BIS defends globalization though gains not evenly spread

    The Bank for International Settlements (BIS), which reflects the thinking among central bankers across the word, has launched a passionate defense of the economic benefits of globalization but acknowledged the subsequent rise in income has not been evenly spread and called for sound domestic policies to help those who are negatively affected.

    In a early release of a chapter from next week's annual report, BIS tackles one of the central questions of the political discourse of the 21^st century: Does globalization benefit or hurt mankind?

     "Globalisation has had a profoundly positive impact on people's lives of the past half-century," answered BIS, the Swiss-based organization that is also known as central bankers' bank.

     "Nevertheless, despite its substantial benefits, it has been blamed for many shortcomings in the modern economy and society."

     BIS admits that income gains from global trade are unevenly distributed and the benefits to unskilled labour in advanced economies may well be diminished because of the greater competition from the large pool of unskilled labour in emerging markets, which then in turn may benefit.

     "The biggest gains have accrued to the middle class of fast-growing EME's and the richest citizens  of advanced economies," said BIS, adding that the global upper middle class has experienced little income growth."

     Other the other hand, global trade leads to lower prices for goods that are disproportionately consumed by lower-income households, boosting their relative purchasing power so the net effect on inequality from open trade is uncertain, BIS said.

     By releasing a single chapter and foreward from its annual report, BIS adds weight and importance to its message about the benefits of globalization. BIS has credibility: It warned authorities and the financial community well in advance about the build up in credit that eventually burst and unleashed the 2008 global financial crises.

     But while globalization has reduced poverty and raised living standards worldwide, for example in China, the uneven distribution of its benefits within countries has allowed its critics to confound the challenges it poses with the main drivers of many economic and social ills.

     "High inequality appears to be harmful to growth and has undermined public support for globalization," said BIS.

     BIS clearly fears that lessons from the past and gains in living standards will be overlooked in the current political climate, most notably in the United States where U.S. President Donald Trump has blamed globalization for a loss of jobs and low wages in some industries.

     "Critics often blame globalization for the rising inequality in some industrialized countries," said BIS General Manager Jaime Caruana, adding:

    "Empirical studies show that other factors, mainly technology, have played a bigger role."

    While globalization has been made a scapegoat by opportunistic politicians, BIS says globalization is not responsible for a rise in income inequality within countries and instead of rolling back globalization it should be properly managed, domestically and internationally.

     BIS, which draws its staff from central banks worldwide as well as academia, called for a international regulatory approach to ensure that policymakers manage global financial risks, one of the integral aspects of globalization.

      Click to read "Understanding globalization", chapter VI in this year's annual report.

     www.CentralBankNews.info

     
   

Does loose monetary policy cause housing bubbles?

   (Following article is written by Graeme O'Meara, economic consultant at Indecon, Dublin, Ireland. The article is based on a paper published by O'Meara in Ireland's Economic and Social Review. Central Bank News occasionally publishes articles by guest contributors if they are of interest to our readers.)

    By Graeme O'Meara

    A new research paper published in the Economic and Social Review re-opens the debate over the causes of housing booms and the role of central banks.

    Much of the recent interest in housing bubbles has emanated from the booms and busts observed in the housing markets of a number of OECD countries. When housing bubbles burst, they tend to plunge an economy into recession through declines in consumption and investment.  It has been argued retrospectively that periods of low interest rates create an environment conducive to the buildup of imbalances in the housing sector.

    Interest rates influence house prices by making credit cheap and increasing the demand for houses through a number of channels. First, lower interest rates reduce the opportunity cost of buying a house compared with investing in other assets. Second, a type of financial accelerator effect creates a feedback loop between house prices and interest rates as the net worth of borrowers changes in response to changes in the value of their assets. A number of studies including Iacoviello (2005) and Calza et al. (2009) have shown that a reduction in interest rates increases the value of houses by increasing the present value of future user costs, enhancing borrowers’ current debt capacity and demand for housing. Third, interest rates can affect house prices through the risk taking channel, where lower rates of interest encourage financial institutions to lever up in order to achieve a target rate of return – a search for yield effect (Rajan, 2005 and Borio and Zhu, 2008).

    Many economists, including John Taylor, have argued that in the years preceding the housing bust in the US, the Federal Reserve’s monetary policy stance was too loose, as examined relative to a Taylor rule. It has been reported that the Fed’s deviation from a Taylor type rule contributed to the run up in house prices.

    As many other central banks pursued a policy similar to the Fed’s over the years 2000-2006, this paper extends the analysis to a number of other OECD economies.

