BANKS AROUND the world cut international lending at the fastest rate since records began more than 30 years ago in the final quarter of last year, according to data from the Bank for Inter-national Settlements released yesterday.

The savage deterioration in overseas lending came as the US economy shrank at an annualised rate of 6.1 per cent, according to information released yesterday while the German government cut its forecast to predict a 6 per cent fall in GDP this year.

International lenders reduced their overseas loans by £1,790 billion (€1,992 billion) in the final three months of last year, down about 14 per cent from the peak in lending in the first quarter of 2008.

The fall in overseas loans came as the financial system narrowly avoided collapse in the final quarter of last year after US investment bank Lehman Brothers failed.

The figures reflected an unwinding of globalised finance, built up in the years running up to the credit crunch. They also indicate a big deleveraging of banks.

The reduction in international lending also underlines the rising tide of financial protectionism as pressure mounts on banks to maintain loans to domestic borrowers following government bailouts.

Almost all of the decline in loans came from banks in western Europe, which had substantially expanded their international lending in recent years.

The contraction in lending will compound fears that eastern European economies could face a shortage of credit. It will also leave many companies around the world scrambling for cash as they seek to refinance loans taken out during the credit boom.

The decline in lending by European banks is important because they play the main role in providing finance to companies and households, unlike in the US, where the capital markets are a larger source of debt. – (Copyright The Financial Times Ltd 2009)