Global banks scaled back cross-border lending to companies,governments and each other at the fastest rate since 2008 in thefinal quarter of last year, with lenders based in the euro arealeading the way.

Lenders reporting to the Bank for International Settlements, therecord-keeper of the world's central banks, shrank theircross-border assets by $799 billion, or 2.5 percent, in the threemonths ended Dec. 31, data released by the BIS show. The declinewas the sharpest since the fourth quarter of 2008, when interbanklending markets froze worldwide following the collapse of LehmanBrothers Holdings Inc.

“The decline was led by a significant drop in interbank lendingarising from the spillover of the euro-area sovereign debt crisisto bank funding markets,” BIS said in its quarterly report. “Thereduction was especially marked for cross-border claims onresidents of the euro area and was mostly attributable to euro-areabanks.”

European banks were trimming their balance sheets to help meetstricter capital requirements set by the European Banking Authorityand by the Basel Committee on Banking Supervision. Foreign banksalso reduced their lending to European banks on concern that theregion's sovereign debt crisis is spreading, prompting concernsthat a credit drought might further cripple the economy of thecurrency union.

Interbank lending contracted by $637 billion during the fourthquarter as the European debt crisis infected bank-funding markets,particularly affecting the euro's 17 member countries, the BISsaid. Cross-border claims on banks in the euro region fell $364billion during the period. The Libor-OIS spread, a gauge of banks'reluctance to lend to each other, “increased to high levels on theback of higher risk premia and the growing reluctance of marketparticipants to engage in interbank loan transactions,” BISsaid.

Italy and Spain saw the largest funding contractions, falling$57 billion, or 10 percent, and $46 billion, or 9 percentrespectively, according to the report. Banks also cut theircross-border claims on German banks by 9 percent, or $104 billion,and on French banks by 4 percent, or $55 billion.

Greece Plummets

Lending to Greek borrowers continued to shrink in the quarter.At $96.3 billion by the end of 2011, it was less than half thelevel two years earlier, when it stood at $217.2 billion.

The cutoff point for the BIS data was before the country's debtswap in March, which will be reflected in upcoming first-quarternumbers. More than two-thirds of the total, or $69.4 billion, islending to the private sector and includes the assets of foreignbanks' subsidiaries in Greece.

Euro-area banks slashed cross-border lending by $584 billion inthe quarter as institutions including Societe Generale SA,Commerzbank AG and UniCredit SpA cut assets to meet EuropeanBanking Association capital rules. That included a $197 billionretreat by French-headquartered banks, predominately from theireuro-denominated assets, the BIS said. The 5.3 percent cutback isthe second-biggest drop for French banks in 12 years, after the 7.1percent decline the previous quarter.

Wary of lending to one another, firms are increasing the amountthey park with the European Central Bank. Deposits with the centralbank rose to a record 828 billion euros on March 5, and were at 770billion euros on May 30. European lenders deposited an average ofabout 280 million euros with the ECB in the eight years beforeLehman's collapse.

Markets recovered earlier this year after the ECB pumped morethan 1 trillion euros into the region's banks via two three-yearLonger Term Refinancing Operations. That optimism has nowevaporated as concern mounts about the future of the euro, the BISsaid.

The BIS data record the cross-border business of banks in thecountries reporting to it. Data for banks' consolidatedcross-border claims — which include bonds, loans and fundsdeposited at banks — are reported by 30 countries. Those countriesinclude most developed and some emerging economies.

Lending to emerging markets also shrank in the quarter for onlythe second time in three years, the BIS reported. Cross-borderclaims from foreign banks to those countries fell by $75 billion,or 2.4 percent, following a $17 billion decline in the previousthree-month period. The Asia-Pacific region, especially Chinesebanks, accounted for 91 percent of the reduction in cross-bordercredit.

Bloomberg News

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