Banks were also hit by US$1 trillion worth of withdrawals, particularly by clients in the US, Britain and Switzerland, according to figures compiled by the world's biggest central banking body.

'In the second quarter of 2008, BIS reporting banks' total international claims declined by US$1.1 trillion at constant exchange rates to US$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 US$125 billion or 1.0 per cent of the total. Meanwhile, following the demise of hedge fund Long Term Capital Management in 1998, lending shrank 1.2 per cent.

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 per cent or US$300 billion.

It was not just inter-bank lending that was hit, but also lending to individuals.

'Banks owned in the euro area, the UK and the US took the lead in reducing international claims on residents of developed countries by US$848 billion dollars or 4 per cent,' noted the BIS.

Even as banks cut back on lending, clients in turn withdrew huge amounts of deposits during the quarter.

'Banks' cross-border liabilities shrank by US$1 trillion dollars, including drawdowns of US$633 billion and US$184 billion in pound sterling, mostly by residents of the US, the UK and Switzerland,' said the BIS. -- AFP