Cross-border bank claims rise in fourth quarter of 2020, says BIS

Geneva, 30 Apr (Kanaga Raja) – Cross-border bank claims increased by $431 billion, or 6% year on year, in the fourth quarter (Q4) of 2020, bringing the outstanding stock to $35.6 trillion at end-2020, the Bank for International Settlements (BIS) has said. In its latest statistics on international banking activity at end-December 2020, BIS said that dollar claims rose by $418 billion during the quarter, whereas euro- and yen-denominated claims declined.
According to the Basel-based central bank for the world’s central banks, claims on emerging market and developing economies expanded, but with dispersion across countries.
The balance sheets of banks expanded noticeably in 2020, with increased credit to the official sector on the assets side and greater deposits from households and non-financial corporates on the liabilities side, it said.
BIS said foreign currency credit growth, an indicator of global liquidity, held up in 2020, with the issuance of debt securities, rather than loans, continuing to be the main driver of dollar credit outside the United States.
According to BIS, banks’ cross-border claims expanded by $431 billion (+6% year-on-year – yoy) on a foreign exchange (FX)- and break-adjusted basis in Q4 2020.
Claims denominated in US dollars grew by $418 billion, while euro and Japanese yen claims fell by $66 and $75 billion, respectively, it said.
The rise in cross-border claims in Q4 2020 was concentrated on borrowers resident in a number of advanced economies (AEs), especially Canada (+20% yoy), the United Kingdom (+13% YoY) and the United States (+11% YoY).
At the same time, claims on the euro area and Japan declined during the quarter, by almost $80 billion in both cases, said BIS.
“Overall, the YoY growth in cross-border claims on most major AEs remained positive,” it added.
Cross-border claims on offshore centres edged up in Q4 (+$16 billion; +0.6% YoY), but the aggregate concealed large offsetting movements vis-a-vis particular centres, said BIS.
While claims on the Cayman Islands declined by $60 billion, those on Asian offshore centres – notably Hong Kong SAR and Singapore – rose by $36 and $43 billion, respectively, said BIS.
Cross-border claims on emerging market and developing economies (EMDEs) returned to positive growth in Q4 with a $34 billion increase, after two-quarters of decline, it said, adding that the yoy rate of contraction was thus a moderate -0.3%.
Claims on emerging Asia and Pacific rose the most (+$22 billion; +1% yoy), said BIS.
Claims on Africa and the Middle East closely followed, expanding by $20 billion, the largest quarterly increase in 2020.
The region’s YoY growth rate of 2% was also the highest among all EMDE regions, said BIS.
Claims on emerging Europe dipped (-4% YoY), while those on Latin America and the Caribbean continued to fall (-6% YoY).
Claims on EMDEs were more volatile in 2020 than in previous years, with a jump in Q1 followed by contractions in Q2 and Q3, said BIS.
“There was considerable dispersion across EMDEs in Q4, with expansions in cross-border claims on Korea (+$19 billion) and Saudi Arabia (+$7 billion) and a contraction in claims on China (-$19 billion, after an increase of $23 billion in Q3).”
BIS said banks’ intra-group positions contributed the most to the increase in cross-border claims observed in Q4 ($224 billion) and were centred on AEs ($183 billion).
At the same time, intra-group claims on EMDEs declined by $17 billion, it added.
“For their part, lending to non-financial borrowers (excluding the general government sector) in all countries increased by 4% YoY, adding $166 billion to the Q4 expansion.”
Claims on the government sector contributed an additional $17 billion, for a 15% yoy growth rate, it added.
According to BIS, banks’ total deposit liabilities surged from $86 trillion at end-2019 to $100 trillion at end-2020.
“This development, observed across many economies, took place in the context of accommodative policy responses to alleviate the negative effects of the pandemic,” BIS explained.
BIS said total deposits from non-financials – mainly households and non-financial companies (NFCs) – grew most consistently in 2020.
Deposits by NFCs reached $10 trillion, up 23% (unadjusted) from end-2019, while those by households also grew strongly (+16% YoY, unadjusted) to reach $19 trillion.
Of the 33 BIS reporting countries that break out household deposits, 25 recorded double-digit annual growth rates in Q4 2020.
Some countries, including Australia, France and Switzerland, reported yoy increases of around 20% (unadjusted), said BIS.
According to BIS, the counterpart to these deposits on the asset side of banks’ balance sheets mainly consisted of domestic claims, i.e. increased credit to residents of the reporting banks’ home country.
BIS said that its consolidated banking statistics (CBS), which track the globally consolidated positions of banks headquartered in a given country (net of intra-group positions), show that banks’ total claims grew by $15 trillion in aggregate in 2020, with $12 trillion of that increase occurring since end-Q1 2020.
