Paris: The exit from crisis-era stimulus by the world’s central banks won’t be an easy ride, and previous market turmoil could well be repeated, according to the Organization for Economic Cooperation and Development. It sees “elevated" risks ahead in the financial system, citing the shift in monetary policy, high levels of public debt and leverage in China’s banking and shadow-banking businesses.
The US Federal Reserve has already begun raising interest rates, and others are following, but the prospect of returning to pre-crisis normality is daunting. Central-bank balance sheets in the US, the euro area, the UK and Japan stood at around $15 trillion at the start of this year, an almost fivefold increase from 2007, the OECD said. “This shift to normalisation has already led to extreme movements in asset prices in the early part of 2018," it said in a report published Monday. “This may be a foretaste of things to come."
The report isn’t the first to point out that central banks face a difficult balancing act when it comes to unwinding stimulus. The Bank for International Settlements has offered a variation of that view, saying that normalization will be “bumpy," but policy makers shouldn’t be distracted if market wobbles are contained.
In its annual report on business and finance, the OECD said that the end of easy money will test the robustness of regulations designed to avoid a repeat of the 2008 financial crisis.
While progress has been made in boosting banks’ capital levels, not enough has been done to untangle commercial from investment banking, and many regulations don’t address new risks from fraud and disruptive technologies. “The period of monetary support for the banking system would have been a good opportunity to fundamentally change the business models and governance of banks," the OECD said. “This opportunity was used only partially."