Banks cut back on overseas lending

Banks around the world cut international lending at the fastest rate since records began more than 30 years ago in the final quarter of last year, according to data from the Bank for International Settlements released yesterday.

The savage deterioration in overseas lending came as the US economy shrank at an annualised rate of 6.1 per cent according to other data released yesterday while the German government cut its forecast to predict a 6 per cent fall in GDP this year.

International lenders reduced their overseas loans by £1,790bn (€1,985bn) in the final three months of last year, down about 14 per cent from the peak in lending in the first quarter of 2008.

The fall in overseas loans came as the financial system narrowly avoided collapse in the final quarter of last year after the US investment bank Lehman Brothers failed.

The figures reflected a severe unwinding of the globalisation of international finance that had built up in the years running up to the credit crunch, and a big deleveraging of banks.

The reduction in international lending also underlines the rising tide of financial protectionism as pressure mounts on banks to maintain loans to domestic borrowers following government bail-outs, but reduce their overall extent of their assets.

George Magnus, senior economic adviser at UBS, said: “There is a huge amount of covert protectionism going on here.”

Sharp cutbacks in overseas lending have exacerbated the credit crunch by withdrawing a major source of funding, even as domestic lenders have also been hit by the crisis.

“The drop in international credit is a symptom of the pressure among banks to shrink balance sheets and, reflecting pressure from governments and regulators, to adopt a ‘home bias', but also a clear signal of the resultant widespread drop in credit supply and credit demand across many countries,” said Michael Saunders, economist at Citigroup.