The Gradual Normalisation Of The Interbank Market

Leverage loans. The next trigger?
J.L. M. Campuzano (Spanish Banking Association) | According to figures from the latest quarterly report of the Bank for International Settlements (BIS), there is a gradual normalisation happening in the interbank market. First of all, international banking assets continued to increase in the first quarter of 2017, driven by a 2.8% year-on-year rise versus the non-banking sector. Year-on-year growth in banking assets was in positive territory for the first time since the first quarter of 2015.
Secondly, the volume of international debt securities was up 4.1% in year-on-year terms in the first quarter of 2017, mainly due to the rise in net issuances from the non-banking sector.
Furthermore, growth in credit denominated in euros to the non-financial sector outside the Eurozone picked up, thanks most of all to the 12.3% advance in bank loans recorded in the year ending March 31, 2017.
The current level of credit denominated in US dollars to non-bank borrowers in the emerging market economies (EME) grew to 3.4 billion dollars at end-March 2017. This advance was due entirely to the rise in debt issuance.
The credit/GDP ratio remained well above its trend levels in the case of various countries like Canada, China and Hong Kong RAE, amongst others. In the majority of cases, these wide gaps coincided with gaps in property prices above critical thresholds.
Finally, the EMEs’ current public debt has doubled since 2007 due to the acceleration in the issuance of debt securities. The rise in debt was accompanied by longer average maturities and greater use of fixed interest instruments.
All the above has taken place against a backdrop of high global liquidity. The improvement in bank financing has overlapped with the ongoing expansion of wholesale funding. The low risk perception, with the VIX at minimum levels,  also means that financial investors prefer returns to risk. In the end, as the BIS itself says, the assumption of risk is encouraged. Too much risk? The extreme regulation applied to the banks obliges them to be transparent and responsable with regard to risk management. It’s not clear if this can be extended to other financing via the markets.

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The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.