02 March 2009

BIS Quarterly Review

The Review presents an overview of recent developments in financial markets. Policy measures aimed at stabilising markets gain traction over the period, the report states. Central bank actions and government guarantees helped to calm interbank markets.

The Review presents an overview of recent developments in financial markets and includes a special feature article on assessing the risk of banking crises.

Uncertainty about the depth and duration of the economic contraction continued to roil financial markets over the period between end-November 2008 and 20 February 2009. Credit markets generally remained under pressure from weak economic data and earnings reports and the resulting expectations of rising defaults. Pressures were particularly evident in the renewed widening of non-investment grade spreads. Cyclical deterioration also drove the worsening of equity prices, particularly in Japan.

At the same time, policy measures aimed at stabilising markets appeared to gain traction over the period. In money markets, central bank actions and government guarantees helped to calm interbank markets and spreads between Libor and overnight index swaps continued to decline gradually. Facilities that included outright purchases of agency mortgage- and other asset-backed securities contributed to signs of normalisation in mortgage markets, while funding facilities and government guarantees of financial sector issues provided a helping hand to primary debt markets, where activity surged to record levels in January.

To be sure, policy measures backstopping debt claims on banks were generally not perceived as positive for financial shares, and financial sector concerns continued to lead overall equity market losses in the United States and Europe. Meanwhile, the lack of detail on key support packages, among other factors, contributed to elevated levels of implied volatility as well as to price/earnings ratios which were extremely low by the standards of the past two decades.

Uncertainties about the severity of the financial crisis and the economic downturn exerted further downward pressure on government bond yields, though mounting concerns over increased issuance limited overall declines in yield during the period under review. At the same time, segments of the bond market were still showing clear signs of being affected by factors other than expectations about economic fundamentals and policy actions.

The latest BIS international debt securities statistics show that borrowing in the international debt securities market rebounded in the fourth quarter of 2008 as the turmoil in financial markets subsided. Activity on the international derivatives exchanges continued to decline in the fourth quarter of 2008 to the lowest levels in more than two years.

Press release
Overview
Quarterly Review
Special feature - Assessing the risk of banking crises - revisited

© BIS - Bank for International Settlements