TWN Info Service on Finance and Development (Aug22/01)
2 August 2022
Third World Network

Finance: Cross-border bank claims surge in Q1 2022, says BIS
Published in SUNS #9626 dated 29 July 2022

Geneva, 28 Jul (Kanaga Raja) -- Cross-border bank claims rose by $1.4 trillion over the first quarter of 2022, the third largest quarterly expansion on record, the Bank for International Settlements (BIS) has said.

In its latest statistics on international banking activity at end-March 2022, BIS said even on a seasonally adjusted basis, the expansion was unusual (+$700 billion), booked mostly vis-a-vis advanced economies (AEs).

Banks' cross-border claims on emerging market and developing economies (EMDEs) changed little overall over Q1 2022, as a drop in claims on China offset an increase vis-a-vis other EMDEs, it added.

Meanwhile, BIS said that banks' exposures to counterparties in Russia and Ukraine declined significantly.

The resurgence of inflation, the war in Ukraine and the lockdown in China raised further challenges to the world economy in the first quarter of 2022, said BIS.

Amidst this complex global landscape, banks' global cross-border claims, as tracked in the BIS locational banking statistics (LBS), surged by $1.4 trillion during the quarter. The expansion was the third largest on record, pushing the stock of cross-border claims to $35.9 trillion at end-March 2022 (up 4% from a year earlier), it added.

The Q1 expansion was uneven across regions and currencies. Most of the $1.4 trillion surge went to borrowers in advanced economies (AEs) ($1.3 trillion), with inter-bank claims ($903 billion) driving this expansion, followed by credit to non-bank financial institutions (NBFIs), said BIS.

Claims denominated in several major currencies went up in Q1 2022, with those denominated in euros growing the most, it added.

Five countries - the United Kingdom, Germany, Japan, the United States and France - together attracted 70% of the increase in cross-border claims.

BIS said claims on offshore financial centres (OFCs) also rose by $74 billion, while those on all EMDEs combined fell slightly, by $3 billion.

BIS said the surge in global cross-border claims in Q1 was partly the result of seasonal factors that affect several large banking systems, with positions contracting at year-end only to expand again the following quarter in most cases.

Removing these seasonal effects tends to moderate the Q1 changes in cross-border claims, it added.

In the aggregate, seasonal effects accounted for 50% of the Q1 expansion, leaving a still remarkable expansion of roughly $700 billion, with the expansion in cross-border claims mainly driven by claims on AEs, which increased by $630 billion on a seasonally adjusted basis.

On the other hand, BIS reported that claims on EMDEs overall fell by $17 billion on a seasonally adjusted basis.

Banks' cross-border claims on EMDEs changed little overall during the first quarter of 2022, with a drop in claims on China offsetting an increase vis-a-vis other EMDEs, it said.

"Claims on Africa and the Middle East rose by a mere $3 billion, significantly less than the $27 billion rise in the previous quarter. Similarly, the rises in claims on Latin America and the Caribbean (+$7 billion) and on emerging Europe (+$15 billion) during the quarter were both noticeably smaller than those in the previous quarter."

In emerging Asia-Pacific, cross-border claims on most major economies in the region expanded, with Korea and Chinese Taipei attracting sizeable inflows ($14 billion each), said BIS.

Offsetting these increases, however, was a $66 billion drop in claims on China, booked mainly by banks operating in Hong Kong SAR, the United Kingdom and Chinese Taipei, said BIS, adding that about 60% of the drop in claims on China was attributable to Chinese banks located abroad.

It said that of the $1.3 trillion in global bank claims on China in Q1 2022, those held by foreign (i.e. non-Chinese) banks accounted for $877 billion.

"These claims, which include banks' cross-border claims as well as the local positions booked by their affiliates located in China, fell in the course of Q1 2022 by roughly $36 billion," it added.

EFFECTS OF UKRAINE WAR

Highlighting the effects of the war in Ukraine that began in February, BIS said that foreign claims on Ukraine fell by $2.6 billion (-19%) during the quarter, to stand at $11.2 billion at end-March.

This decline in foreign claims can include actual reductions in lending or securities holdings as well as the impact of lower valuations and write-downs of the existing assets, it added.

French banks' foreign claims fell sharply (-43%), from $3.5 billion to $2 billion. The 27% and 35% declines for US banks and other reporting banks, respectively, were also remarkable, said BIS.

In contrast, Austrian banks - which had the highest exposure to Ukraine among CBS reporting banks - reported claims only marginally lower (-$70 million, -2%) than in Q4 2021.

Banks' foreign claims on Russia also declined during the quarter, possibly the result of international sanctions, said BIS.

By end-March 2022, they had contracted by $14 billion (-11%) to $107 billion. More than half of this overall drop was reported by US banks, whose claims fell from $16 billion to $9 billion, or by 45%, it added.

Several other major banking systems (e.g. Austrian and French banks) also reduced their foreign claims by more than 10%, while Italian banks, in contrast, reported a 3% increase in foreign claims.

"In addition to revaluations and write-downs, divestures of local affiliates operating in Russia are reported to have played a role," said BIS.

