LONDON (Reuters) - The euro zone crisis triggered a $70 billion collapse in cross-border lending to emerging market economies in just six months, as international banks battened down the hatches and dealt with crises on their home turfs.
The massive fall is revealed in a new study from the Bank of International Settlements (BIS), which sought to explain a $1 billion contraction in international lending to 40 emerging markets in the second half of 2011.
“Our findings confirm policy concerns that international banks might transmit financial shocks from advanced to emerging economies,” the reports authors’ said, noting that some emerging economies were exposed to country-specific shocks because their financial systems were so dependent on one foreign country.
The report found more than 70pc of the late 2011 fall stemmed from euro area banks paring back their international activity because of “home country factors” - a reference to the steps taken by banks to repair their balance sheets in the face of massive losses and higher regulatory capital demands.
While the data is almost a year old, it will trigger fresh fears for emerging markets dependent on international banks, as Spanish and UK banks in particular come under renewed pressure to improve their balance sheets.
Spain’s banks will have to deal with the fallout from its newly-created bad bank, Sareb, which could potentially depress the property market and trigger fresh lending.
The Bank of England recently hinted the UK’s major banks, who hold substantial international assets, could have to improve their capital positions by more than 50 billion pounds, though no timeframe was given.
The BIS study found that European emerging market economies had been particularly badly affected by the late 2011 retreat, with 85 pct of the fall in their cross-border lending stemming from euro area banks.
Reporting By Laura Noonan