BIS Quarterly Review, September 1997
1 September 1997
BANK FOR INTERNATIONAL SETTLEMENTS, CH-4002 BASLE
The BIS is releasing today its regular quarterly commentary and statistics on recent "International Banking and Financial Market Developments". The report notes a continuing high level of activity in the second quarter of 1997, supported by an accommodating monetary stance in the major economies and subdued inflation. However, currency and country risk factors were given greater consideration in the wake of the financial turbulence observed in certain Eastern European and Asian countries, and also owing to the uncertainty surrounding the introduction of the single European currency.
Total announcements of international syndicated loans reached a new record. While a number of borrowers succeeded in obtaining terms that were considered to have tested the limits of lenders' tolerance, there was evidence of growing resistance among intermediaries to a further erosion of margins. Detailed international banking statistics for the first quarter also show a strong recovery in interbank business in the wake of renewed currency and bond market volatility, as well as a sharp swing from net borrowing to depositing by bank customers.
New issuance of international securities showed no signs of abating in the second quarter of 1997. Changes in market sentiment were reflected in a movement away from "core" continental European currencies and towards the US dollar, reflecting large interest rate differentials and renewed concerns with respect to the implementation of European economic and monetary union. These factors seem to have offset the unwinding of long dollar positions associated with the abrupt strengthening of the yen in May and the impact of financial turbulence in some emerging market countries. Moreover, while local economic fundamentals seem to have played a greater role in investment strategies, investors' ongoing search for higher yields prompted the market to test new classes of instruments and signatures. Finally, although renewed volatility in foreign exchange and equity markets since the beginning of the year reduced interest in certain structured products (such as dual-currency bonds), it revived demand for hedging instruments. Thus, in spite of a moderation in the growth of exchange-traded derivative contracts, partial data available in the United States suggest continuing strong demand for over-the-counter derivative products, with reports that end-users and smaller financial institutions are returning to derivatives markets.
There is now broad recognition that the rapid transformation of the global financial industry increases the potential for systemic problems to spread beyond national borders. A number of documents and statements addressing such issues were released in the period under review. Another important area of consideration was the impact of the forthcoming introduction of the single European currency, which raises numerous questions, including the determination of euro-based benchmark interest rates, adjustments in market practices and conventions and legal uncertainties. These issues are discussed in various sections of the commentary, which also includes an appendix dealing with the impact of the single European currency on competition in the international primary debt market.