Credit market turmoil caused by bad US subprime mortgages could be transmitted to emerging market economies through domestic bank lending – a “vehicle for contagion that has been overlooked,” according to recent research by Lehman Brothers.Higher-than-anticipated delinquencies among US subprime mortgages have given rise to tumultuous global credit markets. However, emerging market economies appear to have been shielded from the worst of the crisis, due to their lack of exposure to repackaged US mortgage loans.
In an emerging markets briefing on November 30, Lehman analysts said extensive research showed access to bank lending was a “powerful force in fostering future growth”. On the other hand, evidence suggested it also presented potential risks, including looser lending standards and the possibility of an overheating economy.
“Fast growth in bank loans might also reflect increased reliance on external sources of credit, which might prove to be unstable and potentially very destabilising,” the report said.
Between 2003 and 2006, bank lending increased significantly in almost all emerging market economies assessed in the report. However, there has been much variation across regions during the past five years. In Asia, for instance, the rate of year-on-year growth in private bank lending as a proportion of gross domestic product was roughly 15%. The report said it had been higher in Europe, the Middle East and Africa, at around 35% a year.
Amid tightening global credit conditions, a drop in levels of bank credit in emerging market economies might become a “vehicle for contagion that has so far been overlooked”, the report claimed. “In fact, a slowdown in domestic bank lending could be a trigger for a more abrupt slowdown of domestic economies than thus far envisaged.” Countries with a high proportion of recent lending growth against GDP were potentially more vulnerable, it said.
The report cited Kazakhstan as an example of a country where high levels of bank lending followed by a swift cutback had proved problematic. Where the country’s banks had previously relied mostly on external sources of funding, the report said they had subsequently become overextended, and were now having to resort to domestic liquidity sources. That meant its domestic banks would “almost inevitably” have to shrink their balance sheets.
Topics: Lehman Brothers
More on Structured Products
Dealers, regulators and distributors split on way forward for key information document risk indicators
Provisions on documentation eased but industry says more work needed on advertising rules
UBS bolsters New York equities desk, among other moves in June
Product will pay 5.95% annually if FTSE 100 or Euro Stoxx 50 are above 65% barrier on coupon date
Sign up for Risk.net email alerts
Sponsored video: MarketAxess
Sponsored video: Tradeweb
Multifonds talks to Custody Risk on being nominated for the Post-Trade Technology Vendor of the Year at the Custody Risk Awards 2014
Sponsored webinar: IBM Risk Analytics
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.