New credit gauge warns of impending crises - BIS review

    A boom in credit usually foreshadows a financial crises but authorities failed to spot the build-up in total credit from the late 1990s through 2006 because they were looking the other way, according to an article in the latest quarterly review from the respected Bank of International Settlements (BIS).
    While authorities were busy looking at lending by domestic banks, which only rose slowly, credit created by foreign institutions and non-banks – the so-called shadow banking sector that includes pension funds, mutual funds, hedge funds, and insurance companies – exploded.
    “A new BIS database reveals, for example, that banks may provide as little as 30% of total credit to the private non-financial sector, as is currently the case in the United States,” said the article by senior BIS economist Mathias Drehmann.
    The database, which captures all sources of credit regardless of source or origin, provides more information than the traditional measurements of bank credit and is therefore useful as an early warning indicator for financial crises, Drehmann finds.
    That finding has very practical implications for banks as the Basel III global rules include countercyclical capital buffers that are based on a credit-to-GDP gap, but they don’t specify how national banking regulators should calculate that gap.

Global supervisors aim to limit risks from shadow banking

    Shadow banking, the huge but unregulated frontier of the financial world, will soon be subject to bank-like supervision as global policymakers start to hammer out rules that reduce the chances of future crises yet still allow new creative financing models to emerge.
    The Financial Stability Board (FSB), which monitors and coordinates global financial regulation, has proposed an ambitious policy framework and recommendations that it believes are needed to “mitigate the potential systemic risks associated with shadow banking,” and expects to issue final proposals in September 2013 following industry comment.
    The term shadow banking describes the murky world of hedge funds, money market funds and investment vehicles that are often used by major banks to carry out sophisticated financial transactions.
    As these shadow legal entities do not take customer deposits, they don’t need banking licenses and are not subject to supervision.
    The 2008 global financial crises exposed the threat from shadow banking to financial stability, not just because of its vast size but because it was completely interwoven with the supervised banking system; a regulated banking system relied on unregulated entities with a razor-thin capital base.
    Global political leaders, meeting as the Group of 20, decided that the risks from shadow banking – about half the size of the normal banking system - posed too great a threat and asked the FSB to come up with policy recommendations.

FSB adds BBVA, Standard Chartered to list of key banks

    The Financial Stability Board (FSB), which coordinates global financial regulation, has added Spain’s BBVA and UK-headquartered Standard Chartered banks to its list of global systemically important banks (G-SIBs) and removed Germany’s Commerzbank, the UK’s Lloyds Banking Group and Franco-Belgian Dexia from the list.

    The FSB's latest list of globally important banks is based on data from end-2011 and now comprises 28 banks, down from last year’s list of 29 banks.  Lloyds and Commerzbank were removed from the list due to a “decline in their global systemic importance” while Dexia was taken off as its going through an orderly resolution process.

    Being labeled a systemically important bank or financial institution has consequences as regulators will not only impose stricter supervision but also higher capital charges than other financial institutions.

     The list for the first time divides banks into buckets of additional loss absorbency that is required by regulators. G-SIBs will be subject to resolution planning rules by end-2012 and the additional loss-absorbency requirements will be phased in by January 2016 and fully implanted by January 2019.

    Systemically important banks are defined as those institutions whose distress or disorderly failure would cause significant disruption to the global financial system and economic activity due to their size, complexity and interconnectedness.

OTC infrastructure ready, but no regulatory certainty - FSB

    The private sector infrastructure necessary to trade, clear and record over-the-counter (OTC) derivative transactions is now ready but regulatory uncertainty is blocking everyone from using these new exchanges, according to the Financial Stability Board (FSB).
    The FSB’s fourth progress report on reforming OTC derivatives, which triggered fears of contagion during the global financial crises, showed that the United States, the European Union, Hong Kong and Japan have made further progress in meeting the goal of trading and clearing through central counter parties by end-2012.
    But agreeing on cross-border rules is lacking and the FSB urged regulators worldwide to identify and develop options to tackle the shortcomings to help meet the end-2012 commitment to central clearing.
    The financial crises revealed that OTC derivatives had contributed to the build-up of systemic risk and the global nature of these markets - where buyers and sellers are frequently located in different jurisdictions - makes globally consistent regulation essential.

More finance not always better - BIS paper

    If credit and finance helps businesses grow, it follows that a country should encourage a vibrant and large financial sector. That, at least, was the logic behind the wave of financial deregulation that swept through advanced economies in the 1990s.

    But with the repercussions of the 2008 financial crises still reverberating, economists are starting to question that belief with some concluding that finance can indeed become excessive and this has a negative effect on growth.

    The latest contribution to this debate comes from the Bank for International Settlements (BIS), with a working paper that concludes that at low levels, such as in developing economies, a large financial system can spur faster growth in productivity.

    “But there comes a point – one that many advanced economies passed long ago – where more banking and more credit are associated with lower growth,” wrote BIS chief economist Stephen Cecchetti, and BIS staff economist Enisse Kharroubi in “Reassessing the impact of finance on growth.”