Global central banks buying assets and keeping interest rates low to boost growth have had “positive short-term effects for banks” even as risks from the policies are increasing, the International Monetary Fund said.
“The prolonged period of low interest rates and central bank asset purchases has improved some indicators of bank soundness,” the IMF said today in its Global Financial Stability Report. “Central bank intervention mitigated dysfunction in targeted markets, and large-scale purchases of government bonds have in general not harmed market liquidity.”
Central banks in the U.S., Europe, Japan and the U.K. attacked the longest and deepest recession since the 1930s with unorthodox accommodation. The Federal Reserve is aiding the world’s largest economy by expanding its balance sheet to a record $3.22 trillion, almost equal to Germany’s gross domestic product. The Bank of Japan plans to buy 7.5 trillion yen ($75.1 billion) of bonds a month and double the monetary base in two years to stave off deflation.
“The bottom line is: So far, so good,” Laura Kodres, assistant director of the fund’s Monetary and Capital Markets Department, said today at a press conference at the IMF headquarters in Washington. “The low interest rates and the purchase of various types of securities by these four central banks have put a floor under the economy, boosting activity, and have helped stabilize the financial system.”
Still, if banks don’t capitalize on the help they are getting from the unconventional monetary policies to rebuild their balance sheets, “at some point we can expect another round of financial distress,” Kodres told reporters.
While most measures of short-term balance-sheet health at U.S. lenders have improved because of the central bank policies, they face “significant interest-rate risk” because they “loaded up on government debt lately” to help meet capital requirements, Kodres said at the briefing.
“With interest rates so low, a rise could mean losses on some of these holdings,” Kodres said. “We find that the announcement of various monetary easings tended to raise the spread of bank bonds over government bonds -- possibly indicating that markets saw some future credit risks for banks.”
Even as central bank policies eased dysfunction in global markets, the unprecedented actions “are associated with financial risks that are likely to increase the longer the policies are maintained,” the IMF said in the study, a chapter of its twice-yearly report that was published today.