Bank lending contracts again in Q3 -BIS

International bank lending decreased by its sharpest rate for at least 30 years in the third quarter of 2008 as the financial crisis restrained credit, the Bank for International Settlements said on Thursday.

Credit supply was slightly higher after stripping out big currency fluctuations, however, mainly due to higher lending by banks' foreign offices.

The BIS said international bank lending in the July-September quarter declined by $1.5 trillion, largely because the strong U.S. dollar shrank balance sheet positions denominated in euros. At constant exchange rates, lending rose by 0.5 percent, or $167 billion.

That marked a modest turnaround from the second quarter, when bank lending fell $1.1 trillion, or 3 percent, the sharpest contraction since BIS data began in 1977.

The limited turnaround was driven by a $69 billion increase in UK bank lending, after shrinking by $606 billion in the previous quarter, and by an increase in credit in Germany, Austria and Luxembourg, Swiss-based BIS said in a quarterly report.

But lending in the United States continued to contract — by $83 billion in the third quarter, compared to $199 billion in the previous three months. Lending in the Cayman Islands contracted by $92 billion, more than the $38 billion contraction seen there in Q2.

Banks have cut back on lending to each other since August 2007, forcing borrowing costs higher and governments to step in to try to kick-start the flow of credit.