Banks increase exposure to indebted nations

 

Banks increased their holdings of Greek, Irish, Portuguese and Spanish debt in the first quarter even as the sovereign crisis roiled credit markets, according to the Bank for International Settlements.

Banks boosted the amount they had at risk to the nations by $109 billion to $2.6 trillion, the Basel, Switzerland-based BIS said in its latest quarterly report. Banks in euro-zone countries held the greatest share of bonds from the four countries and Italy, the BIS said.

European banks were most likely to buy the debt because they could use it as collateral for funds from the European Central Bank, according to the BIS. The region's lenders may also have been more comfortable assessing the risk of investing in the countries, the report said.

"During the period under investigation, all euro-area government debt could be used as collateral at the ECB on identical terms," the BIS said.

"The lower market liquidity of the debt issued by the governments of Greece, Ireland, Italy, Portugal and Spain was less of a concern for euro-area banks than for other banks since the former could 'liquefy' this debt in their operations with the ECB."

Euro-zone banks' exposure to the four countries and Italy was about 54 per cent of their total holdings of euro-area government debt, compared with no more than 27 per cent for lenders based in the US, Japan and the UK, the BIS said.

Bloomberg