This paper assesses European bank
deleveraging and its impact on global credit conditions.
Before the onset of the global financial crisis, European
banks had rapidly expanded their foreign lending activities.
However, European banks have since been tightening credit
conditions in Europe more for longer-term lending, a trend
that banks expect to continue. European financial stress has
been transmitted to emerging markets that have experienced a
sustained deterioration of credit standards and funding
conditions. As a result, European lending in emerging
markets has been lagging behind lending of other
international banks although European banks remain a
dominant source of funding. "Good" bank
deleveraging is still necessary from a prudential
perspective. Although acute "bad" deleveraging
pressures due to financial stress, which can trigger a
credit crunch, have subsided recently on account of decisive
policy measures, tail risks remain. Curtailing lending will
probably be a core component of this multi-year deleveraging
process. Taken together...