Lo­cal de­posits make cross bor­der banks re­silient: BIS

The Pak Banker - - COMPANIES/BOSS -

Banks that fi­nance their op­er­a­tions abroad with whole­sale, cross-bor­der or cross-cur­rency fund­ing are am­plify­ing credit crunches, while those re­ly­ing on lo­cal de­posits re­main a more sta­ble provider of loans, econ­o­mists at the Bank for In­ter­na­tional Set­tle­ments said.

Those banks whose for­eign sub­sidiaries lent money raised from lo­cal savers and com­pa­nies shrank their bal­ance sheets less than those re­ly­ing on "non­core" fund­ing, the re­searchers said in a re­port re­leased on Sun­day. The anal­y­sis is based on data cov­er­ing $24.4 tril­lion of for­eign as­sets of banks in 17 par­ent and 38 host coun­tries, col­lected by the BIS, the record-keeper of the world's cen­tral banks.

"Lo­cal claims backed by lo­cal fund­ing made bal­ance sheets more re­silient, even af­ter ac­count­ing for sys­tem­atic dif­fer­ences be­tween host coun­tries and bank­ing sys­tems," re­searchers Pa­trick McGuire and Goetz von Peter of the BIS wrote. "By con­trast, af­fil­i­ates shrank more sharply if they had re­lied pre-cri­sis on non-core sources of fund­ing, in the form of in­ter­bank, for­eign cur­rency and cross-bor­der fund­ing."

The find­ings add to sim­i­lar stud­ies by the BIS show­ing the ben­e­fits of sim­ple con­sumer bank­ing. While the new re­search shows ba­sic bank­ing is bet­ter for economies at large, pre­vi­ous stud­ies by the len­der found that it's also more prof­itable for share­hold­ers.

In ad­di­tion to the fund­ing mix, the eco­nomic health of the par­ent banks was also an im­por­tant fac­tor de­ter­min­ing how big the delever­ag­ing in host coun­tries be­came, the re­searchers said. Prob­lems at home to­gether with a weak re­fi­nanc­ing struc­ture abroad helped pro­mote con­ta­gion. "Banks with larger credit losses and non-core fund­ing spread credit con­trac­tions across many host coun­tries," ac­cord­ing to the re­port. "This com­ple­ments other ev­i­dence in the lit­er­a­ture that global banks can have a sta­bi­liz­ing or desta­bi­liz­ing ef­fect on the economies they op­er­ate in, de­pend­ing on the na­ture of the shocks they face."

More­over, BIS said that re­cent wor­ries over China's econ­omy, oil and com­mod­ity prices and some Euro­pean banks had come as fun­da­men­tal shifts take place in the global econ­omy.

In­ter­na­tional bank-to-bank lend­ing is con­tract­ing for the first time in two years, the use of dol­lar-de­nom­i­nated debt to drive growth in emerg­ing mar­kets has ground to a halt on a strength­en­ing of the cur­rency that has also served to send U.S. com­pa­nies rush­ing to bor­row in euros.

At the same time, world growth re­mains sub­dued, over­all debt con­tin­ues to rise and neg­a­tive in­ter­est rates in large parts of Europe and Ja­pan sug­gest that some lead­ing cen­tral banks are run­ning low on am­mu­ni­tion to quell mar­ket volatil­ity that could pose a threat to the global econ­omy.

"The lat­est tur­bu­lence has ham­mered home the mes­sage that cen­tral banks have been over­bur­dened for far too long postcri­sis," the head of the BIS mon­e­tary and eco­nom­ics depart­ment, Clau­dio Bo­rio, said in its first quar­terly re­port of the year.

"Mar­ket par­tic­i­pants have taken no­tice. And their con­fi­dence in cen­tral banks' heal­ing pow­ers has -- prob­a­bly for the first time -- been fal­ter­ing. Pol­i­cy­mak­ers, too, would do well to take no­tice." The com­ments dove­tailed with con­cerns about the po­ten­tial side-ef­fects of neg­a­tive in­ter­est rates, which are ef­fec­tively a charge on com­mer­cial banks' spare cash. A study in the BIS re­port showed the dif­fer­ent ways neg­a­tive rates were be­ing im­ple­mented by the likes of Swe­den, Den­mark, Switzer­land, Ja­pan and the Euro­pean Cen­tral Bank, which is ex­pected to go even deeper into neg­a­tive ter­ri­tory on Thurs­day.

Ev­i­dence from Switzer­land showed that banks there had not in­tro­duced neg­a­tive rates on cus­tomers' sav­ings but had in­stead in­creased costs on loans such as mort­gages to curb losses.

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