The BIS’ Suppressed Regional Rage

A BIS task force to study oversight challenges from emerging market bank regional expansion found that despite “aggressive lending” local retail deposits offer stable funding, but hedging and crisis management tools are often lacking through standard instruments, regulatory cooperation and safety nets. Developing economy claims are back to their pre-crisis size at $2.5 trillion and concentrated on Asia and China in particular, Brazil and Russia. Bank credit has been 80-90 percent of the total, but international debt security issuance rose at ten times the category’s pace in 2012. One-quarter of corporate bonds go through offshore financial centers and intraregional holdings in Asian debt and equity have jumped to high single digits through Hong Kong and Singapore. Banks outside Australia and Japan now account for 5 percent of trade and other lines in ASEAN, and advanced economy source substitution is prominent as well in Latin America and Europe. In the BRICs state-owned groups lead the outward push, but the global presence remains “relatively small” from a host country perspective with frontier market exceptions. In Central America, Colombian units loom large, and South African subsidiaries control sizeable shares throughout the continent. Geographic and cultural ties explain movement, with migration patterns motivating Korean networks in Kazakhstan and Middle East ones in Pakistan. Mergers and acquisitions tend to be in nearby areas, while Indian lenders favor organic growth in place. Euro area portfolios shrank over $1.5 trillion with deleveraging but Spanish, Austrian and Italian parents have maintained their respective European and Latin American franchises, according to the paper. Gulf banks have recently diversified into Libya and Tunisia post-Arab spring, and indigenous pan-African operations have spread in the East and West. Balance sheets emphasize traditional commercial facilities and products and conservative loan-deposit ratios although investment banking and wholesale borrowing are increasing. Rollover and exchange rate risks can cramp liquidity and limited local market depth is another challenge with collateralized paper like repos often lacking.

The Asian Bond Market Initiative has worked for the past decade to promote infrastructure and mechanisms like the new credit guarantee body, while the parallel Chiang Mai swap backstop was doubled to $250 billion in 2012. Europe though the Vienna Initiative under EBRD auspices has sustained the cross-border reaches of big groups and acted to boost home-host country supervisory contact to prevent “disorderly exit.” Baltic and Nordic authorities have a joint prudential forum and memoranda of understanding have also been signed between Caribbean and African neighbors. Such collaboration has assumed urgency with “full force retrenchment” in emerging economies at the turn of the year, according to the BIS’ companion quarterly review. Currency depreciation and retail investor flight were apart from Fed tapering concerns and prompted forceful policy interventions and rate hikes involving delicate tradeoffs which may affect future access and growth prospects. In the Q3 2013 reporting period covered international banks had already reduced EM exposure beyond China, where the first onshore bond default may further irk lenders.