January 7 2010
The so-called “central banks’ central bank” has summoned a number of private sector bank chiefsto Basel this weekend
Bankers are back to the excessive risk taking that brought on the financial crisis. That, at least, is the fear of the Bank for International Settlements. The so-called “central banks’ central bank” has summoned a number of private sector bank chiefs to Basel this weekend to rap their knuckles about the return of “aggressive behaviour that prevailed during the pre-crisis period”. Given that the BIS was one of the few official organisations to warn of the credit crisis way back when, its latest admonition is worrying. Yet, at the same time, the BIS wants to have its cake and eat it.
Central banks want private bankers to take more risk. They want them to lend, even if credit demand is weak. More generally, they want to see funds flow out of cash and into the real economy. That, after all, is the point of near-zero interest rate policies and quantitative easing. The result has been a colossal and lucrative carry trade, with both welcome and unwanted consequences.
The supply of cheap funding has created useful demand for government bonds, just as fiscal deficits are rising. It has also helped banks rebuild their balance sheets. It may even have led to an incremental increase in the supply of credit. But being able to borrow at zero in the US and lend at, say, 9 per cent plus in Brazil has unleashed a possibly dangerous surge of hot money into emerging markets. Back home, it has also produced embarrassingly large profits at banks that weathered the crisis well, such as Goldman Sachs.
It is well-nigh impossible to separate desirable risk-taking from undesirable until either interest rates rise, or new bank regulations such as higher capital requirements are in place. In the meantime, the banks will make hay.
Top banks invited to Basel risk talks
January 6 2010 23:30
The Bank for International Settlements will gather top central bankers and financiers for a meeting in Basel this weekend amid rising concern about a resurgence of the “excessive risk-taking” that sparked the financial crisis.
In its invitation, the BIS cited concerns that “financial firms are returning to the aggressive behaviour that prevailed during the pre-crisis period”.
The BIS, known as the central banks’ bank, outlined in a restricted note to participants some specific proposals that it believes could create a healthier financial system. Those proposals including lowering return-on-equity targets for the banks as a way to discourage such risk taking
The meeting comes at a moment of intense uncertainty, with the global economy’s tentative recovery shadowed by “the overhang of private-sector debt and rapidly rising public debt”, and high unemployment.
“The concern here is that the prolonged assurance of very cheap and ample funding may encourage excessive risk-taking,” the BIS invitation note says.
“For example, low financing costs coupled with a steep yield curve may make participants vulnerable to future increases in policy rates – a situation reminiscent of the 1994 bond market turbulence which followed the Federal Reserve’s exit from a prolonged period of low policy rates.”
The note also expresses concern about deteriorating public finances and warned that doubt about fiscal prudence “could seriously disrupt bond markets if it triggered concerns about creditworthiness or inflation because of concerns with government incentives to inflate debt away.”
Among the charts included with the note is one indicating the cost of credit insurance against sovereign defaults.
In the past, the BIS has invited the top chiefs of private-sector banks to such gatherings in Basel on a yearly basis. But such meetings have been more frequent recently.
“These meetings are an attempt to bring a real world perspective to the deliberations of the wise men of the world,” one Federal Reserve official said. Central bankers “want to get a sense of what the markets are reacting to.”
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