The financial sector

BIS Annual Economic Report  | 
27 June 2005

Banks and insurance companies in industrialised countries registered stronger performance during the year under review. Lower costs, the improved credit environment and healthy revenues from retail business contributed to higher profits. Structural improvements meant that better performance was also evident in jurisdictions that had experienced strains in the past. The search for yield continued to compress spreads in credit markets and risk-taking by investment banks persisted, helped by liquid funding conditions. The hedge fund sector experienced large inflows, while returns have declined.

The financial sector nevertheless faces significant macroeconomic risks. They are related to the potential effects of higher interest rates and possibly associated declines in real estate prices and household expenditure. The current environment highlights the importance of making further progress in developing an operational macroprudential framework, especially as regards the identification of systemic vulnerabilities and the calibration of prudential tools.