Banks’ cross-border exposures to shadow lenders fell in Q2

Banks’ cross-border exposures to so-called shadow banks fell back slightly over the second quarter, having barrelled higher in Q1, data from the Bank for International Settlements (BIS) shows. Outstanding claims and liabilities are still elevated over end-2019 levels, however.

Banks’ outstanding claims vis-à-vis non-bank financial institutions (NBFIs) totalled $7.33 trillion globally as of end-June, down 3% on three months prior but up nearly 8% on end-2019. The majority of these, $4.32 trillion, were in the form of loans and deposits.

Over Q2, outstanding loans and deposits fell nearly 7% whereas outstanding debt securities increased 6%.

 

Banks’ outstanding liabilities vis-à-vis NBFIs also shrunk down over Q2, by 5% to $5.3 trillion. Loans and deposits made up $4.54 trillion of these, down 5% quarter-on-quarter. Outstanding short-term debt securities issued by banks to cross-border NBFIs increased nearly 4% to $78.6 billion and longer-term securities fell under 2% to $162.5 billion.

Who said what

“With [NBFIs’] growth has come greater interconnectedness. Many NBFIs rely on the banking system for credit and backstop liquidity … The Covid event revealed a banking system that withstood this shock quite well with limited official sector support, and a nonbank system that was significantly more fragile” – Randal Quarles, vice-chair for supervision, Federal Reserve Board, at the Securities Industry and Financial Markets Association annual meeting, October 20.

What is it?

The BIS publishes international banking statistics as part of its quarterly statistical data release on the balance sheets of internationally active banks. It uses two indicators: locational and consolidated statistics. The former provides information on the geographical and currency composition of banks’ assets and liabilities. The latter measures banks’ country risk exposures on a worldwide consolidated basis.

Why it matters

Amid the coronavirus crisis, NBFIs tapped their credit lines with banks to get their hands on the cash they thought they needed to ride out the storm. Many placed this cash with commercial lenders, which explains why both claims and liabilities increased over the first quarter.

Another factor was the behaviour of mutual funds classified as NBFIs. Many are invested in private debt, and had to liquidate part of their holdings to meet redemption requests. The increase in cash held by mutual funds as a result of this activity also amped cross-border liabilities.

These flows reversed somewhat in Q2. However, total cross-border claims on NBFIs are still a whopping 58% greater than five years ago, and liabilities 46% greater.

As the bank and non-bank financial sectors have become more enmeshed, the concerns of regulators have increased. Governor Quarles of the Federal Reserve has said a “holistic perspective” on the linkages within non-bank financial intermediation and between shadow banks and traditional banks is required for “addressing vulnerabilities in the financial system going forward”.

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Banks’ cross-border exposures to shadow banks surged in Q1

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