Central banks cannot repair the balance sheets of households and financial institutions. Central banks cannot ensure the sustainability of fiscal finances. And, most of all, central banks cannot enact the structural economic and financial reforms needed to return economies to the real growth paths authorities and their publics both want and expect.
Only a forceful programme of repair and reform will return economies to strong and sustainable real growth . . .
Though six years have passed since the beginning of the global financial crisis, a robust and sustained economic recovery still eludes many economies. In its
83rd Annual Report, the Bank for International Settlements (BIS) warns strongly that the effectiveness of central bank accommodation in spurring economic growth is limited, and has only bought time to develop and institute real reforms to restore productivity growth and balance sheet health. The prescription for a true recovery, says BIS, is a mix of policies:
- Authorities need to hasten labour and product market reforms so that economic resources can shift more easily to high-productivity sectors.
- Households and firms have to complete the difficult job of repairing their balance sheets, and governments must intensify their efforts to ensure the sustainability of their finances.
-
Regulators have to adapt the rules to a financial system that is becoming increasingly interconnected and complex and ensure that banks have sufficient capital and liquidity buffers to match the associated risks.
-
Each country needs to tailor the reform agenda to maximise its chances of success without endangering the ongoing economic recovery.
It is only with others doing their part, says BIS, that central banks will be able to normalize monetary policy. The BIS report urges that we maximize the use of this time that central banks have borrowed for us.
One of the four BIS prescriptions for sustaining growth is healthier and better regulated banks and financial institutions. BIS believes that achieving this requires a coordinated and resolute effort to establish effective risk management and measurement, balance sheet repair, and reduction of complexity by structurally segregating some bank functions. Now that many of the reforms encompassed in the Basel III framework are underway, the focus has turned to monitoring implementation, and seeing to it that regulations keep up with the ever-changing marketplace. It is the BIS's position that consistant application of and continual adaptation by the prudential framework is the best way to use this breathing space central banks have given us. They stress, however, that time is running out.
Prudential standards that strengthen the capacity of banks to deal with risks represent the most reliable defence against financial instability. Rules requiring ample capital and liquidity buffers that are linked to the underlying risks are key elements of these standards. These rules need to address the complexities of risk measurement in a way that improves transparency and comparability in the financial system. A key step towards that goal is harnessing the mutually reinforcing nature of risk-sensitive and risk-insensitive metrics of solvency. Buffers that are robust to uncertainty and reflect the complexities in risk assessment will enhance the resilience of individual banks and of the financial system as a whole.
Given the tone of urgency in the Annual Report, look for BIS to press the case further at every opportunity.