A year on from the collapse of Lehman Brothers sending global markets into a tailspin, credit markets and bank funding costs appear to be stabilising, according the the latest assessment by global banking authority Bank of International Settlements.
The cost of funding for banks has pulled back to the lowest level since the start of 2008, although central banks around the work continue to provide support to to lenders, BIS said in its latest quarterly review.
''Generally, markets continued to show signs of normalising, as risk tolerance edged further upwards and risk premia receded.''
''In interbank money markets, key spreads narrowed to levels not seen since the beginning of 2008, and in some cases even further. Improvements were also visible in credit markets, although important segments continued to rely on central bank support,'' BIS said.
BIS is often referred to as the central bank of central banks. Further details the health of credit markets are expected this afternoon when the Reserve Bank of Australia releases minutes of last week's monthly board meeting.
Despite uncertainty about the pace of global economic recovery, BIS said investors remained ''cautiously optimistic'' in the period between end-May and early September 2009.
Ongoing support of bank wholesale funding markets continued to spur on fund raising among banks. Globally, the volume of bank debt securities in the second quarter of 2009 of $US837 billion, was up 25 per cent from the same time last year.
BIS noted the financial sector continued to report surprisingly strong earnings for the second quarter, helping to fuel a surge of up to 20 per cent during the period. Still, BIS said questions remain about the quality and sustainability of bank profits.
Banks international exposure is still shrinking, although at a slower pace as tensions in financial markets begun to subside.
Banks registered a $US812 billion ($946.9 billion) fall in their interbank positions compared to the fourth quarter of 2008, reflecting protracted funding pressures. However, the decrease in international credit to non-banks, at $US258 billion, ($300.9 billion) was only one fourth that seen in the previous quarter.
The assessment follows G20 finance ministers and central bankers earlier this month throwing their support behind a push for central banks to strengthen capital reserves. Not only should banks hold more capital, but it should be of higher quality, G20 officials said.
Separately, Australia's banking regulator last week detailed new rules that could be force banks to substantially increase the minimum level of cash and so-called liquid assets sitting on their balance sheet aimed at helping them withstand further global financial shocks.
But the rules, if adopted, may hit profits for the sector given that holding liquid assets, such as cash or government bonds, is an unproductive, though necessary, part of banking.
Many banks were caught out in September last year when funding markets dried up as fears spread through the financial system about contagion from the US sub-prime crisis.
The Australian Prudential Regulation Authority proposed that banks must have enough cash or cash-like assets on hand to fund their operations for at least a month. Current rules require cash assets to cover just five days' worth of funding.
ejohnston@theage.com.au
The Age
