BIS warns of risks to global economic growth
Euro zone lenders dampen global banking recovery decade after crisis: Report
ZURICH/LONDON: The Bank of International Settlements (BIS) on Sunday urged governments to allow growth trends toward long-term averages to target structural reform while warning against inflation and protectionist winds.
In its annual report, the BIS said the growth outlook appeared more favorable than the anemic climate of a year ago, Claudio Borio, head of its monetary and economic department, told reporters in a conference call.
“We had already stressed last year that the rhetoric being used to describe the global economy was too downbeat,” said Borio, noting a strengthening of the global growth outlook, lower jobless tallies in major economies and inflation coming closer to target.
“One good year has been sufficient for economic conditions to become the most favorable since the Great Financial Crisis (GFC),” said Borio in a report which noted that “raising the economy’s growth potential is critical.”
For Borio, “the problems we face are global. The solutions must be global too. It would be illusory to think and act otherwise.”
Borio further cautioned against higher inflation and debt, rising protectionism and timidity on investment.
Taking into account fears on the consequences of globalization, the BIS devoted a whole chapter in its report to the issue.
For the BIS, “economic globalization has contributed to a substantial rise in living standards and falling poverty over the past half-century” amid enhanced competition and new technologies driving efficiency gains.
But “like any other form of far-reaching economic change, globalization poses challenges,” notably rising income inequality, while “financial openness exposes economies to destabilizing external influences,” the report said.
“Properly designed domestic policies can enhance the gains from globalization and mitigate the adjustment costs. And international cooperation must supplement such policies in order to address global linkages.”
Overall, the BIS said it supported “rebalancing policy toward structural reforms, relieving an overburdened monetary policy, and implementing holistic policy frameworks that tackle more systematically the financial cycle.”
Although a better economy is helping global banks to turn the corner a decade after the financial crisis began, euro zone lenders remain a dampener on the sector’s recovery, the report added.
Banks should use the “growth dividend” to increase their resilience to market shocks and reshape business models, it added. An improved economy will stop the rise in non-performing loans (NPLs) whose repayments have fallen behind.
“That said, the banking systems in some jurisdictions still look vulnerable to a further deterioration in credit quality. In a number of euro area countries, for example, the share of NPLs remains stubbornly high.”
Euro zone authorities had to intervene in struggling Spanish bank Banco Popular earlier this month, and face pressure to sort out some of Italy’s problem lenders as well.
But economists say that Europe was hit by two crises — one financial, the other related to euro zone countries’ debt. In the meantime, US banks have benefitted from their main market being in a stronger phase of the economic cycle — though the euro zone economy is recovering.
Europe, however, is widely seen as being slower and less aggressive in tackling struggling banks compared with the US, and the region is still “overbanked.”
The BIS said banks globally have made progress in cutting leverage and diversifying income, but market valuations for many lenders still point to investor skepticism.