By Andrew Hurst
European Banking Correspondent
ZURICH (Reuters) - Banks, which have used a glut of cheap money to help fuel a boom in real estate may face a rough ride when lending conditions turn sour, the Bank for International Settlements said on Sunday.
"Given the key role that a benign credit environment has been playing in boosting the performance of the financial sector over the past years, a turn in the credit cycle represents a significant risk to its outlook," the Basel-based BIS said in its annual report.
A combination of low interest rates and unusually infrequent rates of default among borrowers in many countries have played a big part in boosting profits at financial services companies.
The BIS also warned that favorable credit conditions, supporting a flood of money into leveraged finance deals, structured credit product markets and property, could not last forever.
"In many respects these conditions could be characterized as exceptional from the perspective of recent business cycle experience," it said.
Although corporate defaults are still very low, the ability of some companies to carry on servicing very high levels of debts could be stretched severely if business conditions take a turn for the worse and interest rates rise.
And those banks which have let strict lending rules slip may have the most to lose, the BIS said.
"A general question regarding the ability of banks to weather potential strains from a turn in the cycle, possibly associated with a broader slowdown in economic activity, relates to the discipline they have shown in their lending standards."
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