Euro credits ride high as dollar slumps

More new credit was made in euros rather than dollars in interbank lending in the last quarter of 2007, according to statistics from the Bank of International Settlements (BIS) yesterday.

New dollar denominated credits almost halved to $247 billion (Dh906bn) in the quarter, while credit in euros more than doubled to 377 billion (Dh2.2 trillion) during the period, said the BIS, also known as the "central bank of central bankers".

"Growth in US dollar-denominated claims continued to slow for the third consecutive quarter, while new claims in euros more than doubled," the BIS said.

Overall, banks increased cross-border lending by $1.1trn in the last three months of last year to $33.5trn. New credit grew from 64 per cent of the total in the third quarter to 73 per cent in the fourth quarter amid increased lending by European and British banks.

In terms of risk exposure of bank assets, BIS noted a rise of $1trn in what it termed as "other exposures", mainly due to increased derivatives and to guarantees.

However, the bank said there was no information on the extent to which this was due to higher market values for existing positions. In December, BIS said turbulence in global financial markets caused a sharp drop in the number of international debt securities issued in the third quarter of 2007.

BIS General Manager Malcolm Knight said the global credit crunch would have been less severe if the Basel II capital adequacy rules had been in force when it struck last year.

"The turmoil has also confirmed the need for robust, consistently applied global standards of prudent risk management and financial stability," he said.

"If Basel II had been in implementation before the middle of last year, some of the problems that have occurred would have been much less pronounced," he added.

The Basel II accord, developed by the Basel Committee on Banking Supervision, brings in more sophisticated rules for bank capital adequacy. It is now in force in Europe, but not yet in the United States.

Knight said it was not clear how far the present financial turmoil will extend or its likely effect on the real economy, but warned the deleveraging process can be painful.

"Nobody knows how long the present deleveraging process will take... and what effects this is likely to have on the real economy."

"We do know this deleveraging has to run its course and is always accompanied by deflation in asset prices until a new equilibrium is found. History has shown that this process can be a very painful one."

Knight added the current financial market turmoil was made all the more serious by the presence of real disequilibriums in the global housing market and in the persistence of large current account imbalances.

He said the current financial turmoil has highlighted the need for closer co-operation between monetary policymakers and regulatory supervisors and the importance of effective liquidity management for cross border and foreign currency operations.

The numbers

€377bn: Credit in euros more than doubled in 2007 to this figure

$247bn: New dollar denominated almost halved to this figure in Q4