Global central bank espies narrow path to recovery

MANILA, Philippines - The Bank for International Settlements (BIS) has expressed concern that the world has a narrow path leading out of the financial crisis.

In its annual report, the BIS said that a healthy financial system is a precondition for effective of expansionary policies and stable long-run real growth. “It is essential that authorities... repair the financial system and persevere until the job is done,” it added.

The BIS is composed of 55 central banks, including the Bangko Sentral ng Pilipinas (BSP).

“Implementing the rescue is a complex task that is fraught with risks. Policies should aid, not hinder, orderly adjustment. They need to strike a balance between short-term stimulus and well-articulated exit strategies that ensure long-term sustainability,” it said.

The report further indicated that central banks must allow the financial sector to shrink as borrowers reduce their leverage. They must promote a shift in production patterns away from export- and leverage-led growth models towards more balanced ones.

Government and the private sector have to work together to build a more resilient financial system.

Addressing the broad failures revealed by the crisis means that systemic risk in all its guises must be identified and mitigated, adopting a macro-prudential perspective – a core theme of the BIS’s work for many years.

Financial instruments, markets and institutions all require reform if a truly robust system is to emerge.

For instruments, it means a mechanism that rates their safety, limits their availability and provides warnings about their suitability and risks.

For markets, it means encouraging trading and clearing through central counterparties and exchanges.

For institutions, it means the comprehensive application of enhanced prudential standards that integrate a system-wide perspective.

Above all, regulators and supervisors must adopt a macro-prudential orientation. By focusing on the stability of the system as a whole, as much as on the viability of individual institutions, it would reduce the probability of joint failures that arise from common exposures and at the same time moderate the pro-cyclicality inherent in the financial system.

“But better regulation is not enough. Macroeconomic policies can and must play a role in promoting financial stability. For monetary policy, this means taking better account of asset prices and credit booms; for fiscal policy, it means putting a premium on medium-term fiscal discipline and long-term sustainability,” the BIS report said.

The annual report, presented at its annual meeting in Basel, Switzerland, reported a balance sheet total of SDR 255 billion ($381 billion) at end-March 2009, a decrease of SDR 56 billion over the past year. Net profit was 18 percent lower than for the previous financial year, amounting to SDR 446 million ($666 million). Currency deposits by customers represent some four percent of the world’s total foreign exchange reserves.

Its central bank members will receive a dividend of SDR 265 per share, unchanged from the previous financial year.