Global credit continued to contract in the third quarter of 2013, driven by a sharp drop in lending between banks, especially in Europe, that is similar to the magnitude and length seen during the global financial crises, according to the Bank for International Settlements (BIS).
BIS, which tracks cross-border banking activity and is known as the central banks' bank, said global lending fell by $508 billion, to $28.5 trillion, with credit between banks down by $471 billion, or 2.8 percent, from the end of June to the end of September.
Lending between banks has been on the decline since 2011 and interbank positions fell by a total of $2.9 trillion, or 15 percent, between the end of September 2011 and September 2013.
This is comparable to a total fall of $3.1 trillion, or 14 percent, between end March 2008 and end-December 2009, said BIS based on preliminary data for the third quarter of 2013.
“The slowdown in cross-border lending in Q3 2013 coincided with a period of volatility in global financial markets,” said BIS, referring to the tightening in global financial conditions following the U.S. Federal Reserve’s statement in May that it was considering phasing out quantitative easing.
Although interbank lending shrank by a similar amount in the 2011-13 period and 2008-09, BIS said the decline in the last few years was concentrated in interbank activity in contrast to an overall contraction in credit during the global financial crises.
Another difference is how the decline in interbank lending in 2011-2013 was concentrated in the euro area whereas it dropped worldwide during the financial crises.
To illustrate this, BIS said the share of global credit extended to unrelated banks in the euro area fell to 36 percent at the end of September from 47 percent in early 2010.
But while interbank credit has been contracting, BIS said lending to non-bank borrowers – mainly non-bank financial institutions, governments and companies – fell by only $37 billion, or 0.3 percent in the third quarter. However, this was still the second consecutive quarterly decline in claims on non-bank borrowers, partially reversing a modest increase seen in 2012.
The decline was concentrated on non-bank borrowers in the United States and the euro area, with consolidated international claims on the U.S. public sector rising to $580 billion end-September from $534 billion end-June 2012.
In Europe, most of the drop in lending affected non-bank borrowers in Germany and France while the BIS took note of a stabilization of lending to Greece and Portugal in the third quarter as sharp reductions in recent years.
The pace of overall lending to borrowers in emerging markets from global banks also continued the slowdown seen in the second quarter, said BIS.
While total lending to emerging market borrowers rose by $57 billion in the third quarter, countries that were hit by financial market volatility from capital outflows and currency depreciation experienced a substantial drop in global credit.
Cross-border lending in the third quarter to India fell by $13 billion, by $7 billion to Brazil, by $5 billion to Turkey and by just under $2 billion to Thailand.
For Turkey, it was the first substantial drop in international lending in about two years, BIS said.
In contrast, credit extended to China rose by $62 billion, by $16 billion to Taiwan, by $6 billion to United Arab Emirates, and by $6 billion to Malaysia, the largest increase seen in three years, driven by lending to banks and the public sector.
While U.S. banks accounted for the largest drop in lending to emerging markets and European banks maintained their share, BIS said Asian banks in particular continued to expand their international presences in the Asian region.