Credit to non-bank financial firms continues to grow-BIS

     The rapid growth of credit to non-bank financial institutions (NBFIs) since the global financial crises continued in the fourth quarter of 2018 when total worldwide cross-border bank claims grew only 1.0 percent, according to the Bank for International Settlements (BIS).
      After growing in 2016, global cross-border lending was largely steady in the last 2 years as higher lending to borrowers from advanced economies in 2018 was offset by a decline in lending to borrowers from emerging and developing economies, and offshore centers, BIS said in its latest release of international banking statistics for the end of 2018.
      Total global cross-border claims grew by $134 billion, or 1.0 percent year-on-year, during the fourth quarter of last year to an outstanding amount of $29 trillion, propelled by an 8 percent rise in claims on NBFIs, short-hand for an vast number of firms that provide financial services but do not have a full banking license and do not accept customer deposits.
      One of the effects of the global financial crises was that banking regulators tightened their supervision of major banks, forcing them to retreat from some riskier financing operations.
     Into this breach, stepped non-bank financial firms, such as insurance companies, specialized lenders, or institutional investors such as pension funds and brokerage firms.
      Between end-2015 and end-2018 cross-border claims on NBFIs grew by an annual pace of 8 percent in stark contrast to 0 percent growth in lending to banks and only 2 percent growth in lending to non-financial borrowers.
     Another illustration of the shrinking role of banks is that cross-border claims on banks fell by an annual 1 percent by end-2018 while claims on non-banks was up by nearly 5 percent, data from BIS, know as the central banks' bank, showed.
    The bulk of credit to NBFIs, nearly 80 percent, is focused on a small number of jurisdictions, with nearly half of the total global stock of $6 trillion in claims against borrowers in the US (24 percent), the euro area (23 percent), the Cayman Islands (18 percent) and the UK (14 percent).
      After rising sharply in 2016 and 2017, lending to emerging and developing economies slowed last year, especially to borrowers in developing Europe, while lending to Latin American revived.
     Overall claims on emerging market and developing economies slowed from 9 percent growth at the end of 2017 to 3 percent by the end of 2018, with roughly half of the $30 billion in claims in the fourth quarter going to borrowers in developing Asia and Pacific.
     Claims on Asia and Pacific rose $15 billion in the fourth quarter, bringing annual growth to 5 percent, with claims on China up $9 billion, the Philippines by $4 billion, Indonesia by $3 billion and Thailand by $2 billion.
     In contrast, cross-border lending to Taiwan fell by $11 billion, Swiss-based BIS said.

     Click here to read BIS international banking statistics at end-December 2018

     www.CentralBankNews.info


   

Kenya holds rate, concerned over impact of rate cap

    Kenya's central bank left its Central Bank Rate (CBRF) at 10 percent, as expected, saying "overall inflation is expected to remain outside the Government target range in the near term due to the elevated food prices, even as demand pressures remain subdued."
    The Central Bank of Kenya (CBK), which cut its rate by 150 basis points last year, also said it remains concerned about current uncertainties, including the impact of the government-imposed cap on lending and deposit rates by commercial banks on the effectiveness of monetary policy.
    A preliminary analysis, which included a survey of commercial bank officers, showed the rate cap, which went into effect last September, would lead to an increase in demand for credit but actual credit granted would remain constant due to the tighter credit standards.
    Also, a market perception survey from this month showed private sector respondents expect a decline of growth this year due to the current drought and a slowdown in private sector credit growth.
    While growth of private sector credit has stabilized at 4.0 percent, the share of loans to corporates has risen relative to business and personal loans and the average maturity of loans has shifted to short-term lending.
     Loan approvals have declined by 6 percent between December and February this year while lending to micro, small and medium enterprises has declined in value due to reduced lending by large and medium banks, the CBK said.
    It added that banks were still adjusting their business models to ensure they remain competitive in the new environment in which lending and deposit rates have been capped at 4 percentage points above the CBK's key rate.
    Kenya's inflation rate rose to 9.04 percent in February from 7.0 percent in January, almost entirely due to higher food prices, with food inflation up to 16.5 percent from 12.5 percent due to drought.
    In contrast to 2014 and 2015, Kenya's shilling has remained stable in 2016 and this year, supported by a narrower current account deficit and resilient inflows from horticulture, tourism and remittances.
    The shilling was trading at 102.8 to the U.S. dollar, steady from 102.2 at the start of the year, with the central bank's foreign exchange reserves up to US$7.762 billion from $6.963 billion at the end of January for import cover of 5.1 months.
    The rise in reserves was largely to due inflows from government loans, which together with the $1.5 billion arrangement with the International Monetary Fund provides an "adequate" buffer against short-term economic shocks, the CBK said.

