BIS warns of high spirits in the financial markets

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DCentral bank measures have had a stabilizing effect on the first strikes of the corona crisis. But in the long run they need the support of the states when it comes to pushing growth again. In its annual report released on Tuesday, the Bank for International Settlements (BIS), which is considered to be the bank of central banks, also warns of an exuberance that is spreading in the financial markets because the extent of the crisis is still far from known.

Markus Frühauf

The BIS is now anticipating rising corporate insolvencies. After the economic standstill had primarily led to liquidity problems, the viability of many companies is now being put to the test. “Monetary policy alone cannot be the growth engine,” said BIS Director General Agustín Carstens at the Annual General Meeting in Basel.

In view of the rising government debt in the wake of the crisis measures, the former central bank governor of Mexico considers it imperative that fiscal policy remains on a long-term path through timely consolidation. This could better support economic growth and financial stability. Carstens also believes structural reforms are necessary.

Opportunity for a new policy

As great as the damage caused by the Corona crisis is, there is also the opportunity for a growth-promoting policy. Since the resources for the governments are limited, they should prefer investments in an ecologically sustainable growth such as the realignment of the energy sector due to the climate risks, Carstens demanded.

The Basel-based BIS has more than 60 central banks, for which it manages foreign exchange reserves and serves as a think tank for monetary policy. The BIS profit in the 2019/2020 financial year (as of March 31) was ultimately pushed down significantly by the market turmoil caused by the Corona crisis. Net income decreased year-on-year from 461 million to 166 million special drawing rights. The book money introduced by the International Monetary Fund (IMF) is based on a basket of currencies consisting of dollars, euros, Swiss francs, pounds and renminbi and corresponds to the equivalent of 135.5 million euros.

The BIS advises central banks to regain monetary leeway in good time. Chief Economist Claudio Borio sees this as the most important challenge. This requires an interaction of monetary, fiscal policy and regulation if growth is to be sustainable and in line with financial stability.

New innovation center in Frankfurt

Looking at the article on digital payments and assets published in the previous week, Carstens emphasized the importance of international cooperation. In his view, technical developments and innovations in payment transactions must be based on the system of central banks. The Bundesbank will play an important role in the new digital money world. It will become a hub for common digital financial innovations from central banks around the world. Together with the French central bank, it is currently building a BIS innovation center in Frankfurt and Paris.

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