Læs også: Investor-legende tjener styrtende på spekulation mod tysk bank
By Editor on - theeventchronicle
It’s late June which means it is time for the annual warning by the Bank of International Settlements about the growing futility of monetary policy and central bank impotence. Exactly one years ago, the BIS asked “Of What Use Is A Gun With No Bullets?”, in which the BIS said central banks are defenseless against the coming crisis. Well, it underestimated just how far the central banking “magic people” are willing to reach inside their “magic bag of tricks” to preserve the status quo: to be sure nobody at the time expected the ECB to begin buying not just corporate bonds but junk bonds too.
Fast forward one year and the song and dance has been repeated, with the issuance of the BIS’ 86th Annual report in which we read that “Easy-money policies and unprecedented monetary stimulus have started to backfire in global financial markets” as Bloomberg summarizes the 130 page report, which is largely full of data and analyses quite familiar to regular readers.
In its report, the BIS “says that historically low interest rates and bond-buying programs – which have sent yields below zero on more than $8 trillion of government bonds, a record amount – are causing anomalies in asset values. One example is that small price differences in related securities or assets, which banks traditionally eliminated through arbitrage, are persisting more often.”
“Monetary policy is running out of room for maneuver,” said Hyun Song Shin, head of research at the BIS, in an interview. “It is not clear how much further stimulus of the real economy can be achieved using monetary-policy tools alone without inviting unwanted distortions.”
Like on virtually every occasion since 2013, the BIS on Sunday once again called on governments to reduce their reliance on extraordinary monetary policy for spurring economic growth. “Instead, they should redouble efforts on structural and financial reforms, it said. The stimulus produced by the world’s monetary authorities will approach the limits of its effectiveness, according to the BIS, which was formed in 1930 and acts as the central bank for many of those institutions.”
One lament raised by the BIS is one we have heard loud and clear in recent weeks from both Deutcshe Bank as well as Citi:
With the cost of money so close to zero, the profitability and resilience of banks has been sapped, impairing their ability to lend to the wider economy and make markets for securities… When banks choose not to hold as many securities, that reduces depth and liquidity in bond and currency markets, threatening to disrupt their smooth functioning.“It’s far better for banks and broker-dealers to have a strong capital base because it allows them to lend more in support of the real economy and on better terms,” the BIS’s Shin said. “It allows them to make markets in a robust way.”
Lenders across Europe from Deutsche Bank AG to Societe Generale SA are struggling to increase revenue as the European Central Bank pushes interest rates below zero, regulators demand bigger capital buffers and market volatility spooks investors, according to their financial reports last month. Intesa Sanpaolo SpA, Italy’s second-largest bank, said in May its first-quarter profit dropped 24 percent due to such reasons.
Another point the BIS makes is something we have discussed over the past year, namely the blow out in cross-currency basis swaps, which as we futher pointed out on Friday, blew out to the most negative print since 2012:
