The City of London has suffered a dramatic collapse in its core business as global lending falls at the steepest rate since records began, according to new figures from the Bank for International Settlements (BIS).
Cross-border loans worldwide fell by $1.1 trillion (£740bn) in the first half of the year, reflecting the scramble by the financial industry to cut leverage by pulling credit lines and slashing risky exposure.
Foreign lending by UK banks fell by a staggering $884bn, equal to 81pc of the entire contraction in international lending.
The City is facing a double blow since worldwide issuance of bonds and securities has also gone into freefall, plummeting 77pc from over a trillion dollars to $247bn in the third quarter. The City has been the epicentre of Europe’s structured credit industry.
The collapse in bond issuance reflects the near-total closure of the capital markets in the late summer as credit spreads surged. Bonds issued in euros dropped by 94pc from $466bn to $28bn over the quarter.
The UK banking sector includes branches of US, European, Asian and Mid-East institutions. These banks tend to use London as a base for their global credit and investment operations.
Though foreign, they make up a crucial part of the City nexus and are a mainstay for accounting firms, lawyers and the panoply of financial services that enrich the City.
In its quarterly report, the BIS warned the US Federal Reserve, the Bank of England and other central banks that near-zero interest rates and emergency monetary stimulus may come at a cost.
By opening the cash spigot, the authorities risk displacing the money markets and may “discourage banks from lending to other banks”.
The money markets are a crucial lubricant for the financial system, but they cannot function if rates fall too low. The sector can wither away, as Japan discovered during its “Lost Decade”.
The BIS also hinted that the European Central Bank and Sweden’s Riksbank may have blundered by raising rates
this year to contain the oil shock. It said short-term energy spikes have no lasting effect on inflation or wage deals.
“Evidence suggests an absence of strong second-round effects on inflation. The temporary inflationary impulse will soon drop out,” it said.
By Ambrose Evans-Pritchard
Last Updated: 8:53AM GMT 09 Dec 2008
Source: The Telegraph