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The Quarterly Review presents an overview of recent developments in financial markets and highlights the latest BIS data on international banking and financial activity.
Hopes that the worst of the financial crisis and economic downturn had passed sparked a rebound in risk appetite among investors in the period between end-February and end-May. As a result, equity prices gained sharply, credit spreads narrowed and implied volatilities fell.
A number of policy measures contributed importantly to the improvement in investor sentiment. In addition, central banks took further steps to ease monetary conditions.
Despite the turnaround in markets, by end-May conditions in many market segments remained some way off the levels seen before the bankruptcy of Lehman Brothers in September 2008.
In equity markets most indices were still 20-30% below where they stood in mid-September. In credit markets they had in general not fully returned to their earlier levels. Sub-investment grade and sovereign CDS spreads, in particular, were still significantly higher. However, in interbank markets conditions continued to gradually improve.
The latest BIS international banking statistics point to an unprecedented contraction in banks' international balance sheets during the fourth quarter of 2008.
The most recent BIS derivatives statistics indicate that the first quarter of 2009 saw a continued but limited decline of activity on the international derivatives exchanges. While overall turnover in interest rate derivatives remained largely unchanged, equity derivatives turnover fell for all contract types, and trading in foreign exchange derivatives also slid.
According to the latest BIS semiannual OTC derivatives statistics, in the second half of 2008 the financial crisis resulted in a decline in the total notional amounts outstanding of OTC derivatives to $592 trillion as of end-December from $684 trillion six months earlier - the first such contraction since data collection began in 1998.
The latest BIS international debt securities statistics show that borrowing in the international debt securities market increased in the first quarter of 2009, reflecting a gradual return of confidence.