March 2017 BIS Quarterly Review: Beyond swings in risk appetite

6 March 2017

Press release

Investors have started to discriminate more across asset classes, regions and sectors as they try to make sense of the implications of a changing political environment, in contrast to the cross-asset herd behaviour that characterised markets in recent years.

The shift away from the consistent waves of risk-on, risk-off buying and selling suggests that, during the quarter, central bank decisions, and the associated swings in investor risk appetite, played less of a role in driving valuations. In the United States, for example, winners and losers emerged as sectors such as defence, construction and manufacturing outperformed import-intensive sectors.

"Politics tightened its grip over financial markets in the past quarter, reasserting its supremacy over economics," said Claudio Borio, Head of the Monetary and Economic Department.

The March BIS Quarterly Review also:

  • Recounts how concerns about EMEs generally receded in the first quarter, although the outlook for some individual economies remains uncertain. In China, the popularity of wealth management products contributed to a liquidity squeeze and a jump in domestic bond yields.

  • Details the rise in US dollar credit to non-bank borrowers outside the United States, a key gauge of global liquidity to $10.5 trillion, up $420 billion in the six months to the end of September. Emerging market economy (EME) borrowers accounted for about a third, or $3.6 trillion. For the first time, the total includes dollar credit extended by banks in China and Russia.

  • Shows that reforms to US money market funds reduced US dollar funding for non-US banks by around $415 billion between September 2015 and December 2016. Lower funding from prime funds was partly offset by a rise in repo funding from government funds. Still, global US dollar funding for banks outside the United States rose to a new high of $9 trillion in September 2016, driven by a $531 billion increase in offshore deposits of dollars since the start of the year.

"These structural changes highlight the increasing role of offshore dollar funding in the global banking system," said Hyun Song Shin, Economic Adviser and Head of Research.

The publication contains four special features, three of them focusing on challenges for the structural plumbing which underpins the smooth functioning of markets and the financial system:

  • Enisse Kharroubi and Emanuel Kohlscheen (BIS)* find that economic growth is systematically weaker when it is led by consumption rather than other drivers such as investment. Increasing shares of private consumption in GDP can be a sign of growth slowdowns in the future, particularly if consumption-led growth goes hand in hand with rising debt.

  • Benjamin H Cohen (BIS) and Gerald A Edwards (JaeBre Dynamics)* assess new accounting rules requiring banks and other companies to provision against loans based on expected credit losses. They review the potential impact on the financial system, with the help of survey evidence and scenario analysis.

  • Morten Bech, Yuuki Shimizu and Paul Wong (BIS)* find that the spread of faster systems for lower-value payments between individuals, businesses and governments is so far surprisingly similar to that of real-time gross settlement (RTGS) for wholesale payments. However, advanced economies are this time not dominating the rollout of new technology, and emerging economies are likely to leapfrog advanced ones.

  • Lawrence Kreicher (Dartmouth), Robert N McCauley (BIS) and Philip D Wooldridge (BIS)* find that bond markets are shifting from using government rates as benchmarks to using private rates. Interest rate swaps continue to gain on government bond futures for hedging and positioning at the long end of the yield curve. However, unlike in money markets, swaps do not seem to be completely displacing government futures as market benchmarks.


* Signed articles reflect the views of the authors and not necessarily those of the BIS.