19 September 2011

BIS September 2011 Quarterly Review traces back recent turbulence in financial markets to weaker growth expectations

Global growth and sovereign debt concerns drive markets

Developments in financial markets during the review period largely reflect substantial downward reassessments of trajectories for economic growth. The prices of risky assets fell sharply in July and August as negative macro-economic data cast a dark cloud over the strength of recovery in several major economies. Market participants' concerns about growth were amplified by perceptions that monetary and fiscal policies had only limited scope to stimulate the global economy. In Europe, concerns about sovereign debt spread from Greece, Ireland and Portugal to Italy and Spain. This led to tighter funding conditions for European banks and even affected pricing in euro area core sovereign debt markets.

All these developments led to flows into safe haven assets, which appreciated in value. Yields on 10-year US Treasuries and German bunds fell to historic lows, while gold prices and the Swiss franc soared before the Swiss National Bank imposed a floor on the Swiss currency against the euro.

Highlights from the BIS international statistics

The aggregate cross-border claims of BIS reporting banks rose during the first quarter of 2011, mainly because of increased lending to US residents. BIS reporting banks increased their cross-border claims on residents of emerging market economies by the largest amount since the global financial crisis. The $178 billion (6.3 per cent) expansion was primarily due to a rise in interbank claims, which increased by $147 billion (10 per cent). Cross-border claims on Asia-Pacific grew by an unprecedented $126 billion (12 per cent) in the first quarter, largely reflecting a surge in claims on China ($80 billion or 24 per cent). Cross-border claims on residents in the other emerging market regions also increased.

More bilateral netting and higher collateralisation have reduced counterparty credit exposures in the OTC derivatives market. BIS statistics show that the amount of bilateral netting in this market has gone up since late 2007, as has the degree of collateralisation.

Press release

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