BASEL, Switzerland - The currency crisis in the European Community helped boost otherwise sluggish international bank lending last year, the Bank for International Settlements said in its 1992 annual report.
After contracting 1% in 1991, lending grew by a sluggish 2% in 1992, only because of exceptional capital flows during the foreign exchange crisis, the BIS said. The growth exceeded 10% annually from 1985 through 1990.
During the European crisis, banks in the countries of currencies under pressure exported large volumes of domestic currencies, which were imported by banks in perceived safe havens.
Lively Derivatives Trading
The tension within the European Rate Mechanism also sparked an explosion in derivatives trading, as market participants sought protection from currency volatility by hedging their positions.
Total international bank lending grew $155.8 billion, compared with a decline of $103.4 billion in 1991. Net of the double-counting resulting from interbank operations, the volume of new credit managed by international banks reporting to the BIS grew by $195 billion, compared with $80 billion.
Banks reporting to the BIS include those in the Group of 10 countries, other Western European countries, Hong Kong, Singapore, and other offshore banking centers.
The BIS said that, ignoring flows resulting from the currency crisis, the fundamental factors that had caused a contraction in bank lending in 1991 persisted in 1992.
"The general economic weakness and, partly related to it, the downgrading of credit ratings, acted as a constraint on both demand and supply in all sectors," the BIS said.
Investors Get Choosier
Heavy government borrowing and greater investor selectivity exacerbated the crowding out of nonprime borrowers.
Japanese banks continued to streamline international operations, with lending falling by $114 billion decline in 1991.
Nordic banks retreated from the market by an estimated 13% in exchange-rate-adjusted terms due to funding difficulties and repayments of foreign currency loans by their customers.
Bank credit to countries outside the BIS reporting area grew 8% in 1992, the largest rise in 10 years, with lending to the non-OPEC developing world particularly buoyant.
Turnover of financial futures and options instruments surged 35% in 1992 to 453.9 million contracts, compared with 336.2 million in 1991 when turnover only rose 5.4% from the previous year.
In Europe, ERM turbulence prompted a 66% rise in contract turnover. However, the overall increase in international derivatives business also reflected shrinking liquidity in over-the-counter markets as well as a lack of hedges for cash market positions.