I hear the Cayman Islands are lovely this time of year

Maybe New York bankers should schedule a few visits to the branch offices down there. They sure are doing plenty of business in the Caribbean.

US banks have extended more credit to the Caymans ($568.9 billion) than to London ($457.9 billion) -- and the amount that they are lending just seems to keep growing. Lending to the Caymans has almost doubled since the end of 2001. US bank credit to the Caymans now accounts for about a 30% of all US bank credit to foreigners ...

Compare that say with the share of US bank lending to Asia before the Asian crisis: 20% (it is about 10% now).

Seriously, when the Federal Reserve worries about too much liquidity sloshing around global markets and fueling financial excesses (like really low spreads on US corporate debt, for example) they probably are looking at statistics like these. Bank credit to the Caymans is probably a pretty good proxy for bank credit to hedge funds.

Banks lend to their branch office in the Caribbean, who then lend to hedge funds. The hedge funds then buy US securities. This of course does not provide any net credit to the US: Banks lend to a foreigner (a hedge fund based offshore) and the foreigner lends the money right back to the US.

LTCM’s crisis back in 1998 led banks and broker-dealers to pull back on the credit they extended to hedge funds. I hope the lessons of this crisis have not been forgotten. I suspect the New York Fed does too. The spreads on lots of risky assets have fallen back to pre-LTCM levels.

Leverage plus major global imbalances that imply large changes in the relative prices of many financial assets at some point, though no one can say when, are a potentially dangerous combination.