The Bank for International Settlements (“BIS”) issued its annual report for the financial year ending on March 21, 2015.
In the report, the BIS stated that interest rates have been low for the longest time in history. According to the BIS, those rates fueled costly financial booms instead of sparking sustainable and balanced global expansion.
The BIS maintained that monetary policy continued to be “exceptionally accommodative,” with many regulators delaying tightening regulation, and noted that central bank balance sheets remained at unprecedented high levels. The BIS argued further that the international monetary and financial system amplified financial imbalances by “transmitting exceptionally easy monetary and financial conditions to countries that did not need them.”
As a solution to the imbalances, the BIS suggested “a triple rebalancing in national and international policy frameworks,” which would require regulators to enact policies that paid greater attention to the “medium term” and the costly interplay of domestic-focused decisions.
The report also provided information pertaining to post-crisis behavior and the business models of financial institutions. Specifically, the report noted that the prolonged period of low interest rates was particularly challenging for institutional investors.
Lofchie Comment: The BIS report’s conclusions about systemic risk are far more negative than FSOC’s, and far more explicit in pointing to governmental policies as creating that risk by focusing on the short term. As we have noted previously, U.S. regulatory policies now prohibit or limit banks and broker-dealers from taking, or even holding, risk positions (i.e., buying assets). The result is this: a fall in asset prices and the consequent sell-off have the potential to create a significant downward spiral. In short, if there is a sell-off, who will be a buyer?