World credit turns to domestic borrowers: BIS

World credit has turned to domestic borrowers as a result of the Covid-19 pandemic, according to statistics from the Bank for International Settlements (BIS).

After a sudden surge in cross-border bank credit at the start of the pandemic, the subsequent reversal gave way to an expansion of domestic positions.

Beyond banking, BIS statistics reveal similar trends in debt markets, driven by increased government borrowing in an effort to mitigate the effects of the pandemic.

Initially, in the first quarter of 2020, there was an extraordinary expansion in global cross-border banking.

Banks redistributed liquidity in their international operations and reversed these flows in subsequent quarters as tension in financial markets eased.

World credit

Since then, annual growth rates have fallen and turned negative for bank credit to emerging markets and developing economies (EMDE).

In fact, banks’ cross-border assets vis-à-vis EMDEs contracted by almost $ 100 billion in the second quarter (-82 billion) and the third quarter of 2020 (-13 billion).

Fluctuations in cross-border positions provide only a partial picture of how the balance sheets of internationally active banks have evolved during the pandemic.

A more complete view based on the BIS consolidated banking statistics shows that the banks’ total assets and liabilities have actually increased since the beginning of 2020.

The total assets of banks based in 22 BIS reporting countries grew from $ 67 trillion at the end of the third quarter of 2019 to $ 75 trillion by the third quarter of 2020, an increase of 12%, in a pattern shared with total liabilities.

Most of the increase in claims corresponded to national positions, that is, deposits and loans to residents in banks.

At the same time, increasing holdings of government bonds and reserves in central banks played a key role, following an accommodative policy.

As a result, bank portfolios have become more national since the start of the pandemic: the share of foreign claims in total claims fell across the board.

The same trend toward domestic borrowers is shown when the vision is broadened to include both the banking and bond markets.