01 September 2008

BCBS: Quarterly Review - September 2008

Global financial markets adjusted to growing signs of a broad-based cyclical deterioration, the latest Review finds. Worries about the economic outlook and related uncertainties gained prominence, weighing on valuations across asset classes.

During the period from end-May to late August 2008, global financial markets adjusted to growing signs of a broad-based cyclical deterioration, the latest Review finds. While markets continued to display signs of fragility, worries about the economic outlook and related uncertainties gained prominence, weighing on valuations across asset classes.

 

Credit markets came under renewed pressure over the period, as spreads widened to reflect the implications of the ongoing cyclical adjustment for loss expectations and financial sector balance sheets. Equity markets reflected similar concerns, as valuations adjusted to reflect disappointing earnings data, including in the financial and other cyclical sectors. Against this background, pressures in interbank money markets persisted, prompting further central bank action to ease financial sector access to funding.

 

In the international debt securities markets, borrowing recovered sharply in the second quarter of 2008 despite the continued turmoil in financial markets. Net issuance of bonds and notes increased to $1,071 billion, recovering almost to the level recorded just before the recent turmoil began. The increase came chiefly from the euro-denominated bond segment, where net issuance was more than four times the level of the previous quarter. Mortgagebacked bond issuance rose markedly, particularly in the United Kingdom, following the Bank of England's announcement in April 2008 of a Special Liquidity Scheme that enables UK banks to swap illiquid assets such as mortgage-backed securities for UK Treasury bills.

 

Growth in international bank claims continued to slow in the first quarter of 2008. BIS reporting banks' gross international claims on non-bank borrowers expanded by $365 billion, the smallest first quarter increase since 2003. Reporting banks continued their net transfer of funds out of the United States, a trend evident since the onset of the financial turmoil in mid-2007.

 

The Quarterly Review also contains four special feature articles on:

• the inflation risk premium in the term structure of interest rates;
• the development of money markets in Asia;
• foreign exchange settlement risk;
• the determinants of the returns of ABX indices, an important barometer of subprime mortgage market conditions.

 

Press release

Quarterly Review

Review devided by sections

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