The central bank governing central banks – BIS has issued a warning that a credit boom can be on its way because it has witnessed a sharp rise in elnidng in USD especially form Asia.
China has lended USD to housing and non bank clients and the figure has doubled in the last two years.
As many mortgages and business loans are written in euros or Swiss francs in central and Eastern Europe, foreign currency stood in recent years at a quarter or a third of total bank credit in the Czech Republic and Poland and more than half in Hungary, and about 90% in the Baltic states, the BIS added.
“Foreign borrowing [by households and non-financial institutions] and monetary policy can interact perversely, as raising domestic policy interest rates may induce further switches into foreign currency debt, which is perceived as cheaper,” the BIS said in its Quarterly Review. Thus, foreign currency lending constrains the room for policy maneuver in countries whose residents denominate a significant part of their debt and assets in a foreign currency, the BIS added.
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Such a credit boom is also a daunting challenge to control, the BIS said. Regulatory authorities may not want to put their banks at a competitive disadvantage with tightening regulations, and supervisors of large foreign banks may have little incentive to act if the large multinational banks they supervise have relatively small exposure to the economy where foreign-currency credit is booming, the BIS said.
“Addressing this challenge calls for international coordination,” it said.
The rise in foreign currency lending also reflects the growing importance of wholesale funding — the importance of external sources, which could be direct cross-border lending or interbank lending, the BIS said.
The US is looking at QE3 to revive the local economy and put pressure on givernments and the BIS to maintain USD as the worlds reserve currency.