SUNS 4335 Tuesday 1 December 1998
FINANCE: BANKS CONTINUE RETREAT FROM ASIA AND EMERGING MARKETS
Geneva, 30 Nov (Chakravarthi Raghavan) -- International bank lending to Asia contracted by $51.4 billion in the first half of 1998, following up on a $29.4 billion withdrawal in the second half of 1997 (when the financial crisis first hit Asia), the latest data by the Basle-based Bank of International Settlements disclosed.
Figures for the third quarter (ending September) show that liquidity in international debt markets have virtually dried up, dampening overall loan syndication activity, says BIS. And detailed data for the second quarter of 1998 show that BIS reporting banks substantially withdrew from emerging markets and stepped up purchases of marketable paper in the G-10 countries.
Commercial banks have now become important players in the securities markets worldwide. To the extent that securities holdings are recorded in the trading books of banks, this tendency for internationally active banks to securities their claims and to rely more heavily on issues of securities for their funding could have important implications for global financial intermediation.
"Some observers," BIS adds, "have expressed concerns that extreme aversion of investors to risk and an associated drying-up of financing through capital markets could have a negative impact on the real economy."
Bank lending to the developing countries as a whole was a negative $31.6 billion in the first half of 1998, and lending by BIS area banks to outside the reporting area was also negative $9.3 billion.
For a while in 1998, the retreat of international banks from Asia was partly offset by lending to Latin America, bulk of it to Brazil. But this stopped after the Russian moratorium, and accentuated by the
collapse of the Long-Term Capital Management Fund. Fears of a systemic disruption,BIS notes, prompted the US monetary authorities to sponsor the LTCM's recapitalization and to the decision to lower official interest rates.
However, reports the BIS, detailed data now available for the second quarter of 1998 show that while there has been a further reduction in banks' exposure to outside area countries, international claims (lending to entities within and outside together) of BIS reporting banks showed a rebound - from a six billion dollars in the first quarter to $236.7 billion in the second - a ten percent increase on
annual basis.
In an overview of both international banking and financial market developments, the BIS that the turmoil which began in the developing world assumed global dimensions in the third quarter of 1998. The Russian moratorium declared on 17 August, together with the banking problems in Asia triggered a massive flight towards safety and a broad tiering of spreads according to credit quality.
There has been a rush to liquidity, illustrated by the sharp widening of liquidity premia between benchmarks and other government debt instruments. The unwinding of large and highly leveraged exposures added to price volatility.
The developments in the international securities markets during the period illustrated the investors growing aversion to risk, notes the BIS. Demand has dried up for all but the most highly rated names, while primary market activity contracted for the second consecutive quarter.
Activity in the derivatives markets showed a preference for the safety of exchange trade transactions, while counter-party risk concerns hampered the business in swaps and credit-related products.
The shifts in market liquidity from OTC to exchange-traded interest rate instruments accentuated demand and supply imbalances in underlying markets, and this was particularly evident in the case of the German government bond future markets.
The BIS points out that the Russian moratorium decision could be seen as part of a series of mutually reinforcing events which have highlighted a number of deficiencies in the world financial system.
For e.g. "the massive unwinding of leveraged positions has served as a painful reminder that linkages between markets have become highly complex and opaque."
Recent events have also "underscored the inadequacy of models" in coping with abrupt shifts in market liquidity and has provided another illustration of the "increasing convergence in behaviour of banks and other categories of market participants." And in view of the globalization of markets, significant shortcomings in national and sectoral regulatory oversights are now broadly acknowledged.
The Basle Committee on Banking Supervision has announced a wide-ranging review of the Capital Accord to take account of evolving financial practices. But finding the appropriate balance between market discipline, regulatory standards and supervisory practices in a way that enhances effectiveness of market disciplines and minimizing moral hazard will be a challenging task, BIS adds.