The FINANCIAL — Foreign exchange trading volumes dipped sharply toward the end of 2011 as the euro zone's sovereign debt crisis flared up and European banks cut back lending worldwide, the Bank for International Settlements said in its quarterly report.
Non-European banks and emerging market bond issuers stepped in to fill funding gaps as European lenders retrenched from global markets in the final part of last year, the BIS said in its report, released Sunday.
According to Borsa Italiana – London Stock Exchange Group, daily turnover in global foreign-exchange markets likely reached $4.7 trillion on average in October 2011, but volumes likely dipped sharply toward the end of the year and into the start of 2012, BIS researcher Morton Bech wrote.
Foreign exchange volumes were hit hard through 2011 by the euro zone's debt crisis, as rolling volatility kept investors on the sidelines. Figures from a range of trading centres show volumes during October fell for the first time since 2009, when markets were recovering from the collapse of U.S. investment bank Lehman Brothers.
The last time the BIS measured daily foreign exchange trading volumes was in April 2010, in its triennial report. At that time it estimated daily turnover at $4 trillion. The Basel, Switzerland-based BIS describes itself as a banker to central banks, serving as a counterparty for central bank transactions and conducting research.
BIS researchers also found that a roughly 50% increase in emerging market bond issuance in the fourth quarter of 2011, compared with the previous quarter, helped compensate for shrinking available bank credit as a result of European deleveraging.
That helped support asset prices and kept trade finance flowing even as European banks sold assets and reduced lending, the BIS said. "An open question is whether other financial institutions will be able to substitute for European banks as the latter continue to deleverage," the BIS wrote in its quarterly review.
European banks faced funding strains in the last half of 2011 as economic growth slowed and questions about the solvency of European sovereigns raged. Regulatory requirements that European banks hold more capital also exacerbated these pressures, bringing "fears of deleveraging to the forefront of financial market concerns," the BIS wrote.
As those banks retrenched globally, cross-border lending to emerging economies fell by $18 billion, or 0.6%, in the third quarter, the first such decline in 10 quarters.
The European Central Bank's refinancing operations that provided looser conditions for euro lending also helped to slow the deleveraging process and cushion its impact on markets, the BIS said.