Politics reassert supremacy over financial markets - BIS

     Politics reasserted their supremacy over financial markets in recent months as investors began to discriminate across asset classes, regions and sectors in contrast to the heard behavior in recent years that was characterized by consistent waves of risk-on and risk-off buying and selling, according to the Bank for International Settlements (BIS).
     This break with the past was another sign that financial markets' close dependence of central banks' utterances and actions has been weakened, at least temporarily, according to Claudio Borio, head of BIS' Monetary and Economic Department.
    In its March 2017 Quarterly Review, BIS also found that U.S. dollar credit to non-bank borrowers outside the United States grew by $420 billion between the end of the first quarter and the end of the third quarter of 2016, with the total outstanding amount end-September now at $10.5 trillion when new data from banks in China and Russia are included.

    Click to read the BIS Quarterly Review, March 2017

    Following are remarks by Borio and Hyun Song Shin, economic adviser and head of research at BIS, known as the central banks' bank, in connection with the release of the review:

BIS Quarterly Review: Markets pass Brexit test

    Markets recovered quickly from the shock of the Brexit vote. Central banks have exerted a calming influence and have eased further in recent months as dissonant markets raised questions about the outlook and the pricing of underlying risks, according to the latest quarterly review from the Bank for International Settlements (BIS).

    “There has been a distinctly mixed feel to the recent rally – more stick than carrot, more push than pull, more frustration than joy. This explains the nagging question of whether market prices fully reflect the risks ahead,” said Claudio Borio, head of BIS's Monetary and Economic Department. 
    “Doubts about valuations seem to have taken hold in recent days. Only time will fully tell,” Borio added in a statement issued by the Swiss-based BIS, known as the central banks' bank.
    Here is the link to the latest BIS Quarterly Review: www.bis.org/publ/qtrpdf/r_qt1609.htm 
    BIS also released following remarks by Borio and Hyun Song Shin, economic adviser and head of research:

Stronger USD strains global financial markets-BIS's Shin

    (Following press release was provided by the Bank for International Settlements)

    A stronger US dollar is putting strains on global financial markets and the banking system, leading to tensions not only in emerging market economies, but in “safe haven” currencies such as the Japanese yen and the Swiss franc, BIS Economic Adviser and Head of Research Hyun Song Shin said on Wednesday.

    Speaking at a World Bank conference in Washington DC, Mr Shin said market strains were visible not only in emerging economies but in advanced economy currency markets. One intriguing development has been the breakdown of a rule which has traditionally been seen as a yardstick for well functioning markets. The relationship, known as covered interest parity, ensures that interest rates implicit in currency markets are consistent with those in money markets. That relationship broke down during the stresses of the financial crisis, and deviations have reappeared in the last 18 months as the dollar has strengthened. The size of the deviations has fluctuated in step with a stronger dollar.

    “The key takeaway is that a stronger dollar is associated with more severe market anomalies,” Mr Shin said at the World Bank’s “The State of Economics, The State of the World” conference.

    “The amazing thing is that this is true not only for emerging markets, but also for ‘safe haven’ currencies such as the yen and Swiss franc.”

    The breakdown reflects, in part, the tensions created by the divergence of monetary policy among major central banks and the withdrawal of easy dollar credit conditions that prevailed after the financial crisis, all in the context of the dollar’s special role in the global financial system. As the dollar has strengthened, investors have found it harder to roll over hedges put it place when the US currency was depreciating and investors were borrowing more in dollars to take advantage of low interest rates. BIS global liquidity indicators show that non-bank borrowers outside the United States owed $9.7 trillion; a third of that, or $3.3 trillion, was owed by borrowers in emerging markets.

    BIS data show that the euro and the yen may be starting to follow in the footsteps of the dollar: lending in those currencies outside the currency areas has increased as they have depreciated.

    “As the euro and yen join the dollar in the ranks of international funding currencies, we are left with a dilemma. With each successive wave of monetary easing after the financial crisis, greater demands are being made on international capital markets,” Mr Shin said.

