Geneva: The Bank for International Settlements (BIS) has said that inadequate regulations was one of the reasons for the sharp rise in private sector debt in many countries, prior to the global financial crisis.
According to BIS, a grouping of the central banks worldwide, banks should recognize their losses at an early stage as well as rebuild their capital to help bring down the overall private sector debt.
In its quarterly review for September, the Basel-based BIS noted that inadequate regulations were also responsible for the “sharp build-up in private debt, particularly mortgage lending to households, in several countries.”
The ravaging financial crisis during 2008-09 happened mainly due to the mortgage crisis in the US, which turned for the worse after the fall of Lehman Brothers in September 2008. Private debt in the American market had then jumped in the wake of the massive lending on sub-prime mortgage securities, which carry higher risk of default.
BIS said that its analysis casts doubt on possible concerns that a sustained period of debt reduction might lead to low growth in the future.
“Growth rebounds rather quickly. We take this as indication that it is possible to reduce debt and still experience healthy growth,” it added.
To achieve the same, BIS stressed that policymakers have to first fix the problems in the banking system that had resulted in the financial meltdown.
“The experience of Japan, but also that of other crises, indicates that this (maintaining healthy growth while cutting debt) requires essentially two things: to recognise losses, and rebuild bank capital,” the report noted.
Even though, cutting private debt might not be the top priority for policymakers when output is declining, it is important to address the problems that led to the crisis as the recovery picks up, BIS said.