As in previous quarters, the easy stance of monetary policy in the largest economies encouraged investors to seek higher-yielding cross-border alternatives, leading to a further narrowing of spreads relative to benchmarks. Indeed, there were increasing concerns that the prevailing mood of euphoria might leave markets somewhat exposed to a turnaround in monetary conditions in the major countries and to uncertainties relating to the practical implementation of European economic and monetary union (EMU).

Activity in global derivatives markets was mixed, with exchange-traded turnover levelling off while over-the-counter (OTC) business reportedly remained buoyant. Competition from OTC markets and stagnating business meant that exchanges throughout the world continued to face pressures to lower transaction costs and consolidate market share. These pressures were reinforced in Europe by the perceived need to establish a strong position ahead of the launch of the single European currency. However, this focus on EMU may have obscured the fact that more fundamental changes are currently shaping the industry which may reduce the relative importance of centralised trading systems in the future.

At the same time, detailed international banking data available for the second quarter of 1996 indirectly confirm preliminary evidence of ample liquidity, but also of growing competition from other institutions and instruments in wholesale transactions worldwide. Of note in this context is the increasing role of repos in the international market, contrasting with the tendency for traditional interbank lines to subside. Ample liquidity was also illustrated by the continuing brisk volume of lending to emerging economies in Asia. However, efforts by national authorities to reduce reliance on short-term capital, a reassessment of lenders' strategies and, in a few major instances, economic and/or political difficulties may eventually curb such lending.

Other features highlighted in the commentary include the issues raised by the development of electronic money, the potential impact of the prospective introduction of the euro on European exchange-traded derivatives markets and an assessment of the rapid expansion of the market for international asset-backed securities. When seen in connection with the growing acceptance of lower-rated or unrated issues in the international markets, the development of securitisation may add to existing concerns about liquidity, transparency and the pricing of risk in the international financial markets.