    Shin's speech, "Global liquidity and procyclicality," is available at www.bis.org

    www.CentralBankNews.info

Philippines to adopt rate corridor in June, key rate to fall

    The central bank of the Philippines will on June 3 switch to a new system of monetary operations - an Interest Rate Corridor (IRC) - aimed at improving the transmission of policy decisions to money market rates and financial markets.
    "The shift to the IRC system does not represent a change in the BSP's stance of monetary policy," Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco said, adding the move was "primarily operational in nature and will not materially affect prevailing monetary policy settings upon implementation."
   The IRC will comprise following instruments:
    An overnight lending facility (OLF) of 3.50 percent that replaces the repurchase (RP) facility. This amounts to a reduction in the current upper bound corridor from the current reverse repurchase rate of 6.0 percent. OLF will form the upper bound of the rate corridor.
    An overnight reverse repurchase rate (RRP) of 3.0 percent. The RRP rate will remain the BSP's policy rate but will cut from the current level of 4.0 percent. RRP will be set in the middle of the rate corridor and will become a pure overnight facility
    An overnight deposit facility (ODF) that replaces the current Special Deposit Account (SDA) window but the rate will remain at 2.5 percent. This forms the lower bound of the rate corridor.
    In addition, BSP will launch a term deposit auction facility (TDF) that will serve as the main tool for absorbing liquidity.
    "By helping ensure that money market rates move within a reasonably close range around the BSP's policy rate, the IRC helps to enhance the link between the stance of BSP monetary policy and financial markets and, thereby, impact the real economy," Tetangco said.
    The new IRC system is expected to promote greater interbank activity by encouraging banks to use day-to-day liquidity management more actively as the operations of the central bank have a larger influence on short-term liquidity, the governor said.

Uneasy calm in markets but tensions to be resolved-BIS

    After last summer's turmoil in financial markets, an uneasy calm has reigned but this behaviour belies weak underlying economic conditions and at some point this tension will have to be resolved, cautions Claudio Borio of the Swiss-based Bank for International Settlements (BIS).
    "Markets can remain calm for much longer than we think. Until they no longer can," said Borio, head of BIS' Monetary and Economic Department in a briefing to media in connection with the publication of the institution's latest quarterly review.
    During the recent calm in financial markets ahead of an expected shift in U.S. monetary policy, stock markets have rallied, commodity prices have bounced back before weakening again, emerging market currencies have stabilized, credit spreads have narrowed and volatilities have declined.
   But Borio warned that underlying conditions have not changed: The short-term outlook for emerging market economies remains weak and financial vulnerabilities have not gone away. The stock of U.S. dollar-denominated of over $3 trillion remains and has grown in domestic currency terms in line with the appreciation of the dollar, weighting on financial conditions and balance sheets.
   In addition, there is a large stock of domestic debt, especially corporate but also household, that has surged while credit and property price booms appear to be losing steam.
    Meanwhile, U.S. swap rates are low despite growing credit risks and overall interest rates remain exceptionally low as the Federal Reserve appears to be nearing lift-off, with one-third of euro area sovereign paper trading at negative yields, a new peak.
    "Monetary policy divergence loomed ahead, with potentially significant implications for exchange rates and market adjustments," said Borio, noting it is hardly a surprise that financial markets remain unusually sensitive to central banks' every word and deed under such extraordinary conditions.
    Click here for the BIS Quarterly Review for December 2015.

   
 

Global shadow banking grows by $5 trillion in 2012 - FSB

    Shadow banking assets grew by an estimated $5 trillion in 2012 to a total of $71 trillion, mainly due to the general rise in financial markets, according to the Financial Stability Board (FSB).
    In its third annual survey of the world of shadow banking, which has been expanded to include hedge funds along with insurance companies, pension funds and public financial institutions, the FSB said the rise last year measured on a broad basis amounted to 8.1 percent, up from an 0.6 percent rise in 2011.
    In general, shadow banking - or non-bank financial intermediaries - forms a large proportion of financial systems in advanced economies and was largely stable last year but the FSB said shadow banking had grown strongly in emerging markets, up by over 20 percent, though from a small base.
    In China, for example, shadow banking assets grew by 42 percent in 2012 while in Spain they shrunk by 11 percent, the FSB said.
    The rise in shadow banking assets last year is in contrast with the banking system where assets were relatively stable as the effect of higher asset values was counterbalanced by shrinking balance sheets.
    Globally, the assets of the shadow banking system represents an average of some 24 precent of total financial assets, about half of banking system assets and 117 percent of the Gross Domestic Product of the 25 jurisdictions and the euro area as a whole that were monitored by the FSB.

Portfolio flows fuel global liquidity - Jackson Hole paper

    (Following is the third of four reports based on papers presented at the 2013 Jackson Hole Economic Policy Symposium, hosted by the Federal Reserve Bank of Kansas City. The reports will be published as soon as the authors present their papers to the symposium.)

