Quote:

The Bank for International Settlements (BIS) said cross-border loans fell by $799bn (£520bn) in the fourth quarter of 2011, led by a broad retreat from Italy, Spain and the eurozone periphery.

Lending to banks in the eurozone fell $364bn or 5.9pc, with drastic reductions of 9.8pc in Italy and 8.7pc in Spain.

The BIS's quarterly report said the decline in lending was "largely driven by banks headquatered in the euro area facing pressures to reduce their leverage".
Banks must raise their core tier one capital ratios to 9pc by the end of this month or face the risk of partial nationalisation. The global Basel III rules are also pressuring banks to retrench.

The International Monetary Fund said banks will have to slash their balance sheets by $2 trillion (£1.6 trillion) by the end of next year even in a "best-case scenario".

This could reach €3.8 trillion if Europe mishandles the debt crisis.
Tim Congdon from International Monetary Research said regulators were making a grave mistake by forcing banks to cut lending during a slump.

"What they are doing is frightening. If banks shrink their balance sheets, it destroys money. It causes a credit crunch and intensifies the recession. This is why we are facing a global slowdown," he said.

Alastair Clark, a member of the Bank of England's interim Financial Policy Committee, said last month that regulatory pressure may have gone too far, "inadvertantly" causing banks to restrict credit.

The BIS said French banks slashed their cross border assets by $197bn, and German banks cut by $181bn. The figures mostly predate the effects of the European Central Bank's liquidity blitz over the winter, which has had the effect of "Balkanizing" Europe's banking system. Analysts say the pace of withdrawal has since quickened.

Separately, the BIS said reserve accumulation by Asian central banks has jumped from $1.1 trillion to $6.4 trillion over the past decade, reaching levels that threaten to set off inflation and destabilise their economies.

The reserves – mostly in dollar and euro bonds – top 100pc of GDP in Hong Kong and Singapore, and 50pc in China, Malaysia and Thailand.

The effect is to distort the whole credit structure, promote the growth of "shadow banking", and store up all kinds of problems. "The expansion of the central banks' balance sheets has created dangers that require attention," the BIS said.