Banks' Funds Flee US, Go to Europe for Safety

Banks transferred funds out of the United States and into Europe in the first three months of 2008 as they turned to safer assets during the global credit crunch, the Bank for International Settlements said.

"In the first quarter of 2008, 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 Swiss-based BIS said in its quarterly review of financial markets and banking activity, published on Monday.

It said European banks had cut dollar loans booked by their U.S. offices, resulting in a net outflow from those offices of $259 billion during the first quarter of the year, following a net outflow of $238 billion during the second half of 2007.

The BIS said banks stepped up their holdings in public sector debt, while their outstanding debt securities claims in the non-bank sector fell for the first time since 2001.

Much of that decrease reflected sales and write-downs of bonds issued by corporate and non-bank financial entities, it said "This fall in debt securities claims seemed to coincide with a broader shift in bank balance sheets away from the U.S. non-bank private sector, at least for some banking systems," it said.

The expansion in international claims on non-bank borrowers worldwide was weak in the first quarter of 2008, with growth of $365 billion -- the smallest first quarter expansion since 2003, it said.

As banks tapped international sources of funds, their cross-border equity and other liabilities surged in the first quarter by $122 billion overall, BIS data showed.

Drop in Reserves

The reporting banks saw a decrease in their deposit liabilities to official monetary authorities, reflecting partly a drop in reserves these authorities were placing with commercial banks abroad, BIS said.

Of this, U.S. dollar liabilities fell the most, and bank offices in the United States, United Kingdom and euro area reported the largest declines in their holdings of such deposits.

"Identifying with any degree of precision which central banks accounted for these moves is difficult because of incomplete data on the residence of the central bank counterparty," BIS said.

But it quoted reserve holdings reported by 63 monetary authorities to the International Monetary Fund as revealing an aggregate decrease of $56 billion in deposits placed in commercial banks in the first quarter of 2008.

Relatively large declines were reported by the monetary authorities in Russia, India, Indonesia, Malaysia and Romania.

Borrowings Rise

The BIS reported a sharp recovery in borrowing in the international debt securities market in the second quarter of 2008, with net issuance up at $1,071 billion against just $371 billion in the first quarter.

The biggest increase was in issuance of euro-denominated bonds and notes, while UK borrowers were the largest issuers. At the same time, there was a retreat in activity on the international derivatives exchanges in the second quarter.

"Total turnover based on notional amounts decreased from the high of $692 trillion recorded in the first quarter to $600 trillion," the BIS reported.

Trading in commodity derivatives declined from the record level in the first quarter but continued to be active, it said.

"The largest fall was observed in agricultural derivatives, followed by precious metals, non-precious metals and energy products. "The decline in turnover in agricultural derivatives came chiefly from Asian exchanges, in particular Chinese ones," the BIS said.

It said the drop in trading coincided with an easing of price increases in agricultural products over the quarter.