BIS said while Chinese authorities do not report the CBS, other data sources suggest that Chinese banks may have maintained or stepped up their credit to borrowers in Russia.

"Outstanding syndicated loans derived from Dealogic data up to June 2022 show that loans extended by Chinese banks reached $51 billion, accounting for over 40% of the global total of syndicated loans to Russia."

BIS said the most recent up-tick echoes developments seen in the earlier phase of the war: Chinese banks expanded their syndicated loans to Russia in 2016 following a retreat by banks from other countries after the imposition of sanctions on Russia in 2014.

A notable development regarding counterparts in Russia was on the liability side of global banks' balance sheets, it added.

"BIS reporting banks' cross-border liabilities to Russia have exceeded their claims on the country since Q1 2015."

During the first quarter of 2022, these net cross-border liabilities (liabilities minus claims) to Russia almost tripled, reaching $68 billion.

The biggest increase was reported by banks located in Belgium and the United States, which saw their liabilities jump mainly vis-a-vis banks and the NBFI sector in Russia, respectively.

"This suggests that, in a process resembling capital flight, Russian residents may have shifted dollar and euro deposits from banks located in Russia to banks abroad," said BIS.

While not as strong as in Q4 2021, the net issuance of syndicated loans was positive in Q1 2022. Monthly data show brisk net issuance (new loans minus repayments) in January of loans to non-financial corporates (NFCs) in both AEs and EMDEs. Net issuance slowed in February and March but remained positive, said BIS.

GLOBAL LIQUIDITY INDICATORS AT END-MARCH 2022

BIS said that in Q1 2022, foreign currency credit stagnated in dollars but expanded in euros, and as a result, the year-on-year (yoy) growth rates diverged.

[According to BIS, its global liquidity indicators (GLIs) track credit to non-bank borrowers, covering both loans extended by banks and funding from global bond markets through the issuance of international debt securities (IDS). The main focus is on foreign currency credit denominated in three major reserve currencies (US dollars, euros and Japanese yen) to non-residents, i.e. borrowers outside the respective currency areas.]

BIS said dollar credit to non-bank borrowers outside the United States stood at $13.4 trillion at quarter end, some 3% higher than a year earlier.

Growth in euro credit to non-bank borrowers outside the euro area accelerated to 11% yoy, pushing the stock to EUR 3.8 trillion ($4.2 trillion).

Yen credit to non-bank borrowers outside Japan grew for the first time since end-2020, at 1% yoy, to stand at 47 trillion yen ($0.4 trillion).

BIS said that in all three currencies, issuance of international debt securities (IDS) continued to outpace bank loans.

Foreign currency credit to non-banks in EMDEs remained resilient through end-March, having expanded at roughly 5% per annum in both dollars and euros in recent years, it said, adding that this left the stocks at $4.2 trillion and EUR 0.8 trillion, respectively.

In all regions, yoy growth rates remained positive, except for euro credit to Latin America, said BIS.

During Q1 2022, total foreign currency credit to EMDEs increased by $44 billion after adjusting for exchange rate effects, with borrowers in Asia-Pacific accounting for $35 billion of this expansion, mainly through dollar credit.

According to BIS, the deterioration in market sentiment following the start of the war in Ukraine and the broad- based surge in inflation coupled with expectations of faster-than-anticipated policy tightening by the major central banks weighed on foreign currency credit to EMDE corporates.

During Q1, net monthly issuance (gross issuance minus redemptions) of foreign currency-denominated syndicated term loans to non-financial corporates (NFCs) in EMDEs turned negative, by $8 billion, it said.

The downward trend continued in Q2, with a cumulative decline of $13 billion by end-June 2022, it said, adding that this is in contrast with AEs, where net issuance of foreign currency syndicated loans remained positive in both Q1 and Q2 2022.

BIS said monthly data on global bond issuance also show signs of weakness, particularly for EMDEs. Net issuance (in dollars, euros, and yen) by NFCs in EMDEs (residency basis) turned negative in February 2022 (-$10 billion).

"This downward trend continued into the second quarter, when net issuance declined by a further $8 billion."

Aggregating net EMDE issuance on a nationality basis shows an even sharper cumulative decline of $21 billion by March, and even $58 billion by end-June, said BIS.

The $37 billion contraction in the stock of outstanding foreign currency bonds between April and June 2022 was the largest quarterly decline recorded to date, with bonds issued by Chinese NFCs accounting for nearly $24 billion (65%) of this.

BIS said a prolonged tightening of financial conditions makes it more expensive for EMDE corporates to refinance their foreign currency debt.

It said that for EMDE NFCs as a group, $158 billion in debt securities denominated in dollars, euros and yen will mature between June and December 2022.

BIS said Asian NFCs have the largest refinancing needs ($110 billion), with Chinese firms accounting for 67% of all upcoming redemptions in the region ($74 billion).

"This is followed by borrowers headquartered in Latin America ($19 billion), Africa and the Middle East ($17 billion), and emerging Europe ($12 billion)," it added. +