BIS Fears Central Banks Laying Groundwork for Next Financial Crisis

The Bank for International Settlements (BIS) is the oldest global financial organization still in existence. Made up of 60 central banks from all over the world, it monitors national bank regulation trends and their impacts on the global economy.

The Bank for International Settlements (BIS) is the oldest global financial organization still in existence. Made up of 60 central banks from all over the world, it monitors national bank regulation trends and their impacts on the global economy.

In its 85th annual report, issued in late June and reported by Business Insider, the BIS cautioned that its members might already be laying the foundation for a future financial crisis. The basis for the criticism is an observation that various nations’ current political regimes may be pressuring central banks to enact policies that buy “short-term gain at the cost of risking long-term pain.”

In support of this assertion, the BIS points out those central banks continue to have record-low interest rates as part of their ongoing response to the Global Recession of 2008. Unfortunately, these same nations have soaring national debts that have largely gone unchecked. The BIS worries that these practices, in addition to super low long-term rates, may be hurting long-term growth and productivity. The BIS noted that these polices focus too narrowly on short-term output and inflation stabilization while ignoring the slower-moving, but much more important and costly, long term financial cycles.

The BIS believes that nations currently suffering from slow growth, stagnation, or contraction may actually face these situations due to a failure to come to terms with how “financial developments interact with output and inflation” in a global economy. It went on to say that, current banking policies have been ineffective at preventing excessive rises and falls in either advanced or emerging markets. As a result, these failures have led to long-lasting harm to various national economies that have lost productivity and misallocated resources.

Unfortunately, these practices do not only affect the nation implementing them. As the BIS pointed out in its report, “As monetary policy in the core economies has pressed down hard on the accelerator but failed to get enough traction, pressures on exchange rates and capital flows have spread easy monetary and financial conditions to countries that did not need them, supporting the buildup of financial vulnerabilities.”

The BIS also fears that the global economy itself relies too heavily on monetary policy to boost output; a trend it deems an “alarming and unsustainable trend.” Many of these policies are the same as those that led to the Global Recession originally.

As a result, the BIS fear that when the next global financial crisis occurs, central banks will lack the necessary tools to deal with it.