BIS reports on economy's resilience

The BIS Annual Economic Report (94 page / 1.7MB PDF) said a deceleration in the global economy during 2018 was to be predicted, but when it came in the second half of the year it was stronger than expected. Although there was no global recession, due to policy decisions made by central banks, the BIS said questions remained about the future of the economy.

The BIS said there were four main systematic forces currently at work, providing the backdrop for developments in the economy. These included subdued inflation, the role of finance in the economy, a lack of productivity growth, and the "political and social backlash against the open international economic order".

The report identified high corporate debt as an issue in both economies heavily affected by the global financial crisis and those which were less affected. It said the most visible symptom of potential economic "overheating" was the "remarkable growth of the leveraged loan market".

The BIS pointed to a surge in the number of collateralised loan obligation (CLO) products available, saying this was reminiscent of the steep rise in collateralised debt obligations that amplified the subprime crisis before the 2008 financial crash.

"Should the leveraged loan sector deteriorate, the economic impact would depend on the potential amplification mechanisms. These can run right through the banking system, linked to unstable wholesale funding, and other parts of the financial system that hold leveraged loans and CLOs, via price adjustments," the report warned.

It also said low profitability in the banking sector was a matter for concern, and added: "Profits are the first line of defence against losses and, as by far the primary source of capital, they are the foundation for banks’ ability to lend and support the economy."

The report includes a chapter focusing on technology companies which have been making inroads into the financial sector. The BIS said the combination of the use of data and the diversified activities of many of these companies made them serious competitors to banks, but also posed major policy issues for governments and regulators, who had to grapple with the challenges posed by the digitalisation of the economy.

Last year BIS executive board member Benoît Cœuré warned the next financial crisis could be triggered by a cyber attack, noting that strengthening cyber-resilience should be part of any policy agenda.

"For clearer skies to appear, the policy mix needs to be rebalanced. Higher sustainable growth can only be achieved by reducing the reliance on debt and reinvigorating productive strength," the report said.

The BIS said it was essential to revive economic policies designed to boost growth, promoting competition between traditional and challenger financial institutions under an "adequate regulatory umbrella" and with closer cooperation between national and international authorities.