Three quarters of the rise in 2020 was booked against borrowers in their home country. As a result, the share of foreign claims in total claims fell noticeably in 2020, a pattern observed across several banking systems, said BIS.
Bond markets also reflected the expansion in domestic borrowing, mainly as a result of government bond issuance, it added.
The rise in banks’ assets was mainly concentrated in claims on the official sector, comprising governments and central banks, said BIS.
Global banks’ claims on this sector – mainly in the form of holdings of government bonds and reserves at central banks – stood at $21 trillion at end-Q4 2020, up from $14 trillion a year before, a substantial increase of 42% in unadjusted stocks, it added.
Over that period, BIS said the share of claims on the official sector in total claims reported by BIS-reporting banks (excluding Japanese banks) rose by almost 5 percentage points to reach 26% at end-2020.
Canadian and US banks’ shares rose by roughly 7 percentage points, while all other banks’ shares rose by an average of 4 percentage points, said BIS.
In a box insert to its main report highlighting its global liquidity indicators at end-December 2020, BIS reported that growth in foreign currency credit to non-residents held up during the Covid-19 pandemic.
According to BIS, its global liquidity indicators track credit to non-bank borrowers, covering both bank lending and bond market financing, with the main focus being on foreign currency credit, i.e. credit denominated in the three main reserve currencies (US dollar, euro and Japanese yen) to residents outside a currency area.
BIS said that by end-2020, US dollar-denominated credit to non-banks outside the United States had grown by 5% year-on-year (YoY), reaching $12.7 trillion.
Euro credit to non-banks outside the euro area grew by 4%, to reach EUR 3.7 trillion (equivalent to $4.5 trillion), while yen credit to non-banks outside Japan grew by 1%, to reach 49 trillion yen (or $0.5 trillion).
“These positive growth rates during the Covid-19 pandemic stand in stark contrast to the sharp contractions observed during the Great Financial Crisis (GFC) of 2008-09,” said BIS.
Yet, credit to non-residents was less strong than credit to residents, it added.
In each of the main currencies, credit to resident non-bank borrowers grew faster than credit to non-residents since the start of the pandemic.
The surge in credit to residents in 2020 was fuelled by increased government borrowing, reflecting the pandemic’s impact on government finances and efforts to mitigate its economic effects, said BIS.
BIS said that dollar credit to the US government grew by 21% YoY in Q4 2020, while euro credit to euro area governments increased by 15% – comparable to the growth rates seen following the GFC in both cases.
Meanwhile, dollar credit to emerging market and developing economies (EMDEs) showed a similar pattern as credit to all borrowers outside the United States.
For most EMDEs, the US dollar accounts for the largest share in foreign currency credit, BIS noted.
As of end-2020, dollar credit grew by a robust 5% YoY, only slightly below the 7% average over the past decade.
As a result, dollar credit to EMDEs reached $4 trillion at end-2020, more than twice the amount outstanding at the time of the GFC, and about a third of the global dollar debt owed by all non-bank borrowers outside the United States, said BIS.
Dollar credit expanded in all but one EMDE region by the end-2020. Credit to Africa and the Middle East, which has been growing at double-digit rates since mid-2015, rose by 11% in 2020.
Credit to emerging Asia-Pacific and Latin America and the Caribbean also expanded, by 4% and 2%, respectively.
On the other hand, dollar credit to emerging Europe remained weak, although contracting by less in 2020 (-1% YoY) than the average over the past five years (-7%), said BIS.
Developments in bank lending explain the stark difference between dollar credit growth during the GFC and the Covid-19 pandemic, it added.
“Although loan growth slowed in the course of 2020 – a period characterised by an even deeper recession than in 2009 – it remained well above that seen during the GFC.”
In 2009, bank loans had declined sharply (-14% YoY in Q3 2009) but held up over 2020 at 0.6% YoY.
Similarly, dollar loan growth to EMDEs dipped (-1% YoY), a smaller contraction than during the GFC (-15% YoY at its worst), said BIS.
“The GFC was primarily a financial crisis centred on banks, which scaled back their lending,” it explained.
On the other hand, banks could be more supportive in 2020 when the pandemic afflicted the real economy, after the post-GFC regulatory reforms had strengthened their financial condition, said BIS.
According to BIS, debt securities issuance in US dollars continued to be the main driver of dollar credit outside the United States.
By end-2020, debt securities outstanding had grown by 9% YoY, similar to the average pace over the past decade (+8% YoY), and considerably higher than the 1% growth in bank loans, it said.
Likewise, for EMDEs, continued issuance during the pandemic raised bond funding by 12% by end-2020, extending the average growth rate over the past decade, it added.
As a result, said BIS, the share of debt securities in total dollar credit to non-US residents overall, and to EMDEs in particular, has increased by about 15 percentage points since the GFC.
(Published in SUNS #9338 dated 3 May 2021)