European banks borrow heavily to fund lending

European banks, unlike their US counterparts, borrowed heavily from other banks to fund a spurt in lending to companies in the run-up to a global credit crunch, the Bank for International Settlements said.

The scale of borrowing may have exacerbated the credit crisis as banks scrambled to roll over short term-funding when liquidity started to dry up over the summer.

Net borrowing by European banks from other banks, including uncollateralised loans and repo financing, has soared to US$800 billion ($991.7 billion) from practically nil in 1997, the BIS said in a quarterly review.

In contrast, US banks have borrowed in dollars from companies other than banks and channelled these funds to other banks through the interbank market.

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