BIS Quarterly Review, September 2012

During the period from mid-June to mid-September, the trajectory of global growth shifted downwards and concerns about the sustainability of euro area government debt and the future of the monetary union gained new traction. Against the backdrop of lower growth, many central banks loosened monetary policy, cutting interest rates or expanding unconventional policies. Some of the policy measures and announcements triggered large asset price reactions. More...

During the first quarter of 2012, the cross-border claims of BIS reporting banks expanded slightly, after a sharp fall in the previous quarter. Despite this increase, cross-border lending remained significantly below the levels recorded before the global financial crisis intensified in 2008. The latest expansion of cross-border claims was mainly driven by growth in lending to non-banks, which recorded the largest amount since early 2011. Cross-border interbank lending stabilised after the severe contraction in the previous quarter. Lending to banks in the euro area rose by the largest amount in four years, albeit with considerable differences across countries. More...

Excessive private sector debt can undermine economic stability. In this special feature, we propose the debt service ratio (DSR) as a measure of the financial constraints imposed by private sector indebtedness, and investigate its association with recessions and financial crises. We find that the DSR prior to conomic slumps is related to the size of the subsequent output losses. Moreover, the DSR provides a very accurate early warning signal of impending systemic banking crises at horizons of up to one to two years in advance. We conclude that the DSR can serve as a useful supplementary indicator for the build-up of vulnerabilities in the real economy and financial sector.

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Policy rates have on aggregate been below the levels implied by the Taylor rule for most of the period since the early 2000s in both advanced and emerging market economies. This finding suggests that monetary policy has probably been systematically accommodative for most of the past decade. The deviation may, however, in part also reflect lower levels of equilibrium real interest rates that might introduce an upward bias in the traditional Taylor rule.

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The 2007-09 global financial crisis disrupted the provision of credit in Latin America less than previous crises. We identify key initial macroeconomic conditions that contributed to the higher resilience of real credit in Latin America during this episode. These relate to economies' capacity to withstand an external financial shock and the scope for countercyclical macroeconomic policies. We also show that in most cases current macroeconomic fundamentals have deteriorated relative to those in 2007.

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In response to the financial crisis, the authorities in a number of countries used public funds to recapitalise their banks. Did a reduction of risk in banks' lending follow these rescue operations? To help answer this question, we analyse the balance sheets and syndicated loan signings of 87 large internationally active banks. As loan signing volumes started diminishing across the board in 2009, our evidence shows that rescued banks did not reduce the risk of their new lending significantly more than non-rescued banks. Our results are relevant for the ongoing assessment of public bank rescue programmes.

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