Bank for International Settlements publishes BIS Quarterly Review primer on direct and indirect cross-border credit and financial stability risks

The Bank for International Settlements published a BIS Quarterly Review feature explaining how BIS statistics can be used to disentangle the international dimensions of credit to non-bank borrowers and to assess related financial stability risks. The article frames international credit along three main dimensions that matter for vulnerability analysis: whether funding is sourced abroad directly or indirectly, the currency of denomination, and the identity and structure of creditors. The analysis highlights that indirect cross-border credit, where locally extended domestic credit is funded by net borrowing from non-residents, can allow credit growth to outrun domestic deposit growth and is often overlooked if monitoring focuses only on direct cross-border claims. It finds that measures combining direct and indirect cross-border credit are more tightly associated with pre-global financial crisis credit booms and subsequent output contractions than direct cross-border credit alone, and notes that foreign banks’ cross-border credit tends to retrench faster under stress than locally funded local-currency lending. The feature also documents a post-crisis shift in foreign currency borrowing towards capital markets, with the bond share of foreign currency credit to emerging market borrowers rising from almost a third at end-2008 to almost a half in mid-2024, while the US dollar remains dominant and rising dollar rates and sustained dollar appreciation since 2020 have curtailed dollar borrowing but left repayment obligations as a continuing concern.