BIS global liquidity indicators at end-December 2022

Global liquidity indicators at end-December 2022

The BIS global liquidity indicators (GLIs) track credit to non-bank borrowers, covering both loans extended by banks and funding from global bond markets through the issuance of international debt securities (IDS). The main focus is on foreign currency credit denominated in three major reserve currencies (US dollars, euros and Japanese yen) to non-residents, ie borrowers outside the respective currency areas. The GLIs monitor growth in this credit relative to that denominated in those same currencies to residents within these currency areas (as reported in national financial accounts).⁸

In Q4 2022, foreign currency credit denominated in US dollars continued to fall while that in euros and yen expanded (Graph 5). Dollar credit to non-banks outside the United States fell by $257 billion to $12.8 trillion. This led to a yoy shrinkage of 4%, a rate last seen during the Great Financial Crisis of 2007–09 (Graph 6.A). By contrast, growth in euro credit to non-banks outside the euro area remained resilient at 8% yoy, bringing the amount outstanding to €4 trillion ($4.2 trillion) (Graph 6.B). Yen credit to non-banks outside Japan expanded further in Q4 (+17% yoy) fuelled by bank loans (Graph 5.C, Annex Graph C.3).

The divergence in credit growth across the three major currencies reflects their respective funding costs and associated exchange rate developments.⁹ The rapid pace of US monetary policy tightening during 2022 led to an exceptionally strong dollar going into the fourth quarter of 2022 (Graph 5.A, Annex Graph C.1). By September 2022, the US dollar had reached its highest level since the 1980s, making it expensive relative to other major currencies and depressing dollar-denominated foreign currency credit.¹⁰ Euro credit started to reflect rising rates and higher valuations later in 2022 (Graph 5.B). By contrast, the Bank of Japan's commitment to monetary easing and protracted depreciation have made the yen a preferred funding currency, fuelling brisk growth in yen-denominated credit abroad (Graph 5.C).

These developments first affected dollar- and later euro-denominated credit to non-banks in EMDEs (Graph 6). In Q4 2022, credit in both currencies declined, leaving the respective stocks at $5.2 trillion and €0.9 trillion (Graph 6.A). Dollar credit contracted by more than $100 billion for a second consecutive quarter (Graph 6.B), due mainly to reduced bank lending (recall Graph 3) to non-banks in Asia-Pacific (credit to those in China fell by $52 billion). Elsewhere, dollar credit to Africa and the Middle East and emerging Europe dropped, while that to Latin America rose.

For its part, euro credit to non-banks in EMDEs fell sharply in Q4 2022 (Graph 6.C), following two years of uninterrupted growth. Loans shrank by €18 billion, while net issuance of IDS ticked down (–€1 billion). Euro credit to Asia-Pacific contracted the most, followed by that to emerging Europe. By contrast, euro credit to Africa and the Middle East and to Latin America expanded. The latest Q4 contraction notwithstanding, yoy growth in euro credit to EMDEs remained positive at end-2022, at 5%.

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⁸   For more details, see the GLI methodology:    www.bis.org/statistics/gli/gli_methodology.pdf.

⁹   Since quarterly changes are adjusted, exchange rate fluctuations do not affect the growth rates reported in Graph 5 in a direct, mechanical way.

¹⁰   A growing literature documents that dollar strength leads to tighter global financial conditions, especially for emerging market economies, see eg V Bruno and H S Shin, "Cross-border banking and global liquidity", Review of Economic Studies, vol 82, no 2, 2015; M Obstfeld and H Zhou, "The global dollar cycle", Brookings Papers on Economic Activity, 2023 (forthcoming).