BIS data on cross-border flows – a closer look

By: Piroska M. Nagy Director for Country Strategy & Policy

Authors: Piroska Nagy (-7149) and Stephan Knobloch (-7065), 5 May 2009.

New BIS data for the last quarter of 2008 show that BIS-reporting banks significantly reduced their asset holdings across major regions of the world. While in absolute terms most of the reduction took place in advanced countries, in relative terms, emerging markets were hit harder. Our region has thus far been least affected. Furthermore, the decline has been concentrated on a few countries; all others experienced no change or even some increases in net bank capital inflows. Net bank outflows tend to have happened in the most financially integrated countries, but not necessarily in countries with weaker fundamentals; with large outflows both from countries that have already been hard hit by the crisis (Ukraine) and countries that have been resilient so far (Poland).[1]

BIS has reported that, after virtual no change in Q3 2008, the global external claims of BIS-reporting banks shrank by 5.4% in (US$ 1.8 trillion) in Q4 2008, the largest recorded decline ever. The following points are noteworthy:

In absolute terms, most of the decline took place among advanced countries (US$1.3 trillion). In relative terms (net cross border flows as a share of total stock of the previous quarter), the declines are more pronounced in emerging markets.

Among the emerging markets, emerging Asia has taken the hardest hit both in absolute and relative terms. Emerging Europe is the least hit in absolute and relative terms, although the declines (US$ 57 billion) are still very significant.

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Within Emerging Europe, the outflows are concentrated in a few countries: Russia, Turkey, Ukraine, as well as Poland, the Czech Republic, and Slovenia. This is a mixture of countries with very different fundamentals and crisis impact. Russia and Ukraine have suffered large external shocks, where the crisis had been unfolding for some time. On the other hand, countries like Poland and Czech Republic have stronger financial systems, and the direct impact of the crisis had been less pronounced. This is in line with earlier crisis experiences which showed that investors withdraw liquidity not only from countries with weaker fundamentals but also from markets in the same region that are deeper and more liquid.

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Looking forward, similar trends are expected to have continued – if not deepened – in Q1 of 2009. Develeraging is an inevitable part of banks’ balance sheet adjustment in the context of the global financial crisis. As part of Bank’s crisis response, under the Joint IFI Action Plan, the Bank, together with other IFIs, aims to avoid/limit the destructive, uncoordinated develeraging due to failure of collective action by the key stakeholders: bank groups, home and host authorise, and IFIs.

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Footnotes:

[1]. Data refers to all cross-border loans, deposits, and securities held by bank offices located in one of the 41 BIS-reporting countries. This includes assets held vis-à-vis all economic sectors, i.e. private and public, or bank and non-bank. BIS uses the category “developing” countries; this note uses “emerging” countries instead.

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