BIS Quarterly Review, September 2013

Announcements in May that the Federal Reserve envisaged phasing out quantitative easing reverberated through global financial markets. They triggered a surge in benchmark bond yields that spilled over across asset classes and regions. Equity prices in both advanced and emerging market economies fell sharply, as did a number of emerging market currencies. The downward pressure on prices abated in early July when the Federal Reserve, the ECB and the Bank of England reassured markets that monetary policy would remain accommodative until the domestic recovery was on a solid footing. In advanced economies, equities quickly recovered and yields, despite their rise, remained low by historical standards. This led to a continuing squeeze of credit spreads and increased issuance of riskier bonds, a phenomenon reminiscent of the exuberance prior to the global financial crisis. More...

During the first quarter of 2013, the cross-border claims of BIS reporting banks remained broadly unchanged, reflecting two diverging trends. First, lower interbank lending, especially to banks in the euro area, was largely offset by higher claims on non-banks. Second, lower lending to advanced economies contrasted with higher claims on borrowers in emerging market economies, especially in China, Brazil and Russia. As a result, the share of interbank credit to emerging market economies reached its highest level on record. This underpins a longer-term trend: especially in emerging Asia and Latin America, countries generally have been affected less by the global financial crisis. More...

Spurred by stronger regulatory requirements, banks have steadily increased their capital ratios since the financial crisis. For a sample of 82 large global banks from advanced and emerging economies, retained earnings accounted for the bulk of the increase in risk-weighted capital ratios over the period 2009-12, with reductions in risk weights playing a lesser role. On average, banks continued to expand their lending, though lending growth was slower among advanced economy banks from Europe. Lower dividend payouts and wider lending spreads contributed to banks' ability to use retained earnings to build capital. Banks that came out of the crisis with higher capital ratios and stronger profitability were able to expand lending more.

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Contingent convertible capital instruments (CoCos) are hybrid capital securities that absorb losses when the capital of the issuing bank falls below a certain level. In this article, we go over the structure of CoCos, trace the evolution of their issuance, and examine their pricing in primary and secondary markets. CoCo issuance is primarily driven by their potential to satisfy regulatory capital requirements. The bulk of the demand for CoCos has come from small investors, while institutional investors have been relatively restrained so far. The spreads of CoCos over other subordinated debt greatly depend on their two main design characteristics - the trigger level and the loss absorption mechanism. CoCo spreads are more correlated with the spreads of other subordinated debt than with CDS spreads and equity prices.

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Policy rates in advanced economies are at record lows and central banks have resorted to unconventional policy tools, but there are concerns that the low policy rates have not been transmitted to lending rates for households and non-financial firms. In this special feature, we investigate whether the pass-through of monetary policy to rates on bank loans to nonfinancial firms has been impaired in the aftermath of the Great Recession. Our results suggest that the difference between lending rates to the non-financial corporate sector and policy rates is currently close to the pre-crisis level in the United States and Germany, but remains higher in peripheral euro area countries.

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Increasing demand for collateral assets in the aftermath of the financial crisis has raised concerns about a shortage of high-quality assets (HQA). Drawing on a recent report by the Committee on the Global Financial System, we argue that such concerns seem unjustified. In aggregate, the increase in the supply of HQA appears sufficient to meet the additional demand arising from both market forces and regulatory changes. But given the uneven distribution of HQA among market participants, higher demand is likely to trigger market responses that could themselves generate risks for the financial system and thus warrant further monitoring.

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A new database for policy actions on housing markets covers 60 economies worldwide from January 1990 (or earliest date available) to June 2012. Policy actions are summarised by type, region, timing and direction. We suggest how the database might help policymakers and researchers to review what types of policy action were taken in other economies and to assess their effectiveness.

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