    The sharp movement in emerging markets’ exchange rates in recent months is partly because the flow of money from investors’ portfolios have taken on the character of global liquidity, according to a paper delivered at the Jackson Hole symposium.

    The rise of global banking has brought the world closer to being a single financial system, fueled by cross border liquidity that is created by private financial entities, such as major banks and investment funds, and central banks.

    Traditionally, the direction of global capital flows was mainly driven by differences in expected returns and this in turn was based on a mix of growth and monetary policy expectations, according to Jean-Pierre Landau, former deputy governor of the Bank of France, in his paper “Global Liquidity: Public and Private.”

    In the decade prior to the global financial crises, the flow of wholesale banking capital acted as the artery of global financial markets. A large part of cross-border funding took place between the head office and foreign offices of a bank – almost like an internal centralized funding model in which available funds are deployed globally through centralized allocation decisions.

BIS: higher interest rates may stress financial system

    A sharp rise in interest rates from major central banks’ exit from extraordinary accommodative policy could raise the risk of stress in the financial system as banks hold large portfolios of long-dated fixed income assets that will fall in value, warned the Bank for International Settlements (BIS).
    In its annual report, published as financial market shudder from the Federal Reserve’s decision to start cutting back on asset purchases later this year, BIS warned of the challenges facing central banks in striking the right balance between a premature exit and the risks from delaying an exit further.
    “These considerations highlight the possibility that disruptive market dynamics could even materialize as soon as central banks signal that an exit is imminent,” said Swiss-based BIS, as if it had been looking into a crystal ball at last week's plunge in global bond and stock markets.
    The annual report went to the printers on June 14, the week before the Federal Reserve on June 19 laid out its timetable for pulling back from quantitative easing, underlining the uncanny ability of BIS to spot and anticipate financial events.
    In its 2006 annual report – a full 12 months before the first signs of a global liquidity shortages - it warned of “financial market turmoil or a long period of relatively slower global growth” from the unwinding of financial imbalances.  And in 2008, a few months before the bankruptcy of Lehman Bros., BIS predicted a “more protracted global downturn that the consensus view seems to expect.”

Bank regulators propose new securitisation framework

    Global banking regulators have proposed a new framework for banks to calculate potential losses on asset-back securities that aims to reduce their automatic reliance on credit ratings agencies whose  assumptions proved far too optimistic and contributed to the severity of the global financial crises.
    The Basel Committee on Banking Supervision said the proposal - "Revisions to the Basel Securitisation Framework - did not include a specific text but was a revision to the framework. The Committee is now asking for industry feedback and will carry out an impact study of the proposals before deciding on the "definite way forward."
    The popularity of securitised debt, such as mortgage-backed securities, exploded in the last decade but the financial crises revealed that banks and ratings agencies severely underestimated the expected loss in underlying exposures and the concentration of systemic risk. They were also far too optimistic in their view of the benefits to banks of such diversification.
    As the crises started to unfold in 2007, it became clear that capital requirements assigned to both highly-rated and low-rated securitised products were too low. So when ratings agencies downgraded the products as credit quality deteriorated, banks suddenly had to come up with additional regulatory capital and often sought to get rid of their securitisation exposure, further depressing their value.

Global supervisors aim to limit risks from shadow banking

    Shadow banking, the huge but unregulated frontier of the financial world, will soon be subject to bank-like supervision as global policymakers start to hammer out rules that reduce the chances of future crises yet still allow new creative financing models to emerge.
    The Financial Stability Board (FSB), which monitors and coordinates global financial regulation, has proposed an ambitious policy framework and recommendations that it believes are needed to “mitigate the potential systemic risks associated with shadow banking,” and expects to issue final proposals in September 2013 following industry comment.
    The term shadow banking describes the murky world of hedge funds, money market funds and investment vehicles that are often used by major banks to carry out sophisticated financial transactions.
    As these shadow legal entities do not take customer deposits, they don’t need banking licenses and are not subject to supervision.
    The 2008 global financial crises exposed the threat from shadow banking to financial stability, not just because of its vast size but because it was completely interwoven with the supervised banking system; a regulated banking system relied on unregulated entities with a razor-thin capital base.
    Global political leaders, meeting as the Group of 20, decided that the risks from shadow banking – about half the size of the normal banking system - posed too great a threat and asked the FSB to come up with policy recommendations.

