A sharp drop in cross-border lending in Q4 2011 could presage another liquidity crisis.
The Bank for International Settlements (BIS) reported cross-border loans fell by $799bn in the fourth quarter of 2011, led by broad declines in interbank lending in the periphery countries of eurozone.
“During the fourth quarter of 2011, BIS reporting banks recorded their largest decline in aggregate cross-border claims since the drop in the fourth quarter of 2008, which followed the collapse of Lehman Brothers,” the BIS said in its most recent quarterly report. “The latest decline was worldwide but largely driven by banks headquartered in the euro area facing pressures to reduce their leverage.”
This makes the coming Greek elections on June 17 all the more important because if there is even a hint that Greece leaves the eurozone – a Lehman-like trigger event – it will cause banks to further retrench and liquidity to dry up.
That these declines were happening around the time of Europe’s plan requiring 65 major banks to attain a 9 percent ratio of core Tier 1 capital to risk-weighted assets (by the end of this month) was not mentioned in the latest BIS report, but it has been on the BIS’ mind since at least last quarter. In a previous quarterly review, the BIS said fears over deleveraging had been growing and were being compounded by capitalization targets. The ECB’s long-term recapitalization operations (LTRO) at the beginning of the year worked to calm those fears initially; but the impact has since worn off.
The low number cross-border bank loans will likely continue as banks slash their balance sheets in order to comply with the coming capital and liqiidity rules. At a recent NeuGroup Tech20 Treasurers’ Peer Group meeting, bankers predicted further delevering of the bank sector by about $3-4 trillion over the next few years. This delevering and the chance of tighter credit has forced treasurers to line up other sources of funding, particularly in the eurozone where bank lending is more prevalent.
In its report, the BIS also said funding fell sharply in the fourth quarter of 2011. “For banks in the developed European economies, funding dropped $602 billion; for euro area banks, the decline was even larger at $681 billion,” the BIS said. “Among banks headquartered in the main European economies, the strongest declines in cross-border liabilities were in Spain ($81 billion – the largest drop in more than 17 years) and Italy ($68 billion – the largest in more than nine years),” the BIS said.
And banks shouldn’t expect any mercy from regulators. According the Financial Stability Board chief Mark Carney, the timeline for phasing in the Basel III capital requirements will not be changed just because of the turmoil in the eurozone.