BIS Quarterly Review, May 1998

BIS Quarterly Review  | 
02 June 1998

Introduction

The BIS is releasing today its regular quarterly commentary and statistics on recent developments in international banking and financial markets. Although the Asian crisis had important repercussions on international financial markets in the first quarter of 1998, it did not seriously affect their overall buoyancy. The flight to government securities maintained bond yields around historical lows, equity indices in Europe and North America reached new records, while, with the exception of the dollar/yen parity, the foreign exchange market returned to stability. Finally, the recovery of most Asian currencies and the general decline in the risk premia attached to the debt of emerging market countries showed that the integration of such economies into the global financial system was not fundamentally called into question.

Against this background, primary market issuance of international debt securities rebounded strongly, reaching an all-time quarterly record. Aside from the low level of nominal interest rates, the main underlying forces were deferred issuance from the fourth quarter, the rapid emergence of a market for euro-denominated debt and ongoing diversification of funding sources and continuing restructuring by financial intermediaries. Nevertheless, greater awareness of liquidity and credit risks shifted investor interest away from lower-rated signatures and towards the large issues of prime borrowers.

In the international banking market, concerns stemming from the financial difficulties experienced by Asian entities and the withdrawal of certain banking groups were responsible for the sharply reduced volume of syndicated credit facilities in the first quarter of the year. Meanwhile, the comprehensive BIS banking statistics now available for the fourth quarter of 1997 underline the dramatic adjustments which took place at the height of the Asian turmoil. Whereas commercial banks withdrew massively from the Asian region during this period, lending to Latin America continued at a steady pace. The accommodative monetary stance in the major countries appears to have been instrumental in containing contagion outside Asia. At the same time, international interbank business reached an unprecedented level. An ample supply of liquidity helped to accommodate an abrupt adjustment in international investment and borrowing positions and enabled Japanese banks to surmount their funding difficulties.

In derivatives markets, available data show that activity in the first quarter was well sustained. While the Asian crisis generated some business in the early part of the period, there appears to have been greater demand for hedging instruments thereafter, despite the overall absence of abrupt market swings. Competition remained intense, with the growing importance of electronic trading and the formation of new alliances between exchanges challenging the monopoly of established market-places in certain product groups and accentuating the reconfiguration of the industry.

The Asian crisis gave impetus to a number of initiatives bearing on financial stability as well as to proposals to adapt the architecture of the international financial system. At the same time, the accelerating pace of consolidation within the world financial industry added urgency to prior initiatives aimed at addressing the challenges created by globalisation. Lastly, financial institutions continued their preparations for the transition to the single European currency and the next millennium.