Banks progress, but still short of capital under Basel III

    Major banks have made major progress in thickening their capital cushion to prepare for the new tougher Basel III rules but they were still short of up to 374 billion euros by the end of 2011.
    In order for all the 102 largest banks to reach a 4.5 percent minimum level of capital to risk-weighted assets, an additional 11.9 billion euros is needed, the Basel Committee on Banking Supervision said in its latest study of the impact of the new, more stringent rules.
    To reach Basel III's target of a 7.0 percent capital ratio, which includes a surcharge for globally systemic important banks and a capital conservation buffer, the largest banks have to put aside an additional 374.1 billion euros, more than their combined 2011 net profits of 356 billion euros.
    In comparison to the previous study from April, the Basel Committee of global bank regulators found that largest banks had reduced the total shortfall by 111.5 billion euros.

Rescued banks engaged in riskier lending - BIS paper

    Banks that received public funds during the 2008 financial crises were involved in riskier lending than banks that did not need a government bailout, according to a working paper published by the Bank for International Settlements (BIS).

    The paper, by economists Michael Brei and Blaise Gadanecz, examined the loan risk of 87 banks - 40 of which received public funds – and found that before the crisis, the rescued institutions had a significantly higher share of leveraged, and thus riskier, loans  in their portfolios of syndicated loan signings than their non-rescued peers.

     While the finding is hardly surprising, the authors found evidence that those banks that were rescued took on the risk mainly in their home markets,  “possibly reflecting their expectation that rescues are more likely to occur at home, where they may count as more systemic or wield more market power than abroad,” the paper said.

Bank supervisors propose how to gauge intraday liquidity

    Banks must have enough liquid funds to make payments during extreme stress in financial markets and proposed indicators will allow supervisors to monitor banks' ability to live up to their obligations.

    The Basel III banking regulations, created in the aftermath of the 2008 financial crises, raised both the quality and quantity of banks’ capital. The reforms also included minimum standards for short-term liquidity but not intraday liquidity.

     Intraday liquidity is money that can be accessed real time, such as a bank’s reserves and collateral at a central bank and uncommitted credit lines.

    During the early phase of the financial crises in 2007, many banks ran into difficulties because they didn’t manage their liquidity properly, despite adequate capital, driving home the importance of liquidity to the proper functioning of financial markets and banks. A rapid switch in market conditions showed how quickly liquidity can evaporate.

UK banks should boost capital during EU crises - BOE

    UK banks should continue to limit dividends and executive compensation and instead use the funds to boost their capital cushion to absorb any possible losses during the current risk to financial stability from the crises in the euro area, the governor of the Bank of England said.

    In his prepared remarks for a press conference, Mervyn King said the cushion that banks should build up may even be larger than the current planned increase toward meeting the tougher Basel III capital requirements.

    “The Committee continues to believe that there is a need for banks temporarily to raise their levels of capital, in view of the exceptional threats they currently face,” King said presenting the bank’s Financial Stability Report.

Too much finance can suffocate a country - BIS economist

    Like cancer, a nation’s financial sector can grow so large that it starts to devour its host, according to the chief economist of the respected Bank for International Settlements (BIS).

    “Beyond a certain point, financial development is bad for an economy. Instead of supplying the oxygen that the real economy needs for healthy growth, it sucks the air out of the system and starts to slowly suffocate it,” said Stephen Cecchetti, chief economic adviser to the BIS, known as the central bankers’ bank.

    “Households and firms end up with too much debt. And valuable resources are wasted.”

FSB: Emerging markets fear for credit under new rules

    Developing nations fear that credit and liquidity in their markets will dry up as major international banks struggle to meet tougher global rules, the Financial Stability Board said.

    In a report on the effect on emerging markets from Group of 20-led regulatory reforms, the FSB said some developing economies were worried that higher capital requirements levied on major international banks could have unintended consequences, both on their own financial markets and domestic banks.

    The FSB, which carried out a study with the International Monetary Fund (IMF) and World Bank, also found that emerging economies were concerned over a "home bias" in the design or implementation of the reforms that would have adverse effects on their own financial institutions.

    Click to read: Identifying the Effects of Regulatory Reforms on Emerging Market and Developing Economies: A Review of Potential Unintended Consequences.

    www.CentralBankNews.info

The History of the Personal Check [Infographic]

The below infographic details the history of the personal check (also known as cheque), an instrument which has been a pivotal component of historical and modern banking, and the payment system.  While checks have become marginalized and even phased out in some countries, in preference of electronic payment systems, checks and related financial instruments (e.g. letters of credit, bills of exchange, bearer bonds, etc) remain an important tool in financial transactions and arrangements.  Central banks often have oversight of the payment system, particularly where the central bank has banking system regulatory responsibilities, and may play a role in regulating the form and function of checks, and the clearing and processing of check based payments.