The global financial cycle and how to tame it
Panel remarks by Mr Hervé Hannoun, Deputy General Manager of the BIS, at the International Symposium of the Banque de France "Central banking: the way forward?", Paris, 7 November 2014.
My four comments today will cover national and global financial cycles; the excess elasticity of the international monetary system; monetary policy spillovers; and the limits of macroprudential policy.
My first remark relates to financial cycles, national and global. This year's BIS Annual Report refers to the financial cycle as the self-reinforcing interactions between perceptions of risk, risk-taking and financing constraints. These interactions lead to booms and busts that span ordinary business cycles. Emphasising the frequent synchronisation of national financial cycles, the Annual Report measured them at the national level (Graph 1).
Professor Rey analyses the global financial cycle in terms of gross capital flows, credit creation and asset prices. She highlights its relationship with risk aversion as proxied by the VIX and with monetary policy in the centre country. The two approaches to financial cycles, national and global, are quite complementary.
We need to update our understanding of how the international transmission mechanism works. As Hyun Shin emphasised earlier, the first phase of global liquidity from 2003 to 2008 was mostly bank-driven. By contrast the second phase of global liquidity since 2010 has been bond market-driven. The current global financial cycle features rapid growth (to more than USD 5 trillion) of the outstanding amount of US dollar and euro-denominated bonds issued by borrowers who reside outside the United States and the euro zone (Graph 2, top panel), as a mix of conventional and unconventional monetary policy has pushed down term premiums (bottom panel). More...