Cross-border lending fell to $39.1 trillion during the period, the biggest decline for a decade, figures compiled by the Bank for International Settlements, the world’s biggest central banking body, revealed.
Banks were also hit by one trillion dollars worth of withdrawals, particularly by clients in the
"In the second quarter of 2008, BIS reporting banks total international claims declined by 1.1 trillion dollars at constant exchange rates to 39.1 trillion," said the Bank for International Settlements in its quarterly banking statistics review.
The scale of the contraction in lending far exceeded the only other two falls posted in the decade.
After the bursting of the dot-com bubble, lending declined by $125 billion or 1 percent of the total. Meanwhile, following the demise of hedge fund Long Term Capital Management in 1998, lending shrank 1.2 percent.
Shaken by dramatic collapses of banking titans such as Lehman Brothers, banks have been reluctant to lend to each other, resulting in a freezing of the system.
Central banks have had to step in as last resort lenders, making massive amounts of money available to banks to prevent a meltdown of the sector.
These latest BIS statistics indicate the severity of the problem, as it showed that during the period, cross-border inter-bank lending fell 3 percent or $300 billion.
It was not just inter-bank lending that was hit, but also lending to individuals.
"Banks owned in the euro area, the
The cutback on lending was particularly marked in short-term loans of up to and including one year, which accounted for 86 percent of the decline in developed countries.
Increased short-term lending suggests that banks are less willing to give long-term loans.
But when short-term lending shrinks, it suggests that the situation has deteriorated so much that banks prefer to hold back cash and withdraw from lending.
Even as banks cut back on lending, clients in turn withdrew huge amounts of deposits during the quarter.
"Banks cross-border liabilities shrank by 1 trillion dollars, including drawdowns of 633 billion US dollar and 184 billion dollars in pound sterling, mostly by residents of the
Many major international banks, particularly those which had been hurt by the financial crisis, have been hit by asset withdrawals.
Swiss banking giant UBS last week revealed that for the third quarter, it saw a net outflow of 83.7 billion Swiss francs worth of assets as clients took their money elsewhere.