Quantifying the risks from banks’ foreign claims

With bond yields now dropping back again, the drag from unrealised losses on banks’ capital ratios should start to reverse. However, a sharp increase in losses on banks’ foreign loan portfolio has yet to materialise. While our view that major advanced economies will only experience a mild recession suggests that there won’t be widespread defaults, the poor quality of banks’ overseas loans and their sensitivity to rising interest rates and tighter financial conditions suggest that foreign loans pose substantial risks.