Highlights of international banking and financial market activity

The balance sheets of BIS reporting banks, which in the first three months of this year had expanded for the first time since the start of the crisis, ceased to grow during the second quarter of 2010. That said, at a more disaggregated level, several trends that had characterised international bank lending over the past few quarters remained in place. Banks continued to direct funds towards the faster-growing emerging markets at the expense of the slower-growing advanced economies. Just as in the previous couple of quarters, lending patterns diverged considerably across the four emerging market regions. In particular, banks continued to increase their exposures to the buoyant economies of Asia-Pacific and Latin America-Caribbean, but cut cross-border lending to residents of the somewhat slower-growing emerging Europe and Africa-Middle East regions. Amidst the turmoil in global financial markets triggered by concerns about the fiscal situation in Greece, Ireland, Portugal and Spain, foreign claims on these countries decreased during the second quarter.

Activity in the primary market for international debt securities rebounded in the third quarter of 2010, reversing most of the sharp drop that occurred during the European sovereign debt turbulence in the second quarter. Completed gross issuance increased to $1,934 billion in the third quarter, 15% higher than in the previous three months but short of the $2,175 billion recorded in the first quarter. With repayments down 7%, net issuance rose to $475 billion, from $111 billion in the second quarter. Between January and March, issuers had raised $603 billion in the international debt securities market.

Both sharp movements in asset prices and ongoing efforts to mitigate counterparty risk had a strong influence on over-the-counter (OTC) derivatives markets in the first half of 2010. The notional amount of OTC derivatives outstanding fell by 3% in US dollar terms during this period. However, partly as a result of the growing concern over sovereign risk, substantial movements in asset prices drove up the gross market value of these contracts by 15% and the gross credit exposures associated with them by 2%. Consistent with the increased use of central counterparties (CCPs) in some segments of the market, there was a smaller rise in gross credit exposures than in gross market values, reflecting increased netting. The ratio of gross credit exposures to gross market values consequently fell to 14.5% at the end of the first half of 2010, down from 16.3% at the end of 2009 and 24.0% at the end of the first half of 2007.

Trading on international derivatives exchanges, as measured by turnover volume, declined in the third quarter of 2010. Turnover measured by notional amounts fell by 21% to $438 trillion between July and September. The decline in volumes affected all major risk categories. Trading in interest rate contracts receded by 23% to $371 trillion, primarily as a result of lower activity in contracts on short-term interest rates (-24%, to $328 trillion). Turnover in futures and options on stock indices fell by 12% to $57 trillion, and that in contracts on exchange rates by 22% to $9 trillion.