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The latest BIS Annual Report provides an overview of cross-border lending and interbank exposures. “International claims of BIS reporting banks rose from $6 trillion in 1990 to $37 trillion in 2007 (equivalent to over 70% of world GDP.) The withdrawal of institutions from a major national banking system from international lending could affect advanced industrial economies as well as constrain the financing of emerging markets.” For those that follow these matters, it may be worth reading.

The conclusions drawn from this report are analogous to the one's that my team and I have drawn and it is what is powering the next step in my investment thesis which I will start publishing in a few weeks. We look at this from two perspectives:

First – reduction in international exposure by US and European banks would lead further slower down of these banks as they cut down on their loan (and deposit) exposure in emerging and developing economies. Also, these regions generally offer higher NIM and more opportunities growth in fee based income, etc. The banks and financial institutions might have to cut down their forecasts in view of their strategies to strengthen and revive the plagued liquidity situation in their country of headquarter.

Second – This action by banks and financial institutions is likely to impact the growth in developing and emerging economies dependent on foreign source of finance for their development needs. For eg, Latin American economies have large dependence on US and European banks, and any cut-down in investment will impact growth of sectors like infrastructure, real estate, etc, which require large investment.