Despite an initial period of “uncertainty and adjustment” that
is to be expected following the victory of the Brexit camp at the UK referendum
last week, “with good cooperation at the global level, I am confident that
uncertainty can be contained and that adjustments will proceed as smoothly as
possible”, the general manager of the Bank for International Settlements (BIS),
Jaime Caruana said yesterday.
“Extensive contingency plans by the private sector and central banks
have been put in place to limit disturbances in financial markets,” he said,
according to a transcript of his speech at the BIS’s annual general meeting this
past weekend in Basel.
“Stronger capital and liquidity buffers in the private sector have
also made financial systems more resilient to such market disturbances,” he
added. “Central banks have already communicated that they are closely
monitoring the situation and stand ready to take the necessary actions to ensure
orderly market functioning. Central banks have acted swiftly in the past, they
stand ready to act again, and they have the tools.”
Meanwhile, commenting on the BIS annual report issued
Sunday, Caruana reiterated calls for a “rebalancing” of policies at global
BIS Annual Report
Calls for Addressing Productivity, Debit
BIS’s 86th annual report highlights that the
global economy needs policies that drive a more robust and sustainable
expansion and address challenges such as low productivity growth, historically
high global debt and shrinking room for policy manoeuvre.
These issues are leaving the global economy highly exposed
to shocks and political risks, and therefore there’s a need for “policies that
we will not once again regret when the future becomes today,” BIS says.
Looking at trends of the past year, BIS highlights the declining
impact of monetary policy on the domestic economy and the increasing prominence
of “external channels of transmission”, such as exchange rates.
“Monetary policy remained very accommodative over the past
year,” the report says. Nevertheless, “global demand has grown only moderately
and inflation has remained stubbornly low in advanced economies and some EMEs,”
it says, referring to Emerging Market Economies.
“Meanwhile, there were lingering concerns about the
declining effectiveness of domestic channels of monetary policy. The external
cannels, notably the exchange rate, became more prominent,” it says.
Another issue over the last year has been major economies’ very
low interest rates, as well as low government bond yields.
In particular, “the near zero short-term interest rates seen
in the United Kingdom and the United States today represent the lowest levels
observed snice the Great Depression, while current negative short-term rates in
Germany and Japan are unparalleled”, it says.
Meanwhile, for 10-year bond yields – which stood at between
-0.1% and 1.8% for these four countries – the past year has market record or
near record lows.
In addition, large-scale central bank purchases weighed
heavily on yields, it says. That raises questions on the profitability of
financial institutions, sustainability of asset prices and the broader economy,
Moreover, a post-crisis increase in debt has been noticed in
advanced economies, the report says.
To remove the bias towards debt accumulation, taxes and
subsidies could be adjusted, whereas currently “in most countries, tax systems
favour debt over equity”, BIS’s report says.
In addition, “sovereign risk and financial system risk can be
mutually reinforcing”, it says.
To address that, “maintaining or rebuilding a sound fiscal
position is key”, argues the report.
In the banking sector, “the overhaul of the Basel regulatory
framework is nearing completion”, it says.
“This will help to gradually remove regulatory uncertainty
and support banks’ capital and liquidity planning”, it adds.
“The BCBS will focus on not significantly increasing overall
capital requirements,” the report says, referring to the Basel Committee on
“However, ample room is available for national authorities
to further raise regulatory capital, providing sufficient flexibility to
activate countercyclical capital buffers”, it adds.
“The result will be a stronger and more resilient banking
system”, BIS argues.
That would in turn support the economy as better capitalised
banks lend more and stronger market-makers mean higher market liquidity, it