As more countries are borrowing from Chinese banks, these lenders could become an important "source of contagion" globally in the face of future shocks at home or abroad, the Bank for International Settlements said.
Unexpected losses in one country may induce banks to withdraw from other borrower countries that are not crisis-stricken to rebalance the banks' overall risks and satisfy regulatory requirements, the BIS said in its latest quarterly report published March 11. Shocks caused by such a credit squeeze could then spread around the globe when several countries borrow from just a few international banks, which the BIS called "common lender risks."
During the last three financial crises, emerging Asia was hit by common lender risks, the BIS added. During the Asian financial crisis of 1997-1998, Japanese banks were the region's common lenders. When the financial crisis of 2007-2009 and the European sovereign debt crisis of 2010-2012 struck, financial institutions from the euro area were the common lenders which pulled back from Asia.
As of the third quarter of 2017, Chinese banks ranked as the world's sixth-largest international creditor group, with cross-border financial assets worth about US$2.0 trillion, according to BIS' locational banking statistics in the report. Chinese banks are now also the world's third-largest provider of U.S. dollars to the global banking system, according to the data. The BIS did not provide the previous ranking of Chinese banks.
"In the face of shocks, Chinese banks have the potential to play an important role as common lenders," the report said, based on their footprint in emerging Asia, as well as advanced economies and other global offshore centers such as Hong Kong and Singapore.
The report also noted that a new group of lenders located in China, Hong Kong and Singapore is extending more loans to emerging Asia than traditional global banks do. As of the third quarter of 2017, banks headquartered in Japan, the U.S., the U.K. and Europe accounted for about 71% of lending to emerging Asia, down from about 95% as of the second quarter of 1997, on the eve of the Asian financial crisis, according to BIS data.
"Looking forward, the common lender channel would pose its greatest risk to emerging Asia if the shock were to come from Asian borrowers themselves… and if the largest lenders to the region were at the same time highly exposed to the region relative to their broader global portfolios," the BIS said.
Having said that, the BIS added that "the common lender risks that emerging Asia faces today seem much less worrisome" compared to previous crises.
It said emerging Asia is borrowing much less internationally than it did two decades ago. As of the third quarter of 2017, international consolidated claims of BIS reporting banks on five Asian borrower countries — Indonesia, Korea, Malaysia, the Philippines and Thailand – had shrunk to 11% of those countries' total GDP, from 21% in 1997, the BIS said.
Emerging Asia seems to be borrowing from a more diversified set of lenders as inter-regional lending picks up, the BIS added.
