81st BIS Annual Report 2010/11

26 June 2011

In its 81st Annual Report the BIS says that, although the global economy has been improving, it would be a mistake for policymakers to relax. Numerous legacies and lessons of the financial crisis still require attention. The Report analyses the challenges policymakers face in building a lasting foundation for sustainable growth and proposes ways to address them.

Overview of the economic chapters

81st Annual Report by chapter

I. Building a stable future
Over the past year, the global economy has continued to improve. In emerging markets, growth has been strong, and advanced economies have been moving towards a self-sustaining recovery. But it would be a mistake for policymakers to relax. From our vantage point, numerous legacies and lessons of the financial crisis require attention. In many advanced economies, high debt levels still burden households as well as financial and non-financial institutions, and the consolidation of fiscal accounts has barely started. International financial imbalances are re-emerging. Highly accommodative monetary policies are fast becoming a threat to price stability. Financial reforms have yet to be completed and fully implemented. And the data frameworks that should serve as an early warning system for financial stress remain underdeveloped. These are the challenges we examine in this year's Annual Report. More...
II. Building new foundations for sustainable growth
Interrelated imbalances made pre-crisis growth in several advanced countries unsustainable. Rapidly increasing debt and asset prices resulted in bloated housing and financial sectors. The boom also masked serious longterm fiscal vulnerabilities that, if left unchecked, could trigger the next crisis. We should make no mistake here: the market turbulence surrounding the fiscal crises in Greece, Ireland and Portugal would pale beside the devastation that would follow a loss of investor confidence in the sovereign debt of a major economy. More...
III. The risks of international imbalances: beyond current accounts
Global current account imbalances are still with us, bringing the prospect of disorderly exchange rate adjustments and protectionism. But the imbalances extend beyond current accounts to gross financial flows, which today dwarf the net movements commonly associated with the current account. And they pose perhaps even bigger risks by giving rise to potential financial mismatches and facilitating the transmission of shocks across borders. Not only that, but cross-border financing makes rapid credit growth possible even in the absence of domestic financing. As the experience of the past few years reminded us, a reversal of strong cross-border capital flows can inflict damage on financial systems and ultimately on the real economy. More...
IV. Monetary policy challenges ahead
Turning to monetary policy, the challenges are intensifying even as central banks extend the already prolonged period of accommodation. The persistence of very low interest rates in major advanced economies delays the necessary balance sheet adjustments of households and financial institutions. And it is magnifying the risk that the distortions that arose ahead of the crisis will return. If we are to build a stable future, our attempts to cushion the blow from the last crisis must not sow the seeds of the next one. More...
V. Financial regulatory reform: accomplishments, pitfalls, prospects
Progress on financial regulatory reform has been impressive. International agreements on stronger capital requirements and new liquidity standards for banks have been reached quickly. Still, a number of critical steps remain. Among these are the full and timely implementation of Basel III; the adoption of measures to address the systemic risks associated with very large global financial institutions; and the design of regimes to ensure the orderly resolution of such institutions in the event of their failure. But the target will keep moving as institutions resume risk-taking and adapt their business models to the new environment. The supervisory framework must be able to keep up, monitoring and managing risks to financial stability regardless of the given perimeter of regulation. More...
VI. Closing data gaps to enhance systemic risk measurement
The recent financial crisis revealed gaps in both the data and the analytical frameworks used to assess systemic risk. These gaps hampered policymakers in their efforts to identify and respond to vulnerabilities. To do their job, authorities need a broader and more accurate view of the financial system from multiple vantage points. That picture would show sectoral balance sheets and their global interlinkages, and it implies a wider sharing of institution-level data within and across jurisdictions. While better data and analytical frameworks will not prevent future crises, experience suggests that the improvements will enable policymakers and market participants alike to identify vulnerabilities previously unseen and pick up the emergence of others much sooner. More...