BIS Survey: Will the central banks take this to heart?

As if we need another study to tell us what we already know. The Bank of International Settlement has conducted a survey in which it found a significant link between prolonged periods of low interest rates and the risks banks undertake. In other words, the central banks encourage financial institutions to take larger risks when interest rates remain low.

Certainly, the current economic climate was fueled by speculation, which was helped by the Fed’s easy monetary policy. I actually agree with their conclusion about the need for regulators to be vigilant.

However, I wouldn’t read too much into the Bank of International Settlement’s survey when assessing the current economic condition. Given current economic conditions, we are hoping financial institutions take on increased risk and lend more money. Tight monetary policy right now would derail the fragile economy. Since it is now a truly global economy, I hope central banks around the world won’t raise interest rates too soon, but I fear this survey will have an impact. Some central banks, particularly in Europe, which have traditionally feared inflation more than a downturn, and Asia, which went through its own financial crisis a decade ago, will pursue tighter monetary policies too early. This will impact on our own recovery.

Regulators need to watch for potential bubbles. I would like to see regulations catch up to the rise in innovative financial products. But, we are just a long way from worrying about a bubble. After all, we’ve just averted a Depression, and are just climbing out of the Great Recession.