International banks sharply increased their cross-border lending during the first three months of 2014, particularly to China, a report Sunday showed, providing further evidence that the aftershocks of the global financial crisis and subsequent euro-debt crisis have receded.
But the quarterly report from the Bank for International Settlements, a consortium of global central banks based in Switzerland, warned that the present calm of low financial-market volatility—despite some short-lived volatility early in the summer—and high levels of risk-taking could create vulnerabilities down the road, particularly for emerging markets.
"It all looks rather familiar," said Claudio Borio, head of the BIS economics department. "The dance continues until the music eventually stops."
Cross-border claims of globally active banks increased by $580 billion to $29.4 trillion during the first quarter compared to the last three months of 2013, the first major increase since the end of 2011, according to the BIS. On an annual basis, international lending was down 2%, half the rate of contraction of the fourth quarter.
Lending to China increased rapidly during the first quarter, BIS said, pushing outstanding claims on the country's economy—mostly in the form of loans and debt instruments—past $1 trillion. Lending activity to banks in the eurozone rose during the first three months of the year after seven straight quarterly declines. It increased for the U.S. and many developing economies, too.
The main exceptions were emerging economies in Eastern Europe, where lending fell. Outstanding loans and other claims by globally active banks on Russia fell by $16 billion to $209 billion during the first quarter, while those on Ukraine slid $3 billion to $22 billion, as the tensions in those countries started to intensify. The drops were driven in part by weakness in those countries' currencies, BIS said.
The global trends reflect a marked drop in financial volatility brought on in part by ultralow interest by central banks around the world. "By fostering risk-taking and the search for yield, accommodative monetary policies thus continued to contribute to an environment of elevated asset price valuations and exceptionally subdued volatility," the BIS said.
Mr. Borio warned that volatility was also low, and risk-taking high, in the years preceding the global financial crisis. The variance between analysts' economic forecasts is near two-decade lows, he noted, a sign that economists are of similar opinions in how they see the global outlook.
"Ironically, the last time it was this low was in 2007, just before one of the largest forecast errors the economics profession has ever made," he said.
The BIS said that emerging-market economies have benefited in particular from the recent phase of stability in financial markets, stepping up debt issuance as global asset managers poured money into these countries' stock and bond markets.
"Corporates in many [emerging market economies] have taken advantage of unusually easy global financial conditions to ramp up their overseas borrowing and leverage," BIS economists wrote in the report. "This could expose them to increased interest rate and currency risks unless these positions are adequately hedged."
Financial markets in developing economies have stabilized in recent months after a turbulent start to 2014 when Turkey, South Africa and India were forced to raise interest rates to prevent an outflow of money from their economies.
Emerging markets calmed as concerns lessened that the Federal Reserve and other big central banks would tighten monetary policy too soon. Meanwhile, the European Central Bank unveiled fresh stimulus measures in June and September, including rate cuts to record lows, new bank-lending facilities and programs to purchase asset-backed securities and covered bank bonds.
"Market participants also appear confident that, in case of need, central banks will be there to smooth things out," Mr. Borio said. Write to Brian Blackstone at brian.blackstone@wsj.com Source:http://online.wsj.com/
But the quarterly report from the Bank for International Settlements, a consortium of global central banks based in Switzerland, warned that the present calm of low financial-market volatility—despite some short-lived volatility early in the summer—and high levels of risk-taking could create vulnerabilities down the road, particularly for emerging markets.
"It all looks rather familiar," said Claudio Borio, head of the BIS economics department. "The dance continues until the music eventually stops."
Cross-border claims of globally active banks increased by $580 billion to $29.4 trillion during the first quarter compared to the last three months of 2013, the first major increase since the end of 2011, according to the BIS. On an annual basis, international lending was down 2%, half the rate of contraction of the fourth quarter.
Lending to China increased rapidly during the first quarter, BIS said, pushing outstanding claims on the country's economy—mostly in the form of loans and debt instruments—past $1 trillion. Lending activity to banks in the eurozone rose during the first three months of the year after seven straight quarterly declines. It increased for the U.S. and many developing economies, too.
The main exceptions were emerging economies in Eastern Europe, where lending fell. Outstanding loans and other claims by globally active banks on Russia fell by $16 billion to $209 billion during the first quarter, while those on Ukraine slid $3 billion to $22 billion, as the tensions in those countries started to intensify. The drops were driven in part by weakness in those countries' currencies, BIS said.
The global trends reflect a marked drop in financial volatility brought on in part by ultralow interest by central banks around the world. "By fostering risk-taking and the search for yield, accommodative monetary policies thus continued to contribute to an environment of elevated asset price valuations and exceptionally subdued volatility," the BIS said.
Mr. Borio warned that volatility was also low, and risk-taking high, in the years preceding the global financial crisis. The variance between analysts' economic forecasts is near two-decade lows, he noted, a sign that economists are of similar opinions in how they see the global outlook.
"Ironically, the last time it was this low was in 2007, just before one of the largest forecast errors the economics profession has ever made," he said.
The BIS said that emerging-market economies have benefited in particular from the recent phase of stability in financial markets, stepping up debt issuance as global asset managers poured money into these countries' stock and bond markets.
"Corporates in many [emerging market economies] have taken advantage of unusually easy global financial conditions to ramp up their overseas borrowing and leverage," BIS economists wrote in the report. "This could expose them to increased interest rate and currency risks unless these positions are adequately hedged."
Financial markets in developing economies have stabilized in recent months after a turbulent start to 2014 when Turkey, South Africa and India were forced to raise interest rates to prevent an outflow of money from their economies.
Emerging markets calmed as concerns lessened that the Federal Reserve and other big central banks would tighten monetary policy too soon. Meanwhile, the European Central Bank unveiled fresh stimulus measures in June and September, including rate cuts to record lows, new bank-lending facilities and programs to purchase asset-backed securities and covered bank bonds.
"Market participants also appear confident that, in case of need, central banks will be there to smooth things out," Mr. Borio said. Write to Brian Blackstone at brian.blackstone@wsj.com Source:http://online.wsj.com/
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