With household savings and government borrowing on the rise in response to the Covid-19 pandemic, global bank balance sheets grew and liquidity held up, reports the Bank for International Settlements (BIS).
“Banks’ balance sheets expanded noticeably in 2020, with increased credit to the [government] sector on the assets side and greater deposits from households and non-financial corporates on the liabilities side,” said a new BIS report on international banking data.
Cross-border claims were up by 6% at the end of 2020, increasing by $431 billion (all figures U.S. dollars) in the fourth quarter. The increase in cross-border claims in Q4 was led by Canada, up 20% year over year, followed by the U.K. (up 13%) and the U.S. (up 11%).
“At the same time, claims on the euro area and Japan declined during the quarter,” the BIS noted.
Banks’ balance sheets grew during the year, as total deposit liabilities surged from $86 trillion at the end of 2019 to $100 trillion by the end of 2020.
“This development, observed across many economies, took place in the context of accommodative policy responses to alleviate the negative effects of the pandemic,” the BIS said.
At the same time, household deposits grew 16% year over year to $19 trillion, and deposits from non-financials jumped 23% to $10 trillion.
“Of the 33 BIS reporting countries that break out household deposits, 25 recorded double-digit annual growth rates,” the report said.
Banks’ assets also rose mainly due to increased government bond holdings and central bank reserves, which jumped 42% in the year to $21 trillion at the end of 2020, up from $14 trillion.
Additionally, a key indicator of global liquidity, known as foreign currency credit growth, held up in 2020, the BIS reported.
For example, U.S. dollar-denominated credit to non-banks outside the U.S grew by 5% in 2020 to $12.7 trillion. Cross-border credit from Europe and Japan also grew.
“These positive growth rates during the Covid-19 pandemic stand in stark contrast to the sharp contractions observed during the great financial crisis of 2008–2009,” the BIS noted.
While cross-border credit grew in 2020, the growth in credit to residents was even stronger, the BIS reported, “fuelled by increased government borrowing, reflecting the pandemic’s impact on government finances and efforts to mitigate its economic effects.”
For instance, dollar credit to the U.S. government grew by 21% in 2020, and euro credit to euro area governments increased by 15% during the year.
Another key difference between the banking sector’s response to the pandemic and the financial crisis is evident in bank lending statistics, the BIS said.
While loan growth slowed in 2020, it remained well above the level seen in 2009, despite the pandemic inflicting a much deeper recession.
The financial crisis was largely centred on banks, which reined in their lending, the BIS noted, whereas in 2020, “banks could be more supportive…when the pandemic afflicted the real economy, after the post-GFC regulatory reforms had strengthened their financial condition.”