The global banking business saw an unprecedented contraction in its international balance sheets in the fourth quarter of 2008, and a continued decline in derivatives activity in the first quarter of 2009, the Bank for International Settlements said Tuesday.

According to the latest BIS statistics on international banking, the industry saw a sharp decline in both interbank claims and claims on non-banks, reflecting reduced lending, asset disposals and writedowns. Banks also trimmed their cross-border credit to emerging markets, but their local operations in many of these countries remained stable, it noted.

The latest derivatives statistics indicate that the first quarter of 2009 saw a continued decline of activity on the international derivatives exchanges, the BIS said. Total turnover based on notional amounts decreased slightly to US$366 trillion from US$380 trillion the previous quarter. “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,” the BIS reported.

The total notional amounts outstanding of over-the-counter derivatives also declined in the second half of 2008 to US$592 trillion as of the end of the year, down from US$684 trillion six months earlier — the first contraction since data collection began in 1998. “Both foreign exchange and interest rate derivatives markets recorded their first significant downturns in activity, while credit default swap markets continued to contract, with outstanding amounts decreasing by more than 25%,” it noted.

One area that has revived is borrowing in the international debt securities market, which increased in the first quarter of 2009, reflecting a gradual return of confidence. Net issuance increased to US$670 billion, up from US$519 billion the previous quarter, the BIS said.

IE