Monday, February 13, 2017

Jaime Caruana (BIS) Speech - International Financial Crises - New Understandings

Here is a link to a new recent speech from BIS General Manager Jaime Caruana. In this speech he once again expresses concern that systemic risk to the global financial system is being underestimated. Below I have pasted in the Conclusion section of the speech. I added bold type to what I thought were some key points of interest. I'll add this post and speech to our list of systemic risk warnings page.


Conclusion: some current challenges

Let me sum up. As Lamfalussy recognised, the challenge of all such data has been and remains their comprehensive analysis. For instance, my BIS colleagues have tried to operationalise the notion of global liquidity. One approach has been to integrate the banking data with securities data[22] to provide a holistic view of international credit in order to track global trends in dollar credit to non-US residents. Such data form a part of the larger set of global liquidity indicators of the BIS.[23] A further challenge is to assess how much larger dollar credit to non-US residents might be if one takes into account cross-currency swaps.[24]
Stepping back, better statistics alone do not make international finance safe. We also need to struggle to escape the popular models that prevent us from recognising the build-up of vulnerabilities. Getting all the right dots in front of you does not really help if you do not connect the dots.
Right now, I worry that even though we have data on aggregate debt, we are not properly connecting the dots and we are underestimating the risks, particularly when the high levels of debt are aggravated by weak productivity growth in many countries. And the standard of evidence for precautionary action has to be the preponderance of evidence, not evidence beyond a shadow of doubt. Waiting for fully compelling evidence is to act too late.
Total debt in the global economy, including public debt, has increased significantly since the end of 2007. True, banks have delevered and private debt has been reduced in some countries, namely Ireland, Spain, the United Kingdom, the United States and others. However, public debt has increased significantly in advanced economies, and private debt has increased in emerging market economies and some advanced economies less affected by the 2007-09 financial crisis. Over the last 16 years, debt of governments, households and non-financial firms has risen by 63% in the United States, the euro area, Japan, the United Kingdom, Canada and Australia, 52% in the G20 and 85% in emerging economies. Heavy debt can only leave less room for manoeuvre in responding to future challenges.
To conclude, financial crises give us an opportunity to improve the data that can indicate vulnerabilities. As Lamfalussy keenly recognised, these data can only play their part in macroprudential policy if we use them creatively to analyse systemic risk as it evolves.

Please click here to read the full speech text


 Added note: Forbes covers this speech in this article and says the BIS is issuing a new warning on global debt. Here is an excerpt:

"The next financial crisis is likely to revolve around how this debt burden is managed," warns Neil MacKinnon, an economist with VTB Capital in London.

1 comment:

  1. Very good post, and I like your points. However I do think that lists still have some merit, but the poster should try to make the list.

    Currency Exchange